BUYBACKS OR BUST: RUSSIAN ISSUERS MAKE THE MOST OF A BAD YEAR A BAD OF MOST BUST: THE OR MAKE BUYBACKS ISSUERS RUSSIAN Key points ––With new US sanctions causing market disruption, 2018 saw some of the lowest levels Feature ever of new issuances by Russian issuers. ––However, Russian issuers used the political and economic situation to get in on the global frenzy for buybacks. ––Key legal issues in 2018 included the application of the EU Market Abuse Regulation to buybacks and the use of “currency toggles” to mitigate sanctions risks. ––2019, while having good potential, could be another difficult year for Russian capital markets if geopolitical tensions remain high.

Author Matthew Fisher Buybacks or bust: Russian issuers make the most of a bad year

“Everything’s fine, but we can’t go on living like this” was how one politician in of itself becoming sanctioned, even where such somewhat perplexingly summarised the situation in his region in 2018. He could just transaction falls entirely outside US jurisdiction as well have been describing the situation in the Russian capital markets. A flurry of – the so-called “secondary sanctions” risk. buybacks kept overall market activity ticking over, but the year was characterised by The effectiveness of sanctions and their net a sanctions-induced dearth of new issuances, and buybacks alone cannot sustain a impact is much debated. Is it, however, safe to market. With the outlook for 2019 uncertain, an understanding of the key politico- say that the April sanctions contributed to the economic and legal issues of 2018 will hold issuers and their lawyers in good stead. creation of an uncertain business environment for new issuances. Previously, US sanctions against Russia had mostly targeted state- 2017 was a year of robust performance securities, ie buybacks, were the one bright owned enterprises and government and ■for the Russian capital markets. spot in the markets. In 2018, Russian issuers military officials. By contrast, the new targets The year saw Russian corporates issue over announced buybacks with respect to over included privately owned international US$20bn of eurobonds (PwC, January 2018) US$6.8bn worth of their equity securities businesses, including the London-listed and US$6.5bn of equity, including US$2.8bn (BCS, October 2018; author’s research, metals and energy group En+ and the in IPOs (Bloomberg, December 2017). December 2018).1 The lion’s share of this was systemically important producer With reports of a promising deal pipeline attributable to two giants of the Russian oil . This change of tack challenged (Intellinews, January 2018) and the Russian industry: announced and commenced investors’ understanding of the scope of US economy achieving a year of GDP growth a programme for the purchase up to US$3bn sanctions against Russia. As a result, many for the first time since 2014, hopes were high of its equity securities by the end of 2022, Russian issuers appear to have concluded that going into 2018. Sadly, it was not to be… while announced (but has not yet it would be prudent to give investors time to 2018 was an exceptionally poor year commenced) a programme for the purchase of adjust before launching new transactions. for the Russian capital markets. For the up to US$2bn of its equity securities by the end Simultaneously, other politico-economic first time in a decade, there was not a single of 2020. Other significant buyback transactions factors were driving Russian issuers to IPO of a Russian issuer on the were launched by telecoms provider MTS and conduct buybacks. The trend in fact extended Exchange, let alone on international venues retailers and Lenta, which will purchase far beyond Russia: US companies alone (Reuters, November 2018). IPOs planned the equivalent of up to US$430m, US$320m purchased over US$1trn of their own equities by petrochemicals company Sibur, meat and US$165m of their equities, respectively. in 2018, compared to US$625bn in 2017 processor Cherkizovo Group and pipemaker (CNN, December 2018). Worldwide, issuers IPSCO Tubulars (part of TMK Group) The political and economic with healthy cash flows but a reluctance all fell by the wayside in 2018, with many drivers to embark on long-term investment and more unannounced equity transactions also On 6 April 2018, in response to alleged aspects expansion projects seem to have concluded shelved. Debt fared little better: while the of Russian foreign policy, the US Treasury that using buybacks to return value to likes of Rusal, and were able unexpectedly imposed comprehensive sanctions investors, implement management incentive to issue eurobonds in the early part of 2018, on seven high-profile Russian businessmen, programmes or support their share price was total corporate eurobond issuances for the together with companies controlled by them. the best use of cash reserves. It is, however, year amounted to less than US$5bn (author’s Subject to the grant of licences, the sanctions possible to discern factors supporting the review of public filings, December 2018). Even prohibit all dealings with such persons that popularity of buybacks in Russia specifically: without adjusting for inflation, this was the fall within US jurisdiction (which includes any ––First, market uncertainty made for cheap lowest corporate eurobond volume for at least involving a US citizen, a US resident, or an Russian equities. In press releases and 17 years! (RBS, November 2011; Financial interbank transfer of US dollars). In addition, remarks to journalists (, August Times, October 2012; PwC, January 2018) any person knowingly facilitating a “significant” 2018), Rosneft, Lenta and footwear Purchases by issuers of their own equity transaction with a sanctioned person is at risk retailer Obuv Rossii explained their

