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Vostochny Bank could avoid bailing-in subs if shareholders provide support

Vostochny Bank’s (Orient Express Bank) partial sale of its retail loan portfolio might not raise sufficient funds to comply with the central bank regulations and shareholder support is likely to be necessary to bolster its capital, agreed five sources polled by Debtwire. The Russia-based private bank needs to boost its capital levels by end-August to avoid a mandatory conversion of subordinated debt into equity or its principal write-down.

The lender’s USD 125m 12% perpetual subordinated Eurobond has been trading in the 50s over fears that the bank will be unable to avoid bailing-in the notes, according to three of the sources.

“The possibility of writing down perpetual debt is quite real, given the current financial situation at the bank,” a representative from the bank’s former largest shareholder, private equity fund Baring Vostok, told Debtwire.

Baring Vostok lost control over the bank in June, following an earlier order by the regional arbitration court in the Far Eastern city of Blagoveshchensk to hand a 9.9% stake in the bank to Finvision, owned by Artem Avetisyan.

 The bank’s capital adequacy ratio fell below 5.125% from 31 May to 5 June, which under the Central Bank of Russia’s provisions means that it needs to bolster its capital within 45 days or write down its sub debt. The ratio plunge is mainly due to an increase in loan loss provisions on the bank’s problem assets, said Mikhail Polukhin of ACRA ratings, a Moscow-based rating agency.

The central bank previously instructed Vostochny Bank to create RUB 5bn (USD 79.2m) in new provisions, primarily in relation to bad loans in the lender’s corporate portfolio. But in mid-June, Baring Vostok suggested that the lender may need to create an additional RUB 10bn to RUB 15bn of provisions.

The shareholders are in dispute as to the cause of the bank’s poor performance and dwindling capital levels. In a statement to Debtwire, Baring Vostok claimed it is due to “bad corporate loans that Vostochny inherited from Uniastrum  Bank [following the merger in 2017]”.

But Vostochny Bank’s new largest shareholder Finvision (now controls about 42%) claimed it was in fact Uniastrum Bank that saved Vostochny Bank and points to alleged illegal  activity of individual managers of Baring Vostok.

Baring Vostok’s founder Michael Calvey, and other fund executives, have been under house arrest in Russia since February ahead of a trial on embezzlement charges. The accused argue that the charges are spurious and part of an effort to wrest control of a Russian bank away from them.

Shareholder capital 'gift' still an option

Vostochny Bank has a number of options as it seeks to boost its capital ratio, noted the five sources polled by Debtwire. It could get material aid from the shareholders or sell a portion of its risk-weighted assets, said Fitch analyst Alexander Danilov.

On Wednesday (24 July), Vostochny Bank confirmed it plans to sell part of its retail loan portfolio worth between RUB 5bn to RUB 10bn. The sale of risk-weighted assets would act to bolster capital levels through increasing the capital adequacy ratio.

The Central Bank of Russia previously said that Vostochny Bank would need RUB 19.6bn of additional reserves. It is not currently clear whether the announced assets sale will be enough to recapitalise the bank.

“We don’t know the exact amount needed. At this point we have basically been completely shut out from access to information about the bank, other than what is required by the regulator,” said Baring Vostok, which still controls an about 41.6% stake, in the statement to Debtwire.

Despite raising much needed capital, some investors have met the asset sale decision with caution.

“Selling retail loan portfolios to recapitalise the bank is not positive for me,” a London-based buysider said. “[Vostochny Bank] is selling some of its assets and cutting into profitability to prop up the capital. I wonder why the owners don’t want to put in more capital to keep the business stable?”

Shareholders' avoidance to contribute to the bank’s recapitalisation could destroy long-term value for all of the bank’s stakeholders, in the opinion of the Baring Vostok representative.

A court ruling (at the request of Artyom Avetisyan) forbids further equity injections, but material aid from existing shareholders is still possible, said Fitch’s Danilov. The latter differs from an equity injection in that it is essentially a “gift” in the form of cash or assets.

“It does not require the same formal and lengthy registration [process] as the share issue and hence does not impact the votes/share distribution.”

Approving and implementing such a move before the end-August deadline would be difficult, agreed Danilov and ACRA’s Polukhin. But the buysider believes the bank still has enough time to get this through.

In addition to its perpetual bond, Vostochny Bank has a RUB 733.9m 18% 2020 subordinated local bond. The conditions for this bond to be bailed-in are different, noted Polukhin. The common equity ratio must fall below 2% for a mandatory bail-in. As of 1 June, the ratio stood at 4.82%.

Despite market scepticism, Polukhin was hopeful Vostochny Bank could avoid the bail-in. “It is possible, given that the gap is not very large.” The buysider agreed it is “feasible” but depended on whether the new owners see material value in its solvency. “For now, we just don’t know,” he said.

Vostochny Bank declined to comment. Finvision did not respond to request for comment by the time of publication.

Alexander Dooler Credit Markets Reporter Debtwire
Alexander Dooler Credit Markets Reporter Debtwire

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