VTB's "frozen" assets in Britain were proposed to be transferred to a trust for 15 years

External managers of the British VTB Capital have developed a scheme for settlements with the investment bank’s creditors, including parent VTB. But due to sanctions, funds owed to the Russian group may end up in a special trust

VTB Capital, a former subsidiary of VTB in the UK , which is currently undergoing bankruptcy proceedings, has received the first funds for settlements with creditors, according to a report by Teneo Financial Advisory Ltd, which acts as an external manager of the structure.

The document, which RBC reviewed, talks about “significant progress” in the return of assets frozen due to sanctions against the VTB Group. Therefore, at the beginning of 2024 , the external administration of VTB Capital intends to launch a discussion on a settlement scheme with creditors, including the parent bank in RUSSIA, which is under sanctions. If the scheme is approved, then payments for obligations will be carried out through a special trust.

VTB did not respond to RBC's request.

After falling under Western sanctions , VTB lost control over the European “subsidiary” VTB Europe, headquartered in Frankfurt, and over the British VTB Capital in London , which was mainly engaged in investment banking and trading operations on the stock market. The investment bank lost the ability to service its external obligations, and also lost access to funds in correspondent accounts in other banks.

The structure in London was transferred to external management. Since December 2022, Teneo Financial Advisory Ltd has been its administrator. As reported in previous reports, its goal is to sell the available assets of VTB Capital (including unlocking those that were frozen due to sanctions using special licenses), pay off the bank’s creditors and liquidate it.

“Simply unprecedented things, absolutely bandit methods - just take everything away, close it, transfer it to someone. How is this possible? We have always been friendly with the West. We have always been very loyal. We worked with all the major bankers. Personally, I knew all the Americans, all the Europeans. They did a lot to ensure that they actively worked in Russia and earned money,” VTB HEAD Andrei Kostin commented in an interview with RBC on the loss of Western assets.

How far have VTB Capital managers come in Britain?

According to the report, the total liabilities of the British VTB Capital exceed £800 million. The bulk of this amount - £804 million - falls on 434 final creditors (including 164 employees). Among the creditors, VTB Group structures have a significant weight: the group’s claims on the subsidiary amount to £262 million.

Previously, the book value of VTB Capital's assets was estimated at just over £1 billion, but managers considered it possible to obtain only 34.5% of this amount, or £362.5 million.

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By the end of 2023, they managed to return almost half of the expected volume:

£130 million in cash that was frozen in VTB Capital's accounts with Belgian depositary Euroclear. The return was made under a special license. In the future, it may make it possible to unblock balances in Euroclear for another £22 million; £2.9 million in cash from nostro accounts following the closure of VTB Capital's Singapore branch and £0.7 million from the nostro account at HSBC; £1.1 million in insurance claims from VTB Capital counterparties, with similar payments expected for a further £7.2 million; £8.2m payments on closed derivatives transactions; payments on other transactions of approximately £1 million.

Managers also expect:

obtaining licenses from the American sanctions regulator OFAC to unfreeze and return money from correspondent accounts in two American banks - a total of £26 million; cancellation of settlements on pending transactions worth £24 million. Of the six such transactions, three have been settled, another is close to completion. These operations have so far given VTB Capital only symbolic profits; sale of securities worth £67.9 million. Assets that were unfrozen in Euroclear are being prepared for sale, their estimated value is just over £14 million. Securities worth another $15 million (£11.7 million) are blocked in the usa , for access their managers applied for a license from OFAC, but have not yet received it. The balance, approximately £43.7 million worth of paper, is frozen in accounts at Russia's National Settlement Depository (NSD). All assets in NSD, including cash, are estimated by VTB Capital managers at £47.6 million; repayment of at least part of the overdue debts to VTB Capital. These bad loans have a book value of £1.2bn, comprising two loans to customers in Mozambique (worth approximately £1bn) and three loans to customers in India, Turkey and Russia. What payment scheme do VTB Capital managers offer?

