BUYBACKS OR BUST: RUSSIAN ISSUERSBUYBACKS MAKE OR THE BUST: MOST OF A BAD YEAR 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 Russia 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 aluminium producer With reports of a promising deal pipeline attributable to two giants of the Russian oil Rusal. This change of tack challenged (Intellinews, January 2018) and the Russian industry: Lukoil 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 Rosneft 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 Moscow were launched by telecoms provider MTS and conduct buybacks. The trend in fact extended Exchange, let alone on international venues retailers Magnit 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, Polyus and Gazprom 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 (Interfax, 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 Butterworths Journal of International Banking and Financial Law February 2019 105 Feature 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 Moscow Exchange 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.