Purpose of Decree 364
Sanctions have significantly restricted or even made it impossible for many issuers linked to Russian businesses to service their Eurobonds. European and US paying agent banks, trustees, clearing houses and other financial institutions have ceased to process payments relating to such issuers’ Eurobonds and to participate in servicing such Eurobonds in general. This is due to the sanctions imposed both against the issuers (their Russian guarantors, shareholders or control entities) and the Russian securities depositories through which Eurobonds are held (including the National Settlement Depository). The sectoral sanctions also resulted in restrictions on the listing of securities, provision of trust services to Russian persons, etc.In response to the abovementioned restrictions, Russian lawmakers have introducedSuch legislative acts are:
- Presidential Decree No. 430 of 5 July 2022 “On the Repatriation by Residents Participating in Foreign Economic Activity of Foreign Currency and the Currency of the Russian Federation,” as amended by Decree 364 (“Decree 430”);
- Federal Law of 14 July 2022 No.
292-FZ “On Amendments to Certain Legislative Acts of the Russian Federation, Repealing Paragraph 6 of Part 1 of Article 7 of the Law of the Russian Federation on State Secrets, Suspending Certain Provisions of Legislative Acts of the Russian Federation and on Establishing Specifics for Regulating Corporate Relations in 2022 and 2023”; and - Federal Law No.
319-FZ of 14 July 2022 “On Making Amendments to Certain Legislative Acts of the Russian Federation.”
- by making payments directly to such bondholders; or
- by issuing replacement bonds to such bondholders.
Obligation to issue Replacement Bonds
Decree 364 requires Russian corporate obligors under EurobondsAccording to the wording of Decree 430: “Russian legal entities having obligations relating Eurobonds.” to ensure that their Eurobond obligations owed to the Russian Perimeter Holders are discharged through the issuance of “replacement bonds” (“Replacement Bonds”).Such Replacement Bonds are required to be issued by 1 January 2024.
Replacement Bonds
Replacement Bonds are local Russian bonds whose financial terms correspond to the corresponding Eurobonds being replaced.“The amount of income on bonds, the payment dates for such income, the maturity date of bonds and their nominal value shall be similarSection 3(a) of Decree 430 to the relevant criteria of Eurobonds.” Replacement Bonds will be denominated in the foreign currency of the respective Eurobonds, with payments relating to Replacement Bonds to be made in roubles. Replacement Bonds may be listed on a Russian stock exchange.
A number of major Russian issuers have previously issued Replacement Bonds, specifically: Borets, Gazprom, Lukoil, Metalloinvest, MMK and Sovcomflot.
Issuer of Replacement Bonds
The replacement obligation imposed by Decree 364 applies to Eurobonds, irrespective of their maturity.We note that this obligation of Russian companies is worded as the obligation “to secure performance” through the issuance of Replacement Bonds. It is not obvious from the wording of Decree 364 whether Replacement Bonds may be issued not only by the Russian guarantors (or another Russian obligors under Eurobonds) but also by their subsidiaries or affiliates.
The Bank of Russia has previously confirmed in its official clarifications to Decree 430 that the issuer of Replacement Bonds may be either the Russian legal entity owing an obligation (corporate obligor) under the Eurobonds or another Russian legal entity controlled by it, provided that the obligations under the Replacement Bonds are fully secured by a surety or an independent guarantee provided by the Russian corporate obligor under the Eurobonds, which shall be jointly and severally liableParagraph 1.4 of Official Clarification of the Bank of Russia of 6 September 2022 No.
Transition period
Prior to the issuance of Replacement Bonds, Russian corporate obligors under Eurobonds must fulfil their payment obligations owed under Eurobonds to the Russian Perimeter Holders by transferring funds in the manner prescribed by the Board of Directors of the Bank of Russia (ie by making payments directly to such holders through Russian securities depositories).The same procedure will apply if a Russian Perimeter Holder exchanges Eurobonds with Replacement Bonds and continues to hold Eurobonds through the Russian securities depositories.
Exceptions to the general rule of “mandatory replacement”
Russian corporate obligors under the Eurobonds may be exempt from the obligation to issue Replacement Bonds on the basis of permission from the Government Commission on Monitoring Foreign Investment in the Russian Federation. In this case, such Russian corporate obligors will continue performing their payment obligations under the Eurobonds owed to the Russian Perimeter Holders by making direct payments.To the extent of the new rules on “mandatory replacement,” Decree 364 will not cover Russian corporate obligors under Eurobonds if, such obligor had already issued Replacement Bonds prior to the publication date of the Decree.
“Mandatory replacement” procedure
In the course of placement, Replacement Bonds may be paid:- in kind by way of exchange with the relevant Eurobonds; or
- in cash to be used for the sole purpose of buying back the relevant Eurobonds.
Simplified issuance procedure
The Replacement Bond issuance procedure remains in force and unchanged, including:- the simplified issuance procedure without the need for state registration of the prospectus; and
- disapplication of the rules for the approval of major transactions and interested-party transactions.
Additional issues of Replacement Bonds
Under Decree 364, it is permitted to make additional bond issues. Russian issuers, having issued Replacement Bonds, may (but are not obliged to) issue additional Replacement Bonds an “unlimited number of times.” However, the total amount of a Replacement Bonds issue must correspondSection 4(1) of Decree 364 to the value of the relevant outstanding Eurobonds.Placement on a delivery basis
In our experience, the most common method of Replacement Bonds issue is exchange by way of actual delivery of Eurobonds. The placement procedure on such a delivery basis involves the following core stages.Stage 1: the Russian issuer of Replacement Bonds issues an invitation to offer
The Replacement Bond issuer places an exchange solicitation (ie an invitation to offer) to the holders to purchase the Eurobonds owned by them by delivering them in exchange for the Replacement Bonds. Such solicitation should contain the offer form and set out the requirements for holders to confirm their holding of Eurobonds.
Stage 2: Holders make an offer
Holders, on the basis of the solicitation, make an offer to the Replacement Bond issuer to purchase the Replacement Bonds in exchange for their Eurobonds being delivered and to provide the necessary confirmation of ownership of the Eurobonds.
Stage 3: The issuer makes an acceptance of the offer
If the offer documents sent by the holder are acceptable to the issuer of the Replacement Bonds, the issuer accepts the offer via the course of conduct by delivering the Replacement Bonds.
Placement on an assignment basis
Exchange of Eurobonds with Replacement Bonds by way of the assignment of rights under the Eurobonds becomes a solution where delivery of Eurobonds is technically not possible. When issuing Replacement Bonds on an assignment basis, the procedure is largely as follows.Stage 1: The Russian issuer of Replacement Bonds issues an invitation to offer
The Replacement Bond issuer places a solicitation to the holders to assign rights conferred on their Eurobonds in exchange for the Replacement Bonds. The solicitation (alongside with the offer form and the requirements for the holders to confirm ownership of the Eurobonds) must also include the form of the assignment document. In order to streamline the exchange process and taking in account the Eurobonds documentation, we recommend that such assignment document be designed as a unilateral deed poll of assignment expressed to be governed by English law.
Stage 2: Holders make an offer
Holders, on the basis of the solicitation, make an offer to the Replacement Bond issuer to purchase the Replacement Bonds in exchange for rights conferred on their Eurobonds being assigned and to provide an executed deed poll of assignment, together with the necessary confirmation of ownership of the Eurobonds.
Stage 3: The issuer makes an acceptance of the offer
Similar to the exchange on a delivery basis, if the offer documents sent by the holder are acceptable to the Replacement Bond issuer, the issuer accepts the offer via the course of conduct by delivering the Replacement Bonds.
