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Turning Russian debt into equity

Robert Sexton of Salans Hertzfeld & Heilbronn, Paris, explains how debt-equity swaps could help foreign creditors seeking recovery of Russian loans given the precedent of the US junk bond crisis

Desperate times call for desperate measures - and with Russia in crisis, foreign creditors must look for alternative means of recovering many of their loans to Russian companies.

The cash and liquidity problems that Russian debtor companies face are compounded, in the case of hard-currency denominated debt, by the volatile and rapidly devaluing rouble. Moreover, the moratorium on payments to foreign creditors imposed on August 17 by the Russian government, which afforded debtor companies some relief from repayment of loans to foreign creditors, has now expired, requiring debtor companies to once again fulfil their legal obligations.

Taking equity in certain otherwise well-managed Russian companies that are suffering perhaps unjustly from the overall financial crisis may be an attractive option to some foreign creditors.

Legal infrastructure

Virtually all Russian commercial enterprises that may have sought and received foreign capital are either joint stock companies (JSCs) or limited liability companies (LLCs).

In general, Russian law permits the payment for shares in JSCs and ownership interests in LLCs not only in money but also in "securities, other things or property rights or other rights having a monetary value." Because an outstanding debt clearly constitutes a right having a monetary value, it would seem permissible for a creditor of a Russian debtor company to transfer that right to the debtor company in exchange for shares in the debtor company.

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