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Report: Orient Express Bank eyes bond restructuring to boost capital

Public Stock Co. Orient Express Bank suggested that the holders of its subordinated bonds convert them into perpetual bonds to increase the bank's Tier 1 capital after the merger with COMMERCIAL BANK UNIASTRUM BANK (LLC), Vedomosti reported April 10. Orient Express Bank also expects investments from shareholders.

The failure to increase Tier 1 capital in 2017 could raise significant doubts about the group's ability to continue its operations, according to Orient Express Bank's 2016 IFRS financial report. The bank's management team believes that problems with capital will be resolved in 2017, Vedomosti noted.

The bank has four issues of ruble- and dollar-denominated subordinated bonds in circulation, with their total value amounting to 12.7 billion Russian rubles at the end of 2016. Between 60% and 70% of the lender's subordinated bonds were bought by three or four minority shareholders of the bank, a source close to one of the shareholders told Vedomosti in summer 2016.

Orient Express Bank's management board chairman, Alexey Kordichev, said the lender has started negotiations with debt holders, but did not disclose further details.

The bank may need additional capital in order to set up provisions for noncore assets and nonperforming loans of Uniastrum Bank, Vedomosti noted, citing Moody's analyst Olga Ulyanova.

The bank said in the IFRS report that it is in discussions with the central bank about the final results of a recent regulatory inspection, and Expert RA analyst Stanislav Volkov noted that it most likely means that the lender is discussing with the central bank the size of necessary provisions, which will reduce the capital adequacy of the lender.

Orient Express noted that the required level of capital for the merged lender has not yet been agreed with the central bank. Volkov estimates the bank may need around 6 billion rubles in additional Tier 1 capital in 2017.

As of April 10, US$1 was equivalent to 57.28 Russian rubles.