With the onset of 2024, the managers of the British VTB Capital plan to begin collecting statements of claims from individual creditors and will launch a procedure for agreeing on a settlement scheme (Scheme of Arrangement), the report says. It must be approved by a numerical majority of creditors, as well as creditors who hold more than 75% of the debt. Then it must be approved by the COURT so that the agreement becomes binding on dissenting creditors. Finally, the payment scheme must be approved by regulators, including sanctions.

If it is approved, this will allow VTB Capital to repay its obligations, including to creditors who are under sanctions. These include the VTB Group and the Russian VTB Bank itself.

However, VTB Capital will be able to make payments to sanctioned creditors not directly, but to a specially created trust - the Holding Period Trust (HPT). This structure will operate for at least 15 years, the basis for settlements from HPT will be the lifting of sanctions or obtaining a special license. The planned scheme also allows for the sanctioned creditor to receive the funds and assets of the British VTB Capital, which are stuck in the National Settlement Depository in Russia, or to satisfy its claims through the British company’s receivables to the VTB group. According to the report, the net volume of such intra-group debt of VTB Capital is £112 million (RUB 12.9 billion). However, both alternative settlement options are also possible only through a trust, the authors of the scheme indicate.

How do lawyers evaluate this scheme?

A trust for the English legal system is a common design; in this case, it will allow external managers of VTB Capital to complete the bank bankruptcy procedure without delays that may arise due to sanctions, explains Forward Legal lawyer Oles Gruzdev. He reminds that the largest creditors of VTB Capital are under restrictions, “therefore, the managers of VTB Capital cannot dispose of the property by transferring it directly to [such] creditors.”

“What can managers do? They can transfer part of the property to those creditors who are not under sanctions in order to pay off wages or other current payments. Apparently, this is a small part of accounts payable. With regard to the remaining part of the property, establish a trust, the beneficiaries of which will be VTB Capital’s creditors,” the lawyer continues.

Thus, according to Gruzdev, the trust “will allow VTB Capital’s property to be stored in the interests of its creditors in the event that the sanctions are lifted, and the trust has the right to pay creditors at the expense of the trust property.” Until this happens, the trustee will manage the property included in the HPT: invest in assets, generate income, and thereby cover management costs.

“If VTB Capital’s property is transferred to a trust, then this could probably serve as a basis for terminating the external management (bankruptcy) procedure of VTB Capital. With this approach, the design of the trust can make it possible to optimize the resources of the trust managers, reduce the time required for the external management procedure and reduce the burden on the court, which will not need to monitor the actions of the trust managers for 15 years,” says Gruzdev.

If we look for an analogue in Russian legislation, the proposed scheme for settlements with creditors is similar to a settlement agreement, notes Pen & Paper lawyer Roman Kuzmin. He draws attention to the fact that, taking into account the composition of creditors (33% of the debt is held by the VTB Group), the settlement scheme is unlikely to be approved without the consent of the parent bank.

“I see no obvious reasons for the VTB Group to vote for or against. In my opinion, the situation for the group will not fundamentally change, since the funds due to it will still remain unavailable and only their nominal holder will change,” says Kuzmin. The lawyer points out that transferring money from a trust to a sanctioned person will only be possible with a license. “It’s definitely not worth counting on it,” Kuzmin believes.

The sanctioned creditor still has no other options to satisfy the claims at the expense of the property of VTB Capital UK, Gruzdev notes, in turn: “I think that with a higher than average probability they will agree on such a settlement mechanism.” Although the trust scheme will only become operational if sanctions against VTB are lifted or “exceptions are made” for it, the lawyer points out.

Taking into account the sanctions status of VTB Capital UK, the establishment of a trust and the transfer of assets will solve the problem of obtaining separate permissions for transactions with the assets of a blocked person, but “any mechanism does not allow VTB to receive blocked assets until the sanctions are lifted,” he believes senior lawyer in the compliance and sanctions law practice of BGP Litigation Dmitry Dvoretsky.