Vodka Billionaire Bank Bonds at Risk on Russia Consumer Distress
- Russian Standard Bank bonds slide to less than half face value
- Losses widen in first half amid provisions, eroding capital
Deepening distress among Russian borrowers risks triggering the first major writedowns for bank bondholders since the crisis over Ukraine, prices for the securities show.
While Russian Standard Bank JSC, the nation’s second-biggest issuer of credit cards, said in May that its billionaire owner Rustam Tariko will do "everything necessary" to sustain the lending business, its April 2020 Eurobonds have since dropped to less than half their face value. Russians battered by the first recession since 2009 are overdue on 7.8 percent of loans, a surge from 5.9 percent at the start of the year, according to data from the central bank.
"I wouldn’t be surprised if the write-off is larger than the market currently prices in," said Dmitry Kosmodemiyanskiy, a money manager who sold Russian Standard Bank’s bonds in July from the equivalent of $737 million he helps oversee for Otkritie Asset Management in Moscow. "The bank will almost certainly survive, as the main shareholder seems committed, but subordinated debt isn’t the right place to be in these circumstances."
Even though Russian accounting standards show the bank had 62.1 billion rubles ($952 million) of capital at the end of the first half, losses reported this week under international standards almost wiped out the total.
Russian Standard Bank spokesman Artem Lebedev declined to comment on Wednesday by phone after Bloomberg asked about the outlook for the company in the second half and whether a writedown on bonds was possible.
‘Two Worlds’
Moscow-based rating company RusRating revoked Russian Standard Bank’s credit score on Thursday, citing “insufficient information” in a website statement.
“From a financial reporting perspective, the bank continues to live in two worlds,” Dmitry Poliakov, an analyst at Sberbank CIB in Moscow, wrote in a report on Aug. 31. Under Russian accounting, “it still continued to report a relatively sizable regulatory capital base, which allowed it to marginally meet its capital requirements,” he said.
Capital Injection
The bank reported its first-half loss widened to 22 billion rubles on the back of 28 billion rubles of loan-loss provisions, leaving it with 637 million rubles of total capital, according to results under International Financial Reporting Standards. Using Russian accounting, it had a 5.5 billion-ruble loss at the end of the period and a Tier 1 capital ratio of 6.33, the lender said in a separate report.
Whereas IFRS requires banks to estimate the probability of a loan being returned and then create reserves, in RAS the reserves decision is based on current payments.
Under terms of Russian Standard Bank’s Eurobonds due 2020 and 2024, a Tier 1 ratio below 2 by Russian accounting standards would trigger a reduction in its interest payments or a principal writedown.
Russian Standard Bank received a 5.9 billion-ruble capital injection in May and is in line for a further 9.35 billion-ruble contribution from vodka billionaire Tariko’s Russian Standard Co., according to a regulatory filing on Aug. 3. Russian Standard Bank was also included in a government-sponsored recapitalization program that earmarked 5 billion rubles. Any transfer has yet to be published on the Deposit Insurance Agency website, while Deputy Finance Minister Alexey Moiseev said on Thursday the recapitalization is still under review.
Martini Imports
Tariko, who built his fortune importing Martini into post-Communist Russia, started his Russian Standard vodka in 1998, out of a desire to produce a Russian high-end brand.
While Moody’s Investors Service rates Russian Standard Bank B3 with the negative outlook, the junior subordinated bonds due in 2020 are one step lower and 2024s two steps at Caa2. That “means a high probability of losses for investors," Alexander Proklov, an analyst at Moody’s in Moscow, said by phone on Sept. 1.
Banks’ earnings have suffered as the recession hurts the ability of borrowers to repay debt and curbs demand for new loans. The central bank boosted its benchmark rate to 17 percent in December to shore up the tumbling ruble, increasing the cost of funding for lenders, before almost reversing those measures with five rate cuts this year.
“My concern is that if the bank continues to generate losses, like it had in the first half, the new capital might not suffice," Egor Fedorov, credit analyst at ING Groep NV in Moscow, said by phone on Tuesday.