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History weaves odd threads sometimes. In 1971, with Cold War détente in the air, the Soviet Union established the Ost-West Handelsbank to finance trade with West Germany.
Fast-forward over half a century. After the fall of the Soviet Union, a VTB merger in the 2000s, Russia’s invasion of Ukraine and subsequent sanctions on VTB, then a takeover by German regulators, what’s left of the OWH name is the mystery creditor pursuing one of Moscow’s old Cold War allies.
From MainFT over the weekend:
Liquidators of the European arm of VTB Bank have accused Angola of defaulting on a loan after the lender’s Russian parent was hit by sanctions, according to two people familiar with the matter.
Frankfurt-based OWH, the former VTB Europe, has launched arbitration proceedings against the African country to repay the loan, the people said. It is seeking to recover money on assets that were held in the subsidiary and severed from state-owned VTB by western sanctions on Russia.
Even when we first wrote on this, we knew that it had to be a Russian bank debt. But it was almost certainly not a Russian bank that was making the claim of default.
In terms of where the debt came from, no other country could really be home to several sanctioned lenders who had a track record in a place such as Angola. But, politically, it was hard to imagine Russia legally pursuing a not-unfriendly country over a debt because of sanctions problems.
Angola-Russia relations are less comfortable than they were, not least because of sanctions in other areas. But there’s history here. And when Russia does turn legal holdout, it tends to go differently.
That left a creditor that had to pursue repayment. Short of a maniac distressed debt investor somehow acquiring this claim, it could only be an entity with the duties of something like a liquidator.
So, even if the original bond disclosure by Angola wasn’t great — mystery solved?
Almost. But not quite. There are other important questions here.
First, does it matter anyway? Whoever owns it, is this leftover loan really material to investors in Angolan debt? After all, that is the pushback that we had from debt managers and analysts after our original post.
Even if we don’t know exactly how big the OWH-inherited VTB debt is, it can’t be much bigger than the very low hundreds of millions of dollars. On size alone, it won’t make or break Angola’s credit. After all, this all emerged in a half-disclosure buried in the issuance of nearly $2bn in bonds, to serve as collateral for a $1bn loan from JPMorgan, ahead of approximately $6bn in external debt service this year.
If you are bullish and think Angola will soon have market access and other money coming in to cover its bills, you might well bet that other creditors will safely ignore the OWH claim and that, in the worst case, Angola can pay it off in full in the last resort.
And if you are bearish, you are probably bearish for more sweeping reasons: the over-collateralised loan is a bad, not a good sign for you, or you think the price of Angola’s main export will go lower, and so on.
It takes two views to make a market, as ever.
The point is though, the disclosure still lacks for informing those views. Sanctions are complex. International arbitration very often does involve confidentiality. But neither feature of markets is likely going away soon for sovereign debt disclosures, including at times the thorny issue of who may have stopped paying whom when, and if that ranks as a default.
One more thing. Let’s recap the original disclosure:
Other defaults
Angola is a party to an arbitration in relation to a syndicated facility entered into with certain lenders. The facility was performed in accordance with its terms until each of the lenders became subject to international sanctions, the effect of which was to restrict the parties’ ability to perform the facility in accordance with its terms. One lender has recently commenced arbitral proceedings claiming that an event of default has occurred and that it is entitled to full repayment of its portion of the loan. There is no evidence that that lender has the required majority lender consent of 66 2/3rds and therefore, any demand or action taken by that lender in its own name contravenes the terms of the loan documentation. As such, Angola denies that the lender is entitled to accelerate the loan or pursue the claim and intends to defend the arbitration.
What does that tell us clearly about the current sanctions status of the ‘lender’?
Shielded from VTB and now in liquidation, OWH is no longer subject to sanctions. Assuming that it can pursue this claim, that means one of the issues in any litigation may well be whether sanctions now apply to the debt at all. So it’s quite important.
Anyway. We look forward to perusing the prospectus of Angola’s next eurobond sale.
