VK Holding is in technical default because it cannot pay its holders. Their trading on the exchange was halted at the beginning March 2022 because of sanctions. He currently doesn’t have enough money to cover all his obligations. The situation is similar for the internet giant Yandex as well as Ozon’s online store.

VK faces default

Russian Internet holding VK (formerly known as Mail.ru Group) is in danger of technical default on $400m bonds due to mature in 2025 at 1.625%. This was possible due to a halt in trading of global depositary receipts, or GDRs, of the holding at the London Stock Exchange.

GDR VK has not traded on the exchange since March 3, 20,22. This is part the anti-Russian sanctions that were imposed as a result of a special operation in DPR and LPR. The United Kingdom has imposed the most restrictions, followed by the United States.

Trading rules in global depositary receipts can also increase the probability of technical default. They state that bondholders have the legal right to demand early repayment of their debts if trading is halted for more than 10 days. In the case VK, they can exercise this right as early as March 16, 20,22.

Yandex faced the exact same problem with VK

“If the company fails to successfully negotiate with bondholders and fails to pay the appropriate amount of principal on the bonds within three days of the maturity date, or does not pay interest within 14 days, a default event will occur in accordance with the terms and conditions of the bond issue.” , the holding said in a statement.

VK controls many of the most important Russian web services. Vkontakte and Odnoklassniki are his social networks. He also owns Mail.ru, the mail service.

There is not enough money to pay

This is made worse by Russia’s current geopolitical situation and the resulting sanctions. VK might not have sufficient money to pay off all outstanding debts if bondholders demand their early repayment. This is technically a default.

According to the holding’s calculations, as of March 9, 2022, it had at its disposal an amount equivalent to approximately $190 million. The holding kept $140 million of this money in foreign currency, but the problem is that $80 million was placed outside of Russia for the purpose maintaining the working capital of the international business” of the holding. All this when you consider the restrictions on currency circulation located outside Russia.

“Due to uncertainty about the impact of restrictions on the ability to transfer funds from the company’s Russian subsidiaries to its foreign holding company under the recent capital control and protection measures in Russia, as well as the ongoing numerous changes in the regulatory framework, it is possible that the issuer will not have sufficient liquidity in its holding company to finance the payments required for the buyback if the majority of holders decide to exercise the right to present the bonds for redemption,” VK said in a statement.

Everything depends on the diplomats

VK, since December 2021, was led by Vladimir Kiriyenko (a son Sergei Kiriyenko– First Deputy Chief of the Administration of Russia) is going to attempt to resolve this issue through negotiations. They will be initiated in the near future, with the goal of “discussing potential alternatives for bondholders to exercise their right to present for redemption.”

VK representatives also acknowledged that negotiations are not likely to succeed 100% of the time. This is because the bondholders will not be able to pay the debts. A technical default will result.

Problems common to large Russian Internet companies

VK wasn’t the only one at risk of technical default after GDR trading was suspended. Ozon, Russia’s oldest online shop, suffered the same fate. It was established in 1998. It went public in the fall of 2020. It was so successful that Bloomberg ranked it as the most productive Russian company since 2011.

At the beginning March 2022, trading in Ozon securities was stopped on the American NASDAQ Exchange. Three days later, Ozon made public the possibility of technical default.

Yandex was also affected by the sanctions that resulted in the suspension trading in securities. It is listed on both the NASDAQ and the New York Stock Exchange, just like Ozon. Yandex faced a situation in which it could not pay $ 1.25 million in interest on bonds maturing at 0.25% in 2025. “Yandex Group as a whole currently does not have sufficient resources to fully buy back notes . If we are not allowed to distribute additional funds from our Russian subsidiaries to our Dutch parent company, Yandex will not have sufficient resources to redeem most of the bonds,” the internet giant said in a statement.

Yandex was a case in point. Houlihan Lokey was hired as financial advisor by an initiative group consisting of bondholders. They own 72% of the total amount bonded loan. A legal consultant was also hired by the bondholders – Weil Gotshal & Manges LLP.

Both companies represent Yandex’s initiative group in negotiations. “We have begun engaging with Houlihan and are asking other bondholders to identify themselves to Houlihan so that orderly discussions can take place between Yandex NV and the bondholders to find a fair and sustainable solution for all parties,” Yandex said in a statement.