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respective buybacks by reference to to financial instruments traded on an EU This poses a risk to the efficiency of future undervaluation of their stock by the trading venue, but also with respect to transactions as such players play catch-up, market. The message appears to be that financial instruments whose price affects or worse – reveal part-way through that these businesses are in good shape, but the price of financial instruments traded they are unable or unwilling to carry out Russian equity valuations are being on an EU trading venue. The price of a their role in line with the requirements weighed down by temporary external GDR is entirely dependent on the price of of the listing process. Issuers and their factors. Uncertainty around sanctions, the shares that underlie it, and both GDRs lawyers should pre-empt this at kick-off oil production cuts and the health of and shares are financial instruments for by reminding each participant in the emerging markets in general may be the purposes of MAR. Counter-intuitively transaction of exactly what is required of considered important (but by no means then, issuers with EU-listed GDRs are them and, if possible, specifying the same the only) such factors. Issuers taking this subject to MAR when conducting buybacks in detail in their engagement letters. view are therefore likely to have seen such of the underlying shares, even when such ––Fourth, currency toggles are potentially uncertainty as creating an opportunity to shares trade on the and a useful tool for debt issuers, but not a buy back their stock (and thereby reduce not on an EU venue. In the UK, failure to cure-all. As noted above, the US Treasury their expensive equity financing) more appreciate this could land the issuer with generally considers transactions involving cheaply than would normally be the case. a public reprimand, unlimited fine or even transfers of US dollars to be within ––Second, a “decoupling” of the rouble and mandatory delisting. its jurisdiction for sanctions purposes. the price of oil left Russian oil companies ––Second, GDR issuers should conduct Accordingly, the extension of sanctions to with surplus cash. Historically, the value buybacks with due regard to the MAR safe an issuer of US$-denominated eurobonds of the rouble has been in nigh-perfect harbour. Buybacks carry elevated market could prevent the issuer from fulfilling its BUYBACKS OR BUST: RUSSIAN ISSUERSBUYBACKS MAKE OR THE BUST: MOST OF A BAD YEAR correlation with the price of oil. However, abuse risks given issuers’ untrammelled obligation to pay principal and interest investors have an increasingly intense access to inside information regarding their thereon, which is bad news for the focus on geopolitical risks to the Russian own businesses and their control over how bondholders hoping to get their money economy (RBK, September 2018) and and when to conduct buybacks. However, back, and potentially an event of default the Central Bank of Russia has from recognising that buybacks have legitimate for the issuer. Currency toggles – clauses mid-2017 implemented a policy of selling purposes, MAR sets out disclosure, price permitting the issuer to settle payments roubles in the forex market whenever the and volume parameters within which under the bonds in a pre-agreed alternative price of oil is above US$40/bbl, so as to buybacks are guaranteed not to constitute currency if sanctions are imposed – are an reduce the currency’s volatility (Bloomberg, market abuse. Unfortunately, GDR issuers attempt see off this risk. Originally devised June 2018). These two factors resulted may not rely on this safe harbour; it is only for loan financing, such clauses began to be in the rouble-oil correlation breaking available for buybacks of shares admitted to adapted for eurobonds in 2018. Although down almost completely in 2018, with the trading on an EU regulated market. GDR untested, it is reasonable to think that well rouble barely reacting to fluctuations in issuers should not dismiss the safe harbour drafted currency toggles put in place before the oil price. Russian oil companies were entirely, however: it remains a legislatively sanctions are imposed would be effective therefore well placed to reap increased enshrined statement of prudent practice in removing the US dollar jurisdictional US dollar revenues from the surge in and hewing close to it is likely to reduce “hook”. However, such clauses are unlikely oil prices lasting until October, without issuers’ MAR risk greatly. to be a complete solution as it is likely at seeing their rouble-denominated expenses ––Third, some Russian market participants least one of the agents, correspondent banks rise commensurately. Buybacks were one are increasingly unfamiliar with the or clearing systems involved in settling way of sharing the resulting windfall with requirements of international listings. payments will be a US person (who is equity-holders. In the halcyon days of 2006, the London required to give effect to US sanctions) Stock Exchange celebrated 19 Russian or a person that has regard to US Legal and practical IPOs (PwC, September 2014); in the sanctions as a matter of policy. In considerations for Russian five-year period 2014-2019, it saw just addition, payees may be wary of secondary issuers three. The Russian corporate eurobond sanctions where receiving a payment can The developments of 2018 have brought a market has also declined, albeit less be considered a “significant transaction” number of legal issues to the fore: markedly. It is therefore reasonable to with a sanctioned person. Issuers should ––First, Global Depositary Receipts (GDR) suppose that memories of the intricacies therefore discuss the legal limitations issuers must comply with MAR (ie EU of international listings are fading and marketing impact of currency toggles Market Abuse Regulation 596/2014) even among some of those playing important with their lawyers and investment bankers when conducting buybacks wholly outside transaction support roles, such as industry before considering any transaction the EU. MAR applies not only with respect experts and various service providers. making use of them.

