(Adds detail on other banks, new comment)
By Sujata Rao and Alexander Winning
LONDON, Aug 30 (Reuters) - Russian bank Otkritie’s dollar bond maturing in April 2019 tumbled to a record low on Wednesday, reversing the previous day’s gains as fears returned that holders of the lender’s subordinated debt would be asked to contribute to its rescue.
Bonds of other Russian private banks also mostly fell as investors weighed up chances of further problems in the country’s banking sector, though immediate worries over contagion appeared to recede somewhat.
Otkritie’s bailout on Tuesday was one of biggest ever of a financial institution in Russia. The central bank took up to 75 percent of the country’s biggest private lender.
Authorities said at the time there were no plans for the bank’s creditors to share the cost of Otkritie’s rescue — a bail-in in market parlance — and this spurred a huge rally in the bank’s shares and dollar bonds.
But while most of Otkritie’s bonds have held onto their gains, the 2019 issue — which almost doubled in price to 85 cents on Tuesday — reversed that bounce and fell almost 40 cents at one point on Wednesday, according to Tradeweb data.
After opening around 75 cents, the $500 million issue tumbled to just over 38 cents, a record low.
“We saw how much the Otkritie bonds bounced yesterday ... because of the headline from the central bank and no bail-in was seen,” said Richard Segal, an emerging debt strategist at Manulife Asset Management.
But closer scrutiny of the central bank’s statement indicated a bail-in is possible after authorities carry out a scrutiny of Otkritie’s capital situation, Segal noted.
“From the market price, we can see the market sees a strong chance of a bail-in.”
The central bank said it had not ruled out that in the event of Otkritie’s base capital falling below key thresholds of 5.125 percent and 2 percent, “it could lead to subordinated claims being ended (written off) or changed (converted) into shares”.
It added that the size of the bail-in would depend on how much money would be needed to achieve the required capital levels.
The central bank’s first deputy chairman, Dmitry Tulin, may have further spooked markets after he told reporters that Otkritie’s capital shown in its accounts was most likely “higher than in reality”.
Such a bail-in is most likely to affect the April 2019 bond, which is classed as junior or subordinated debt and therefore lower in repayment priority. With minority shareholders also potentially on the hook, Otkritie shares tumbled 4.5 percent as well, ceding Tuesday’s gains.
“Yesterday the mechanism which the central bank announced was very comfortable for all holders of senior debt... All senior creditors were saved,” an analyst at a Russian bank said. “But as regards subordinated debt, there is still a large amount of uncertainty about their fate.”
Markets are also speculating over what assets Otkritie could liquidate to raise its capital levels. That has hit prices of Russia’s 2030 sovereign Eurobond, which fell 1.3 cent at one point to 21-month lows, according to Tradeweb.
Otkritie is estimated to hold around half of the outstanding $10.7 billion bond.
“Since they need to raise funds, the market seems to be speculating that Otkritie will need to sell the (2030) bonds,” one fund manager said. “They have other assets they can liquidate more easily but that’s the link the market seems to be making.”
Credit rating agency Fitch had flagged concerns over a number of Russia’s banks that could have liquidity problems. In an Aug. 18 statement, Fitch mentioned Otkritie, B&N Bank, Promsvyazbank and Credit Bank of Moscow in that category.
The bail-in fears evoke memories of Uralsib’s restructuring in 2015, when holders of subordinated debt were written down to zero while Trust Bank wiped out some of its bondholders in 2014.
While Russian bank shares rose on Wednesday, many of their bonds weakened — the dollar issues of Promsvyazbank for instance were down between 0.7 and 1.0 cent , while Credit Bank of Moscow’s 2018 bond slipped 0.7 cent.
Raiffeisenbank said in a note to clients that the Russian central bank could use a bail-in mechanism should private banks which are not seen as being of importance to the banking system encounter difficulties. (Reporting by Sujata Rao and Alexander Winning; additional reporting by Marc Jones in London and Oksana Kobzeva in Moscow; editing by Jeremy Gaunt)