Gazprombank is proposing to convert 91.8 million euros ($129 million) of mortgage-backed securities at a below-market exchange rate in a deal that London-based brokerage Brains Inc. says would mean losses for senior creditors.
Gazprom's lending unit is seeking to convert the notes at 34.7 rubles per euro, said Igor Rusanov, head of structured and syndicated finance at Gazprombank. The average rate in the past year has been 44.1 rubles per euro, data compiled by Bloomberg show.
"It doesn't make sense for any senior euro note holder to approve such a proposal," said Shammi Malik, head of asset-backed securities trading at Brains Inc. Malik has been in the European securitization market for more than 20 years and was previously head of asset-backed securities trading at Societe Generale. "Senior bondholders would be losing circa 20 percent of the principal of the notes under the proposed redenomination and receive a substantially less liquid security," he said.
Brains traded some of the notes on behalf of clients in November, Malik said.
Gazprombank said the exchange rate is fair. The proposal seeks to "restore liquidity of all classes of the notes and credit ratings thereof," Rusanov said in a statement sent by e-mail. The proposed conversion rate is the exchange rate used between the issuer and Lehman Brothers, which arranged the original currency swap contract on the deal, he said.
The securities were sold in June 2007 by Gazprombank. The notes were backed by Russian residential mortgages provided by a unit of Gazprombank known as GPB-Mortgage, Rusanov said.
The securities were split into five portions, according to a Moody's Investors Service statement at the time. An equivalent 190 million euros of the notes were sold, including a 147 million euro-denominated portion ranked the most senior for repayment in the event of default. The remainder was kept in more junior ruble notes.
Gazprombank Mortgage Funding 2, the vehicle used to issue the bonds, signed a currency swap with Lehman to lock the conversion of the ruble cash flows into euros to pay back the most senior bonds, according to Moody's.
The senior bonds were initially rated A3, Moody's seventh-highest investment grade. They were downgraded nine steps to B3, after Lehman filed for bankruptcy protection. It prompted a default on the currency swap, and the managers of the deal couldn't find a new provider of the derivative, according to a regulatory filing on April 9.
Moody's put the senior notes on review for a further downgrade because the proposal "will crystallize a principal loss of approximately 14 percent due to the local currency depreciation from closing," the ratings company said in a statement Friday. The lower-ranked A2, B and C ruble notes may be upgraded from as low as Caa, nine steps below investment grade status. Moody's doesn't rate the class D notes.
Gazprombank owns more than 10 percent of the class A1 notes, the most senior euro-denominated portion, making it the seller and a bond holder in the proposed deal, Rusanov said.
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