Interview: The most important events in the Russian debt capital market in 2019

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— What events and trends that characterize 2019 in the Russian debt market would you, as practiсing lawyers, highlight in the first place?

ММ: In preparation for the interview, we have identified five interesting “Topics of the Year”. First, the expectations of the appearance of private investors on the market were fully justified, and this is clearly a trend. Second, there were no new significant defaults on the market in 2019. Thirdly, new services and approaches to making deals were actively emerging. Fourth, there was a very noticeable interest in the Russian market on the part of issuers from the CIS countries. Fifth, we see the preconditions for the emergence of financial infrastructure for bonds of the sanctioned industries. Finally, we should highlight the resurgence of interest in securitization and the active development of products to speed up transactions.

— Let us then discuss in more detail each of the topics you have identified and start with the growth of the share of private investors in the market. What impact do you think this trend has on the market as a whole? 

ММ: We are in a global cycle of rate cuts and deposits are no longer viewed by private investors as a saving tool. Private investors have a higher feeling of inflation than institutional and global investors, who follow the official figures in their estimates. This feature paves the way for strong new demand for IPOs, high yield bonds and structured bonds. 

Speaking about the latter. Although we have not seen a large number of placements of new issues of structural bonds, only our team has developed seven different types of documentation for the potentially largest players in this market. Most of them have either already registered their issues with the Central Bank, or are at the stage of considering a package of documents. 

The High Yield Bond (HDB) market, on the other hand, has revived interest in the formation of effective & nbsp; covenants. Now the consolidation of restrictions at the stage of preparing documents for issuers of this sector is the norm. 

— We are talking about the absence of new significant defaults in the market as one of the key characteristics of 2019. But what about, for example, "Finance-Avia" ("UTair")? 

DR: Indeed, there were no new significant defaults on the market, and the next restructuring of Finans-Avia bonds is not news, but a continuation of a long history. 

In general, in our practice of the security trustee — representatives of bond holders — there were several significant processes associated with defaults that arose in the past years. Separately, I would comment on the restructuring of the bonds of the Siberian Gostinets. 

This, of course, is a classic HYB-issuer that has implemented project financing through a bond issue and, unfortunately, has not coped with the debt burden. Sibirskiy Gostinets offered investors the exchange of bonds for preferred shares, which is undoubtedly an absolute novelty for the market. At the same time, the issuer undertook obligations to pay dividends on preferred shares, which should ensure the protection of the interests of already owners of preferred shares. 

A separate topic is the participation of security trustee in bankruptcy on the basis of the law "On the Securities Market". The bondholder's bankruptcy representative must file claims on behalf of all bondholders. Bankruptcy is a long and complicated process. At the same time, as practice has shown, even inclusion in the register of creditors for bondholders can take more than 6 months. In this sense, having a representative of bondholders makes life much easier for bondholders. We are pleased that a new practice is being developed to better protect the interests of bondholders. 

— Okay, let's move on. What new services and new approaches to debt do you mean when discussing the results of the year? 

ММ: The structured bond market alone generates a request for a set of new services. Understanding this request and using the experience of Western markets, where the volume of structured products significantly exceeds Russian realities, we have implemented a mechanism for automatically tracking events about the underlying asset and developed mechanisms for the dissemination of highly sensitive information among investors in a closed mode. The market has already formulated a request to set up a steering committee to operate a range of structured bond mechanisms. 

If we talk about new approaches, I would first of all highlight the changes in the process of evaluating borrowers by the Moscow Exchange. Now part of the process of bringing a company to the public market is a deep and personalized KYC in relation to the issuer, meetings on the exchange floor with its employees, with investors. We see that this approach is extremely justified, it forces issuers and organizers to take more seriously the quality of transaction processing, preparation of documentation and significantly improve the quality of information disclosure.

— What is the interest in the Russian market of issuers from the CIS countries? How do you explain it? 

ММ: Interest manifests itself in specific deals. If last year we participated in the placement of the Kazakh Railways, then in 2019 we fully accompanied two entries to the market of the Belarusian Eurotorg. Another company is preparing to place its securities in the near future. 

DR: Declining rates and sufficient liquidity attract new issuers for the Russian market. If we take into account that for such issuers the Russian capital market is, in fact, external, the investment community quite reasonably formed a request for a list of financial and behavioral covenants, & nbsp; which would correspond to the restrictions provided for by the Eurobonds documentation. It seems to us that this is a qualitative breakthrough in the minds of a Russian institutional investor, which can only be welcomed. 

— The emergence of a financial infrastructure for the bonds of the sanctioned industries - how "alive" is this topic?

ММ: Totally alive. We singled it out by actively observing the market. There are indeed prerequisites for the emergence of such an infrastructure, as well as demand, including from foreigners. This demand will manifest itself in the provision of a reliable system for hiding names (for example, encryption over the blockchain is possible). If this is ensured, the sanction premium will find its investor among foreigners. 

On the other hand, we understand that there are industries that, by definition, are protected from sanctions, primarily environmental projects. Environment is a global factor, and investments in its protection will always be isolated from geopolitical risks. This is the defining reason for the growing interest in the tools of the socially responsible industry — ESG, and we see a demand for competencies in this area. 

— Why do you separately highlight the acceleration of securitization transactions as a "trending" topic? 

ММ: Because we see that if each project took not 6, 9 or 12 months, but three, then the number of closed projects would be significantly higher. Accelerating securitization deals is what our team is focused on. Much here depends on the speed of implementation of the registration actions of the regulators, and we hope that a set of solutions will appear here very soon. At the same time, for our part, we are also in the process of implementing several ideas that should allow us to solve this ambitious task. We already have a set of solutions for the market today. 

Considering the revival of interest in mortgage securitisation (which is facilitated by the emergence of liquidity in these instruments, for example, the liquidity of an issue secured by VTB's portfolio and placed within the DOM.RF Factory is very high), we think these solutions will be useful.