Russian Railways is declared in default for non-payment of bonds

(Bloomberg) A derivative panel declared Russian Railways JSC to default after the company failed to pay interest on a bond, the first such decision since Russia was subject to extensive sanctions that hampered financial transactions.

According to the Credit Derivatives Determination Committee, a default event occurred after a coupon that expired on March 14 failed to reach investors at the end of a 10-day grace period.

The decision could set a precedent for the Russian government and local companies that have found themselves in a similar situation. Since the beginning of the war in Ukraine, Western banks and other financial intermediaries have blocked bond payments while analyzing the legal implications of sanctions, leaving Russian borrowers outside the global financial system.

State-owned Russian Railways attempted to pay the voucher for the bond last month, but was unable to reach holders due to “legal and regulatory compliance obligations within the correspondent bank network”.

Contracts that secure the company's debt against default will be triggered by the decision of the committee, and now the holders will wait to see how much will be paid. The decision has no direct impact on bond investors, who have so far not requested immediate repayment of their holdings.

'Almost inevitable'

The Russian Ministry of Finance accused the United States and other countries of trying to force it into default, which would be the first of its international debt in more than a century. The country was forced to pay two dollar bonds with rubles last week to meet its debt obligations, even though the instruments did not allow it.

“The situation has reached a point where a technical default for Russia is almost inevitable,” said Gary Kirk, emerging markets portfolio manager at TwentyFour Asset Management LLP.

S&P Global Ratings said Saturday that payment in another currency amounts to a default, although the government has until the beginning of May to remedy it with a conversion to dollars. Last week, credit default swaps (CDS) — which are quite illiquid at these levels — showed a 99% probability of default on Russian foreign debt in 12 months. The CDS now point to a probability of 88%.

However, a formal default may trigger a legal response from the Russian government, Finance Minister Anton Siluanov said in an interview with Russian newspaper Izvestia.

It would be “an entirely political default with potentially huge cost implications for banks and CDS covering the market,” according to Roger Landucci, Alphamatrix Finance partner in Geneva. There will be “a lot of work for the lawyers and the compliance officer without an obvious result.”

Original Note:

Russian Railways Ruled in Default Over Missed Bond Payment (2)

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