Investors have been waiting for a wave of Russian companies to default on their debts since the West froze Moscow from the global financial system in retaliation for the war in Ukraine. So Gazprom’s decision to repay a $1.3 billion bond in full on Monday caught bondholders off guard.
This month, President Vladimir Putin called those countries that impose economic sanctions “unfriendly” and said Russian companies might pay investors back in rubles rather than foreign currency — in fact, a default at all. except the name. And yet, fund managers in Europe and the United States got their dollars back from Gazprom two days later. Oil company Rosneft followed suit with a $2 billion refund on Thursday.
But not all Russian borrowers repay. Investors said they had yet to receive a coupon payment on a Russian Railways euro-denominated bond due to arrive on Thursday, Bloomberg reported.
The result is confusion among foreign investors, who hold $21 billion of Russian corporate debt in foreign currencies.
“Gazprom and Rosneft have shown investors that the situation can be very uncertain until the last minute,” said Sergey Dergachev, head of emerging market corporate debt at Union Investment. “Whether companies will continue to pay will depend on the future course of sanctions against Russia.”
Russian companies have $98 billion in foreign currency bonds outstanding, according to JPMorgan, up from a high of $169 billion in 2013, the year before Moscow annexed Crimea. Nearly half of that $98 billion must be repaid over the next three years, including $17 billion due in 2022 alone.
The Russian corporate bond market is highly concentrated, with the largest oil and gas companies such as Rosneft, Transneft and Gazprom accounting for around half of the total. Among the largest holders of Gazprom’s foreign currency bonds are Pimco, Carmignac Gestion and Vanguard, according to Bloomberg data.
This week’s repayments demonstrate that companies with a significant presence outside of Russia and significant dollar revenues are able and willing to use their foreign currency to repay bondholders.
“It seems some Russian companies are trying to keep things as normal and creditor friendly as possible, maybe there’s a gentleman’s agreement [to continue paying]said Charles-Henry Monchau, chief investment officer at Syz Bank, who added that Gazprom and Rosneft were unlikely to have acted without Putin’s consent.
But investors do not assume a general willingness on the part of Russian companies to continue to service their debts abroad, especially since the government – which faces an interest payment on its debt in dollars next week – expected to be largely lacking in the coming weeks.
“As we see the possibility of continued debt servicing from funds already offshore, it will become increasingly difficult for debtors to continue to access hard currency and pay,” Citi analysts said. in a note to customers. “If the sovereign defaults, it may be politically impossible for companies to [pay].”
Investors also fear that payments from Gazprom and Rosneft will already be underway before Putin publishes his ruble repayment plan this weekend – and therefore does not set a precedent for future takeovers.
“It’s possible the executive order came later and they just chose not to cancel the payment instructions,” said Kaan Nazli, portfolio manager at Neuberger Berman.
Upcoming tests of Russian companies’ willingness to pay come with upcoming repayments, including a $483 million bond from gold mining group Polyus – one of 26 natural resource companies to have had its credit rating downgraded by Fitch in recent weeks – March 28 as well as $625 million from Russian Railways and $156 million from oil conglomerate Borets International.
Investors will likely remain in the dark until the last moment, creating an uncomfortable situation for bondholders – and a potential opening for opportunistic buyers. Funds that sold the Gazprom bond at prices as low as 50 cents on the dollar last week lost, while those lucky enough to strike a bargain doubled their money within days.
However, such a strategy remains risky. It’s “highly likely” that many Russian companies will default on debt at some point this year, said Liam Peach, emerging markets economist at Capital Economics. “Russian companies should, in principle, benefit enormously from exorbitant commodity prices,” Peach said. “But the earnings of export-oriented companies are likely to be affected by sanctions, restrictions on international trade and ‘self-sanctions’ by foreign companies.”
Many investors are choosing to sit idly by, reluctant to trade in a market where the spread between offers to buy and sell bonds has exploded.
“It’s almost impossible to get a full picture of what’s going on,” Dergachev said. “So we’re not adding positions, but we’re not selling.”
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