Russian Fixed Income - VimpelCom Terminates Opco Guarantees for Certain Outstanding Eurobonds

The holders of the ruble-denominated VIP 18 Eurobonds (outstanding: R12 bln or $0.2 bln ) have received a notice that effective June 30 the issuer has terminated its guarantee for the issue of the Russian PJSC VimpelCom, the company's major operating entity, saying that it "used its option to do so in accordance with the issue conditions." The prospectus of the VIP 18 RUB (the bond shares a prospectus with the VIP 19 USD and VIP 23 USD) does indeed state that the guarantee of the opco can be terminated, if either of two conditions is fulfilled: first, if the bonds are upgraded to investment grade by either Moody's or S&P; secondly, if the debt of the company's subsidiaries (including guarantees issued by them for the debt of the holdco to third parties) declines to below 25% of the company's total consolidated assets. It may be assumed that the issuer thinks that the second condition has been fulfilled.
Since neither S&P nor Moody's upgraded the paper to the threshold level, we assume that after the recent buyback of the outstanding VIP Eurobonds, where the company bought back the VIP 18 USD and VIP 21 USD Eurobonds (both issued directly by the Russian opco) and VIP 22 USD (issued by the Dutch VimpelCom BV, but irrevocably guaranteed by the Russian opco), the second condition may have been fulfilled. VEON's latest consolidated accounts (1Q17) state that the company has $20.6 bln in total assets and $5.6 bln of debt at the opco level, plus $3 bln of the bonds issued by the holdco were guaranteed by the Russian subsidiary. Following the issue of the new bonds and the buyback of the bonds issued/guaranteed by the Russian opco, as well as the reported refinancing of $1.5 bln in loans of the Russian opco with loans from a Russian bank at the holdco level, which reportedly took place in May, we estimate the current actual level of VIP's debt at the opco levels at around $3.5 bln ($4.1 bln if we add the remaining VIP 22 with the irrevocable guarantee of the Russian opco). In other words, the company's debt at the level of its subsidiaries may have dropped below 25% of the total assets, which permits termination of the guarantee.
We suspect (although we are not certain) that the issuer may have removed the Russian opco guarantee from the VIP 19 USD and VIP 23 USD as well.
All three bonds are putable at par if after termination of the guarantee either Moody's or S&P downgrades the bonds below BB or Ba3. The bonds are currently rated at BB and Ba2. Only the VIP 18 RUB is traded around par, e.g. this is the only bond where executing the put option would make sense if there is a downgrade from S&P. However, S&P rates the new VEON bonds (which do not have the guarantee of the Russian opco) at BB, e.g. at the same level as the bonds with the guarantees, so a trigger of the put option in unlikely.
The termination of the opco guarantee (if it did in fact take place for the dollar bonds as well) weakens the structure of the VIP 19 USD and VIP 23 USD, which may spur some selling interest. However, considering that the new VIP 21 and VIP 24 bonds currently trade below the "old" VimpelCom curve - unfairly, in our view - we think that substantial pricing action is unlikely.