Yandex restructuring event rejected

The credit derivatives determinations committee has declined to consider the question of whether a restructuring credit event has occurred with respect to Russian company Yandex. The background to the decision is unclear but it’s perhaps another illustration of the subtleties of demonstrating restructuring credit events compared to failure to pay events.

On March three Yandex issued a press release confirming that its class A shares had been delisted from Nasdaq and the New York Stock Exchange on 28 February due to Western sanctions against Russia. If ongoing for five trading days, the delisting would trigger redemption rights of its US$1.25m convertible notes due 2025. Hence, holders of the notes could elect either to redeem the notes or to convert them into equity.

Indeed, on nine March, Yandex published a delisting event notice stating that on March four, a delisting event had occurred in relation to the notes. The notice stated that under the conditions of the notes, the delisting event had triggered an option for the noteholders to either convert them to equity or to exercise a put option on them. For the purposes of the put option, the original delisting event period was from nine March to nine May, and the put date was set for 27 May.

However, on 29 April, Yandex agreed to an extraordinary resolution with noteholders to extend that deadline to June seven.

Suzanna Brunton, Counsel at Linklaters comments: ‘’the resolution amended the terms of the bonds because the original put date of 27 May was postponed, so a market participant questioned whether this constituted a restructuring credit event under the credit derivatives definitions. The question was submitted on May 19th and rejected on May 23^rd, so the committee didn’t even consider the question.’’

The response of the committee may be explained by the fact that the number of voting members of the determinations committee weren’t enough to look at the question. Under the DC Rules at least two voting members need to agree to accept a question for the DC to deliberate the point. However, it could also be the case that the members reviewed the facts submitted and thought that it was unlikely to meet the test for a restructuring credit event.

Brunton explains: ‘’postponing payments isn’t enough for a restructuring credit event since there must be a causal link with a deterioration in the creditworthiness of the reference entity. The delisting and subsequent events pertaining to the notes was caused by Russia’s invasion of Ukraine so there’s no obvious causal link to a credit deterioration.’’

The determination of credit events is a highly subtle and technical procedure but in some cases the committees can stand back and-using their experience and expertise- determine whether a particular case in question is a credit event or not.

If the determinations committee rejects a credit event question, it’s still open to the contracting parties to determine on a bilateral basis whether this is a credit event, but there will be hurdles since it ultimately must be proved-including the link to a credit deterioration.

Overall, unlike Russian Railways, the Yandex case doesn’t set a precedent. Brunton notes: ‘’In the Russian Railways case, the payment by Russian Railways was blocked due to sanctions and the determinations committee concluded that a failure to pay event had occurred. Unlike restructuring, failure to pay is accompanied by guidance on whether there has been a credit deterioration.’’

She concludes: ‘’The guidance includes a provision which allows the determinations committee to presume a credit deterioration if the failure to pay is caused by certain events, which would include the imposition of sanctions. Consequently, even though Russian Railways attempted to make payments and there was no obvious evidence of a link to credit deterioration, the determinations committee were able to conclude that the credit deterioration requirement was satisfied.’’

Stelios Papadopoulos