Bank of New York will stop providing services on Russian Eurobonds

The Bank of New York has notified the holders of Russian Eurobonds that due to EU sanctions, it refuses to act as a trustee for these securities.Experts differ in their assessment of the consequences of such a decision.

The American investment holding Bank of New York Mellon (BNY Mellon) warned holders of Russian Eurobonds that it would not be able to perform the functions of a trustee (represents the interests of securities holders) due to the ban on the provision of trust management services to Russian citizens and companies, which was introduced by the European Union in early April 2022. RBC got acquainted with the corresponding letter of the bank, its authenticity was confirmed by two sources in the financial market. The profile TELEGRAM channel “Pro Bonds” also wrote about the mailing list.

The appeal states that it is sent to holders of all bonds for which BNY Mellon acts as a trustee. “The trustee has determined that certain bonds could potentially be affected by EU-imposed bans if the relevant trust arrangements were identified as involving Russian or Russian-related individuals or entities,” the document states. For such bonds, BNY Mellon will not be able to act as a trustee, that is, to represent the interests of investors, including in disputable situations, for example, in the event of a default on the issuer's securities.

At the same time, the bank indicated that they were ready to “re-assess whether he can act as a trustee” if he receives additional explanations or licenses from the European Commission, allowing him to provide trust management services to Russian citizens or Russian companies.

The appeal also emphasizes that BNY Mellon cannot independently transfer the functions of a trustee to another organization. Only holders of restricted bonds have this right.

The fact that BNY, as well as Deutsche Bank will cease to be trustees for the issues of its Eurobonds, was also announced on May 17 by the state company Russian Railways. Banks also motivated this by the regulation of the EU Council.

What does this mean for investors and issuers

Each issue of Eurobonds has a financial intermediary in the form of a trust, explains Sergey Kuchin, HEAD of the personal brokerage department at BCS World of Investments. He is appointed by the issuer. As a rule, large Western banks act as trustees: Deutsche Bank, Citibank, BNY Mellon and others. BNY is a trustee for about half of the corporate issues of issuers from RUSSIA, the Pro Bonds channel estimates. In second place is Citi.

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“The trustee represents the interests of securities holders in defaults, restructurings or in some other situations,” says Kuchin. The trustee cannot act independently, for example, immediately upon confirmation of the fact of default. To initiate the process of protecting interests, the holders themselves must contact him, give appropriate instructions and pay for his services, the expert explains. “It is important to note that the trustee acts in the interests of investors if a certain quorum is collected - 25% of holders or more. If a quorum is not met, the trustee will not do anything,” Kuchin sums up.

The procedure for transferring trustee functions, which BNY Mellon mentions, can also take place only if there is a quorum of more than 25% of the total number of holders of securities, RBC's interlocutor draws attention, and this quorum should not have an equilibrium (also more than 25% of the total number of holders ) "opposition", opposing the change of trustee.

BNY's decision should not affect the payment of securities, for holders, in fact, nothing will change, the Pro Bonds channel wrote. At the same time, borrowers "will no longer be able to turn to the trustee, for example, to hold a vote among holders to amend the issue documentation."

For the trustee himself, the refusal to fulfill the obligations to protect the interests of the holders of securities, including due to sanctions, does not bear any consequences, Kuchin notes. In such a case, bondholders would simply need to select a new trustee. For the holders of securities, the departure of a trustee at the moment also does not have any negative consequences, however, they may encounter difficulties in the event of a default or restructuring: there will simply be no one to protect their interests, the holders of the securities themselves do not have the right to do this directly.

Kuchin suggests that by publishing such appeals, trustees from among foreign investment banks simply want to get away from the process of litigation on Eurobonds in advance. “Because there is a high probability of claims either from the holders or from the issuers. For example, a situation may arise when the trustee will have to defend Russian investors in front of the European Union, whose sanctions led to the freezing of payments, ”the expert suggests.

“Theoretically, the provision of trustee services for Eurobonds may be questionable not only for a Russian issuer, but also for Russian holders of any Eurobonds, because sanctions restrictions on the trustee service apply to all Russian legal entities and individuals, including if they are simply bond holders,” — says a spokesman for the Bondholders Association. That is, if bondholders want to use the services of BNY Mellon as a trustee and vote for some issue, then, formally following the sanctions, Russian holders will not be able to do this, he argues. At the same time, the association hopes that the European Union will agree to issue licenses to BNY and other market companies to continue working as a trustee. “It seems to us that the European Union did not try to bring confusion to the work of the Eurobond market, but simply prohibited the operation of trusts,”