International Industrial Bank, the Russian lender controlled by lawmaker Sergei Pugachyov, became the country’s first bank to renege on its foreign debt since 1999 after defaulting on $453 million of bonds.
IIB said it didn’t repay 200 million euros ($253 million) of 9 percent notes due yesterday and sent a default notice on $200 million of bonds maturing in 2013, according to a statement yesterday. The bank proposed a one-year maturity extension on the 9 percent notes and said holders who vote in favor of the new maturity date by July 14 will get a payment amounting to 5 percent of the principal they’re owed, according to a 17-page company report obtained by Bloomberg News today.
Russia’s biggest lenders survived a recession last year that cut economic output by the most since the Soviet Union collapsed in 1991 as President Dmitry Medvedev pledged more than $200 billion to support banks and companies.
IIB’s cash shortage stems in part from its reliance on central bank funding rather than retail deposits to finance new lending, said Yaroslav Sovgyra of Moody’s Investors Service. IIB made most of its loans to industrial companies controlled by Pugachyov, according to Moscow-based Trust Investment Bank.
While a default by IIB may have a “short-term negative effect” on investor confidence in Russian bank debt, the lender’s problems aren’t indicative of the wider financial system, Sovgyra, a senior credit officer at Moody’s in Moscow, said yesterday before IIB’s announcement. “The vast majority of investors understand that this is a pretty specific case which should not be extended to other banks,” he said.
IIB’s 9 percent euro bonds were trading at 50.25 cents on the euro as of June 30, the last day Bloomberg compiled prices for the debt, plunging from 97.75 at the start of the June. The 11 percent dollar bonds due 2013 traded at 58.50 cents at 5:56 p.m. in Moscow, Bloomberg data show, down from 100 cents when the notes were sold in February. Credit Suisse Group AG and VTB Capital were joint lead managers of the February issue, Bloomberg data show.
“February was a very hot market where investors seemed already much less cautious on their buying, that is why this kind of issue could be placed,” said Sebastien De Prinsac, director of fixed-income international sales at Trust Investment Bank. “Some investors probably didn’t realize that they were buying not just a bank, but the risk of a complex industrial group.”
Finance Minister Alexei Kudrin told reporters in Moscow today that he “hopes” IIB will resolve its problems without losing its banking license.
The failure of some Russian banks today may be “healthy” because the country still has too many lenders, according to Ashmore Investment Management Ltd.’s Jerome Booth. The number of lenders in Russia has fallen to 1,039 as of June 1 from 1,058 at the start of 2010, according to the central bank. Hundreds of banks disappeared after Russia defaulted on $40 billion of ruble debt in 1998 and devalued the currency.
“If they collapse, they collapse,” Booth, who helps oversee $33 billion as Ashmore’s head of research, said at a press conference in London yesterday. “You can’t say there won’t be pain, but it will be healthy. You want to have a banking system which unconditionally punishes irresponsible behavior.”
Russia’s Micex Index dropped 1 percent today as shares of OAO Sberbank, Russia’s largest lender, slipped 0.1 percent. The bank’s 6.468 percent dollar bonds due 2013 rose, sending yields down 13 basis points to 4.39 percent, according to data compiled by Bloomberg. VTB Group’s 6.609 percent dollar bonds due 2012 also climbed, pushing the yield 9 basis points lower to 5.09 percent.
IIB asked noteholders to accept a new maturity date of July 6, 2011, according to the company report today. The bank will hold a meeting with creditors in London on July 21. IIB spokesman Dmitry Morochenko said he couldn’t comment on details of the proposal.
Pugachyov is a member of the Russian Federation Council, the upper chamber of parliament. His United Industrial Corp., the parent company of IIB, also has assets in mining and shipbuilding. IIB has appointed Credit Suisse as an adviser.
“I’ve never been a big fan of their business model, wholesale funding for effectively related party private equity assets,” said Ian McCall, a London-based director at Argo Capital Management, which oversees about $500 million in emerging-market debt and didn’t buy IIB’s February bond issue. “It works fine until it stops working and then it goes horribly wrong.”
VTB Group, Russia’s second-biggest bank, said in a statement yesterday it may lend $600 million to United Industrial using the company’s Elegestskoe coal deposit as collateral. VTB Capital may be mandated to sell the deposit as part of the deal, according to the statement.