Experts assessed the scale of foreigners withdrawing from syndicated loans

In 2022, foreign banks stopped participating in credit syndicates with Russian players for at least $1 billion, the ELWI law firm estimated. In the future, there will be similar “exit” transactions for another $3 billion

In 2022, foreign banks operating in the syndicated lending market closed at least $1 billion worth of transactions to sell their rights of claim on such loans. Thus, they left syndicates with Russian banks and ceased to be considered creditors of Russian companies. Partner at the ELWI law firm Igor Sotnikov spoke about this at the Cbonds forum “Corporate Lending in RUSSIA - 2023”. According to him, credit claims of non-resident banks for at least another $3 billion are being prepared for sale.

“Everyone has probably heard about the famous exit of foreigners from Russia (“exit” through the sale of a business in Russia. — ). So, this is not only about business, but also about the exit of foreign banks from syndicates of Russian borrowers. At the request of one of our clients, we carried out a preliminary assessment of the market for foreigners who had not yet managed to sell their shares in syndicates. According to the most approximate estimates, it turned out that approximately $3 billion of positions in syndicates is worth selling. <...> Over the past year, we closed about $1 billion in deals - we closed this, and these are deals that we know about - and about another $3 billion remains to be solved,” Sotnikov noted.

A syndicated loan  is a large loan that is issued to a legal entity by a pool of banks forming a syndicate. As a rule, we are talking about financing large-scale projects. Lenders enter into an agreement with the borrower on standardized terms; the process of issuance and debt management is handled by the selected agent bank. In 2022, after the start of the Russian military operation in Ukraine and tough Western sanctions, Russian banks specializing in syndicated loans pointed out to the Central Bank the risks of “breaking” syndicates with foreign participation.

Foreign members of the syndicates sell claims on the debts of “premium Russian borrowers,” and the loans themselves, as a rule, are of high quality, Sotnikov points out.

“There is no default on almost any of these loans, unless there is an issue related to sanctions, but nevertheless the banks sell them. They sell at a discount of 15 to 75% depending on the situation, depending on the borrower and other circumstances. The average check is $20–50 million,” the lawyer described the parameters of such transactions.

How exactly do foreign banks exit Russian syndicates?

“Either foreigners will agree to “stay out” in these syndicates (almost all loans there have repayment years of 2024–2026), or you can offer these foreigners an interesting deal,” Sotnikov noted.

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According to ELWI, the main way for a foreign lender to exit a syndicate is through a loan participation financing agreement (LPFA), that is, the joining of a new lender to the syndicate, which buys out the rights of the existing non-resident at a discount. Sotnikov explained that purchasing debt at a discount is primarily of interest to the borrower himself, but syndicated loan agreements, as a rule, directly prohibit such transactions. The SFUK mechanism, according to him, “makes it possible to hide the final acquirer,” since the new fronting creditor could, for example, be a closed mutual fund.

According to Cbonds estimates, more than half of the syndicated loans in January-September 2021 were issued in rubles (11 transactions for 870.8 billion rubles, no later data), another third of the loans were in dollars (seven transactions for $4.4 billion), and a little more than 14% - in euros (three loans for €3.5 billion). The share of foreign banks in the syndicate could reach 50–70%, experts interviewed by RBC estimated.

There were a lot of mixed syndicates with foreign participation, Yan Galin, a partner at the law firm Better Chance, told RBC. He, however, found it difficult to estimate how much credit claims have already been sold and can still be sold by foreign banks. “Most of the information about the syndicates is closed; nothing is publicly available. In general, foreign participants in syndicates have such an interest, but the question is how this is done, with what tools, and how to structure it. SFUK is one of the options, but compliance requirements can be quite strict: sellers often find out a little further who is behind the buyer of the debt, whether there are anyone connected with the borrower, whether there is a sanction risk,” explains the lawyer.

At the same time, he emphasizes that the issue of foreign banks leaving Russian syndicates was most acute last year.

“The first half of the year after the start of the SBO was devoted to ensuring that these stories ended - many borrowers refinanced existing syndicated loans at the expense of a new pool of lenders. But in terms of transactions, this was impossible to do. There, as a rule, everything was recorded as is—regulatory permissions for loan payments were obtained. In my understanding, the majority of foreigners who urgently needed to leave the syndicates did so,” states Galin. He believes that new deals to exit syndicates are no longer so interesting to foreign creditors.

“They “sat” with this loan for almost a year and a half, if there is another year and a half left, then they can wait out it,” explains the expert.

What else has changed in the syndicated lending market

According to Cbonds, in 2022, Russian banks issued syndicated loans worth $2.3 billion compared to $39.2 billion in 2021. However, we are talking only about public transactions. After the sanctions, this lending segment became practically non-public.

“Unfortunately, the market has not yet reached pre-crisis [volumes], transactions are not yet systematic. They are more of a targeted nature,” Alexey Sakhnov, HEAD of the syndicated lending and financial solutions department at Sovcombank, said at the same conference. According to him, a large segment of exporters, who traditionally occupied a significant part, left the market, since their creditors were subsidiaries of large foreign groups. So far no one has been able to replace this segment.

Chinese banks are showing interest in participating in syndicates for lending to large Russian companies, Galin said. In a conversation with RBC, he clarified that there are no syndicated agreements with the participation of Chinese creditors yet, but such negotiations are underway with at least one major Russian exporter.

“We are talking about banks in mainland CHINA . It is unknown whether a syndicate or just a bilateral loan will eventually emerge, but it is a good sign that conversations have begun at all, that foreign creditors have appeared who, in the current conditions, are not afraid to negotiate. There really isn’t a queue, but the main thing is that someone is the first to create such a syndicate - if there is good profitability, then perhaps the trickle will expand,” notes Galin.

Banking market participants are rather skeptical about the prospects for Chinese players entering the domestic syndicated lending market.

“We went through this - that Islamic finance will save us, that the Chinese brothers will save us. Until they save. I don’t see that help will come in the near future,” Oleg Karpeev, DIRECTOR for work with issuers at Sinara Bank, stated at the session.

“It is not yet possible to say that foreign lenders are being actively tested. Although there are friendly jurisdictions, we understand that lenders from these countries are cautious. <…> To say that banks [from China] are standing there in a crowd and calling: “let us go somewhere”... there is no need to talk about this yet,” confirmed Alexey Sakhnov.