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27.01.2009 - MDM Comment: Market Color, LenSpetsSMU, Eurokommerz, Banks

The Russian market was relatively quiet this morning. We see miniscule volumes in ruble bonds, as investors still are mostly unwilling to touch local currency assets. The turnover in Eurobonds is more significant, with locals mostly buying and non-residents selling. On the FX market, the ruble is inching downward against the basket (37.85) despite a massive deficit of ruble liquidity and astronomical money market rates (25-40%). Perhaps some banks expect the basket value to move closer to the new upper band of 41.00 announced by the Central Bank of Russia (CBR) once taxes are paid and more liquidity injections into banking system come in the first days of February.

Below are our comments on the news stories we consider most important today.

1. LenSpetsSMU (S&P B), one of Russia’s leaders in construction and development, has proposed amendments to the terms and conditions of its USD100m 9.75% Credit-Linked Notes (Bloomberg ticker LENSP) that look more like a restructuring plan. It is our understanding that the difficult operating environment the company finds itself in is causing liquidity problems. LSS effectively asked for the put option originally scheduled for April 2009 to be dropped and for the final maturity date to be pushed back 2010 to 2012 with a certain amortization plan (vs. original bullet structure). LSS also wants to amend the financial covenants. A 5% fee is being offered for agreeing to the proposals. We believe that the bondholders have also been offered the chance to sell the notes at distressed levels or keep the notes and vote on February 12. The consent solicitation statement is distributed by ING, which acts as an advisor to the company. The investor feedback we have collected thus far suggests it could be difficult for LenSpetsSMU to achieve a 75% approval rate.

2. Eurokommerz (Caa2), the troubled factoring company, held a meeting with some of its creditors last week to discuss various debt restructuring options, including a two year moratorium on all repayments. A bankruptcy scenario was also discussed (Sources: Debtwire and the company’s own web-site). We do not have much to say on this matter, as we see the company as being non-transparent. We do not know what the Eurokommerz’s asset quality is at this stage, whether secured assets have been taken away by creditors, and why/how the former management/shareholders left the company. 

3. The CBR has published a consolidated balance sheet of Russia’s top 30 banks as of December 1, 2008, which shows that the banks’ asset quality is deteriorating quite substantially as a result of the financial and economic crisis. NPLs have reached 1.8% of the total loan portfolio from 1.3% at the beginning of October 2008, while the combined share of Level 3 and Level 4 assets has reached 11% vs. 8.9% two months earlier. Indeed, the absolute numbers are of questionable value (banks are masking problems to maintain regulatory capital compliance and avoid deposit runs) and are only useful to confirm the trend.

The aggregate Tier 2 ratio in December was restored to 14.8% after a plunge to around 12% in September, reflecting the gigantic injections into state banks in the form of subordinated loans undertaken in October-November. We believe that going forward we will see this process repeat, i.e. a further deterioration in asset quality offset by a very loyal approach from the regulator (relaxing prudential requirements) and more capital injections from the government in both state-owned and privately-owned banks. Finance minister Alexey Kudrin has already announced the government’s intentions to allocate an additional USD40 bn to recapitalize banks. 

27.01.2009 14:25
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