bne IntelliNews – Russia moves closer to bond default

After months of maneuvering through the sanctions minefield, the Russian Finance Ministry appears to have slipped for the first time after missing a $1.9 million interest payment that triggered the first event of default on the Russian sovereign debt since that which followed the 1917 revolution.

As followed by bne IntelliNews, since May 27, Russia has been back on a 30-day countdown to default just two days after the U.S. Treasury decided not to expand its ability to service sovereign debt in U.S. dollars. But now there’s a new problem: The department appears to have forgotten to add $1.9 million in interest payments to a deferred coupon payment made last month. The latest developments are likely to complicate the finance ministry’s efforts to thwart restrictions, including the latest ruble bond proposal.

On June 1, the Credit Derivatives Determinations Committees (CDDC) of the International Swaps and Derivatives Association (ISDA) ruled that a “default to pay” event had occurred on credit default swaps because the Russia had not included the additional interest in a late payment of the bond made in early May.

The CDDC is the committee that decides when an event of default has occurred and can trigger the decision to pay out on credit default swaps, a kind of insurance that bond investors can purchase to protect against default. ‘an obligation. The committee said a default event has occurred, but will meet early next week to decide whether that triggers CDS payouts.

Russia has already narrowly escaped default once this year, just hours before the May 4 deadline. But the $1.9 million in interest accrued during the 30-day grace period did not reach investors. It appears that the department forgot to add this amount to the payment.

“On May 11, 2022, holders of Russian 4.5% 2022 sovereign bonds submitted a notice of default via Euroclear demanding payment of approximately $1.9 million in accrued interest on deferred principal repayment. the bonds matured on April 4, 2022, but payment of principal and interest due at maturity was not made until May 2. The bond documents provide that interest will continue to accrue. run on principal until principal is paid at 4.5% coupon over 30 years. / 360 day account resulting in approximately $1.9 million in additional interest due upon release of the bonds. Russia did not include accrued interest beyond April 4, 2022 in its payment, putting it in default under the bonds. Following the bondholders’ request, Russia n ‘has not paid the interest due’, concluded the CDDC.

Another CDDC meeting on the Russian Federation “default” event is scheduled for June 6, 2022.

The CDDC decision could trigger all outstanding credit default swaps in Russia. According to Bloomberg, citing data from Depository Trust & Clearing Corp, credit default swaps hedged $1.5 billion in net Russian debt at the end of May, up from $3.2 billion at the end of April.

Russia has some $400 million in bonds due in June and a total of about $1 billion is due by the end of this year in another 14 bond payments out of a total of about $40 billion. dollars worth of outstanding Russian debt obligations.

Investors rushed into credit default swaps after Russia’s military invasion of Ukraine amid a sharp drop in bond prices. Under this instrument, two investors exchange credit risk, with one party agreeing to repay the other if the borrower defaults. The American bond investment house Pimco is particularly exposed and is said to have sold more than 100 million dollars of such guarantees as protection to banks such as Barclays and JPMorgan & Chase.

However, notably, the non-payment of $1.9 million in interest is not sufficient to trigger a cross-default on other sovereign instruments, since the minimum threshold of unpaid debt is at least $75 million. dollars, according to documents for other Russian Eurobonds reviewed by Bloomberg.

Still, that is likely to antagonize investors and fuel resistance to the Treasury Department’s latest efforts to circumvent restrictions by the US Treasury’s Office of Foreign Assets Control (OFAC), which oversees sanctions. As followed by bne IntelliNewsLike President Vladimir Putin’s controversial “gas-for-rubles” program, Russian Finance Minister Anton Siluanov recently suggested a similar “bonds-for-rubles” program.

Bondholders should open double ruble-dollar accounts in Russian banks, transfer the ruble equivalent of their coupon payments to their accounts and immediately convert them to US dollars on the market in the second forex account.

The gas-for-rubles program has proven controversial, with European Commission President Ursula von der Leyen initially saying it broke EU sanctions rules against Russia, but more and more companies Europeans have adopted the program that meets the sanctions requirements under the letter of the law, if not the spirit. Some countries like Hungary have agreed to meet their gas bill obligations by paying rubles directly to the Russian state and can expect to be rewarded by the Kremlin with attractive energy deals.

Earlier reports suggested that the two specific issues to be resolved on May 27 potentially allow for other payment options, such as using rubles as a last resort and paying in euros, Swiss francs or pounds sterling for ” reasons beyond the control” of the Russian Federation. .

Two bonds of $183.75 million and $51.1 million due June 23 also have provisions for payment in euros, pounds sterling and francs, so it may be possible for the Ministry of Finance to avoid sanctions in this case. The first really problematic bond will be a coupon payment on June 24 on a $159.4 million bond that matures in 2028 and can only be paid in dollars. Russia is likely to break the terms of the deal in this case, as it is almost certain to offer payment in rubles and could default after the 30-day grace period expires in July.

Garland K. Long