Talks on the restructuring of GKOs - Russian treasury bills on which the government defaulted last August - have once more been cast into disarray just days before a deadline imposed by the Russian finance ministry was due to expire.
In a whirl of publicity Credit Suisse First Boston, co-chair alongside Deutsche Bank of the original group of 19 western creditor banks, has announced a new fund open to all holders of GKOs which claims to provide up to three times the estimated market value of the official Russian proposal. The only hitch is that news of the fund came as a surpise to the Russian ministry of finance.
CSFB's proposal is the Nikitsky Recovery Fund, born of the bank's dissatisfaction with the official debt talks. The settlement terms of the original proposal remain unclear to many but Deutsche Bank controversially came to an agreement just two days after issuing a statement saying it would press for an extension of the deadline. "CSFB believes that investors must be offered a real alternative to the restructuring terms presently proposed by the Russians," says a CSFB press release.
The Nikitsky fund, aptly named after a famous cathedral destroyed during the Stalinist era and recently rebuilt, will look for debt-equity swap opportunities to obtain better value on the defaulted GKOs. The GKOs will be held by the fund for seven years before any swaps take place. Proceeds will then be invested in revenue-generating projects, chosen in partnership with the Russian government and Baiame Strategic Investors, a separate company sponsored by CSFB to advise the Nikitsky fund.
The idea of the fund was initially received warmly by veterans of the GKO restructuring as a deal which at least has some upside potential - the previous proposal is estimated only to provide 4% to 6% repayment of the original pre-crisis value, and some market practitioners now value it as low as one cent on the original dollar.
But following CSFB's announcement of the deal there was confusion. At first the Russian ministry of finance and central bank refused to deny the deal's existence, perhaps fearing they were simply misinformed, but finally admitted they had never heard of it. Some bankers from the group of 19 also reacted with disbelief.
CSFB, after an initial blaze of publicity, refuses to comment further. But some believe the deal was reached with a government executive at a higher level than the finance ministry officials.
If the deal comes off, the positions of Deutsche, Chase and Crédit Lyonnais, which have accepted the Russian proposal, would look rather feeble. One banker, who does not wish to be named, says: "Deutsche must be in an awkward position with their clients. They forced them to accept the Russian process without agreed terms, and the central bank has now unveiled even worse terms for them."
Not all Western bankers are convinced that the fund has been approved by the Russians. Eric Kraus, head of fixed income at Dresdner Kleinwort Benson in Moscow, says: "I find it surprising that any one investment bank would be offered terms widely divergent from those which have been tabled by the Russian side."
It could be that CSFB is simply using the Nikitsky fund as a bargaining tool to try to salvage a better deal from the ministry of finance as the latest deadline (April 15) looms.
If it is simply a bargaining tactic, some bankers do not rate its chances of success. Kraus says: "The only thing subject to definition [on the original proposal] is what the proceeds will be used for. There is a 0% chance that they [the Russians] are going to radically modify the general configuration of the deal at this late date."
Charlie Blitzer, director and chief economist for Europe at Donaldson Lufkin & Jenrette in London, says: "We don't know much about it yet or if it is a feasible alternative, but for the first time it is a deal which offers some upside potential for both the Russians and the western banks."
Meanwhile, those banks from the original group of 19 which exchanged their GKO positions for Russian deputy finance minster Mikhail Kasyanov's controversial deal without agreed terms have already had the carpet whipped out from under them. In the original proposal, $550 million could be repatriated in monthly FX auctions (originally it was $750 million for holders of Russian forwards, but this was reduced).
The Russian central bank has backed off even further and is now only allowing the repatriation of $200 million through FX auctions. A banker says: "One wonders why they [the Russians] are even bothering to take this $350 million off the table, they are kicking sand in the bankers' faces." Jack Dyson