CSFB launches $12bn Russian debt swap plan

CREDIT SUISSE First Boston (CSFB) yesterday announced a plan to restructure Russian foreign debt worth $12bn (pounds 7.4bn). It launched a fund that will swap worthless Russian government debt for stakes in oil and gas projects. The plan is an alternative to repayment proposals put forward by the Russian authorities.

CSFB said the fund would "increasingly be accepted" by the authorities. At an informal meeting yesterday it invited other banks on the 19-strong committee negotiating with Russia to invest in its new Nikitsky Recovery Fund.

The move follows the acceptance by three banks of the government's terms on part of their holdings of the Treasury bills and bonds - GKOs and OFZs - on which Russia defaulted in August. These included Deutsche Bank, which formerly chaired the bankers' committee.

CSFB, which together with its clients holds as much as 40 per cent of the debt in question, said the new fund would "permit both its own investor base and other investors to participate in a recovery proposal radically different from that currently on offer from the Russian Federation".

That deal will offer an eventual return of just five cents in the dollar. The breaking of ranks by Deutsche, Chase and Credit Lyonnais to accept the outline terms earlier this month angered other banks on the committee that had hoped to negotiate a better deal.

Nomura was one of the 19 which expressed support yesterday for the Nikitsky Fund. Daniel Jackson, head of emerging markets fixed income in its London office, said: "The other plan's concept was flawed. This one is fundamentally and conceptually sound."

The Nikitsky proposal will swap the defaulted bonds into claims on equity in specific projects, mainly in oil and gas. The fund has certain investments by major US oil companies in its sights, and is reported to have half the funds it seeks subscribed already.

The more investors it has, said yesterday's statement, the greater will be its negotiating power, not least with the Russian government. CSFB indicated that the plan had the authorities' approval in principle, after extensive discussions.

However, other banks on the negotiating committee are now likely to approach the Russian government to discuss other debt-for-equity proposals. As one said yesterday: "Why would any bank pay CSFB for something it can do itself?"

The principle of debt-for-equity swaps is widely favoured. Other bankers had been seeking to negotiate this form of restructuring with the Russians.

The Nikitsky Fund is to have a minimum life of seven years. Export earnings on oil should secure the returns. A quarter of the dividend the fund achieves will be paid to the investment adviser, on top of an annual management fee.

The Nikitsky Recovery Fund will be managed by Baiame Strategic Advisers, run by Andrew Ipkendanz. Mr Ipkendanz is a former head of CSFB's emerging markets fixed income group.

There was no comment yesterday from Russia's Ministry of Finance.

According to new figures yesterday, Russia's total external debt reached $100bn last year. More than a third of this falls due within a year. Its consolidated debt to overseas banks - loans plus outstanding bonds - amounts to nearly $76bn.

The Treasury bonds and bills in yesterday's plan from CSFB amounted to a $40bn market. Paying no interest but offering potentially huge capital gains, they were speculative investments that were always likely to burn some investors if Russia either defaulted or devalued. In August, it did both.

An International Monetary Fund team is now in Moscow negotiating terms for new IMF loans to Russia.

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