Flash Fixed Income Report /

Transcapitalbank in the news: Asking for forever

  • Russia's Transcapitalbank is seeking to change the terms of one of its bonds – and not for the first time

  • If successful, the dated subordinated bond would become a perpetual security

  • There may be concerns about other lenders considering similar amendments

Transcapitalbank in the news: Asking for forever
Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
28 May 2020
Published byTellimer Research

Transcapitalbank (TRACAP) announced a consent solicitation in respect of its September 2020 bond on 27 May. The lender is seeking to amend the terms of this short-dated security to allow for its treatment as Basel III Tier 1 capital. It currently qualifies as Basel III Tier 2 capital. Thus, if successful, this bond may become a PerpNC5 instrument with fully-discretionary interest payments. Further, under amended terms, the bond may be written down if the Common Equity Tier 1 (CET1) ratio falls below 5.125% or if the Central Bank of Russia (CBR) approves a recapitalisation plan involving the Deposit Insurance Agency (DIA) in bankruptcy prevention measures. At the end of March, TRACAP's CET1 ratio was 9.78%.

Bloomberg data shows the bond was issued in 2007. In 2015, the terms of the bond were changed to, amongst other things, include loss absorption language. The coupon on the bond also changed. The amount outstanding has reduced to US$62.3mn from US$100mn, partly through buybacks.

TRACAP is paying a US$3 (per US$1,000) early consent fee and a US$1 (per US$1,000) late consent fee. The early consent deadline is 4pm UK time on 9 June and the late consent deadline is 4pm UK time on 17 June. In the 2015 consent solicitation, the early and late consent fees were US$50/US$1000 and US$10/US$1000, respectively.

The TRACAP announcement came just a day after the CBR disclosed that net income in the banking sector reduced to RUB32bn in April from RUB190bn in March, partly due to foreign currency-related losses. TRACAP disclosed net income of RUB1.4bn under RAS in the first quarter of this year. Interestingly, the lender is expanding in Uzbekistan – TRACAP disclosed that US$100mn in trade financing had been provided via Uzbekistan banking partners in a 12-month period.

TRACAP's announcement may raise concerns about challenges faced by small or mid-sized lenders in Russia (note TRACAP reported total assets of RUB275bn at end-2019). These concerns probably shouldn't extend to Tinkoff Bank (AKBHC), which is much larger (RUB607bn total assets at end-March 2020). Further, AKBHC has been through at least one crisis before – without changing terms on bonds – and completed a capital increase last year. The bank has withdrawn guidance for 2020, but expects to remain profitable and is confident that adequate capital ratios will be maintained. On Home Credit & Finance Bank (HCFBRU), that lender reported total assets of RUB344bn at the end of last year, so is more similar in size to TRACAP. HCFBRU has also been through its fair share of crises. We recall that the bank had at least two subordinated bonds outstanding when Russia's banking sector faced significant challenges in 2014-16 and the terms of the bonds were not changed. HCFBRU bought back eurobonds (opportunistically, we believe), and subsequently called both subordinated bonds at the first call dates in 2018 and 2019.

Having said all this, we acknowledge that the securities which these banks (and others) now have outstanding are deeply subordinated perpetuals, with fully-discretionary coupons and with write down language. What happens with both dated subordinated bonds and perpetual securities in Russia will likely be keenly watched.