106 February 2019 Butterworths Journal of International Banking and Financial Law BUYBACKS OR BUST: RUSSIAN ISSUERS MAKE THE MOST OF A BAD YEAR A BAD OF MOST BUST: THE OR MAKE BUYBACKS ISSUERS RUSSIAN Biog box Matthew Fisher is an associate in the London office of Cleary Gottlieb Steen & Hamilton Feature LLP (www.clearygottlieb.com). His practice focuses particularly on Russia and he often advises on capital markets transactions, such as the Rusal eurobond and the Rosneft, Magnit and Lenta buybacks referred to in the article. Email: [email protected] / Twitter: _mfshr

Looking forward to 2019 RusHydro (Vedomosti, November 2018) ever IPO of a Belarusian business on 2019 appears likely to have the may signal that Russian issuers in 2019 the London Stock Exchange in 2018 – macroeconomic potential to support will explore fundraising in a more diverse while ultimately unsuccessful – shows capital markets transactions: range of currencies. that issuers from Russia’s western ––First, 2019 is building on the relatively ––Second, Russian companies with neighbour may have good potential. As favourable economic situation in 2018. international listings may repatriate for Uzbekistan, it expects to issue its Russian GDP growth in 2018 appears themselves. At a time when maintaining first sovereign eurobond in 2019, thereby to have increased by a moderate 1.6%, an international listing is becoming establishing a pricing benchmark that broadly in line with the 1.5% growth increasingly difficult for Russian will allow Uzbek corporates to enter the experienced in 2017 (OECD, November businesses, the Russian government has eurobond market too. If issuers from 2018); the average price of oil rose been supportive of them returning to the such countries can convince investors from US$54/bbl in 2017 to US$71/ Motherland. For example, a law passed that they have lower geopolitical bbl in 2018 (World Bank and Reuters, in summer 2018 establishes Russian risks, Russian issuers could face stiff December 2018); and the Russian offshore zones to which the foreign competition. economy ran a budget surplus in 2018 parent companies of internationally of nearly 3% – the first surplus since listed Russian businesses (among others) The announcement by the US Treasury 2011 (Financial Times, December 2018; may re-domicile, thereby receiving in late 2018 of its intention (effective January Reuters, May 2018). This means the favourable tax treatment and access to 2019) to lift sanctions on En+ and Rusal Russian capital markets go into 2019 the Moscow Exchange. With En+ and is likely to be a shot in the arm for market with a solid macroeconomic foundation. Rusal having announced their intention sentiment going into 2019. However, what ––Second, economic conditions in 2019 to rely on the new law, 2019 could see happens in 2019 may ultimately come are forecast to be benign. Russian GDP more Russian companies return home. down to timing. The economic stage seems growth is predicted to remain moderate ––Third, Russian issuers may tire of the set and Russian issuers are waiting eagerly in 2019, with the economy growing 1.5% public markets altogether. The April in the wings. The question is whether the (OECD, November 2018); the price of oil sanctions showed that even being listed geopolitical storm clouds will hold off long is forecast to increase slightly to US$74/ on a Western stock exchange does enough for the show to go on, and whether bbl (World Bank, October 2018); and not put an issuer beyond the reach the audience will stick around to find out! n the Ministry of Finance expects to run of sanctions. At the same time, since another budget surplus in 2019 – this Russian issuers are currently paying The author is thankful to Yulia Solomakhina time of 1.8% (TASS, November 2018). the highest average dividends in the and Jacob Turner for their input. Any world (Intellinews, June 2018) and many mistakes are the author’s alone. This article That 2019 is shaping up to be a healthy are actively returning capital to their does not constitute legal or financial advice. year for the Russian economy is good news equity-holders through buybacks, it Its contents represent the views of the author for the capital markets. However, as 2018 does not appear they are particularly in only and not of Cleary Gottlieb Steen & showed, clement economic conditions are need of additional financing at this time. Hamilton LLP. far from sufficient to guarantee a good crop With public status being as costly and of transactions. If the geopolitical situation onerous as ever, 2019 could see more 1 Excludes Megafon’s tender offer for up to is as turbulent in 2019 as it was in 2018, issuers re-evaluating their listing and US$1.26bn of its own equities, which was a it could significantly shape or hamper the following in the footsteps of telecoms precursor to its delisting from the London development of the markets: operator Megafon, retailer and and Moscow exchanges, not a conventional ––First, eurobond issuers may increasingly pharmaceuticals company OTC Pharm, buyback. seek to raise funds in currencies other each of which went private in 2018. than US dollars. As noted above, ––Fourth, investors traditionally interested Further Reading: currency toggles are potentially one way in Russia may seek opportunities ––The scramble for shares: the return of of mitigating the sanctions risk associated elsewhere. At present, the choice Russian equity deals (2018) 2 JIBFL with US$-denominated fundraising. of international investors targeting 104. Issuing bonds in a different currency corporate securities in the former Soviet ––The dash for debt: Russian issuers in the first place is another. Gazprom’s Union is largely limited to Russian and return to the market (2017) 2 JIBFL move to issue €1bn of eurobonds in late Kazakh issuers. There are, however, signs 82. 2018, followed a day later by the issuance that the Belarusians and the Uzbeks ––LexisPSL Banking and Finance of a record-breaking US$200m worth intend to get involved. The attempt of Practice Note: The effect of sanctions of renminbi-denominated eurobonds by retailer Eurotorg to conduct the first on loan agreements.

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