A view shows train carriages owned by Russian Railways Company on the sidings in Moscow, Russia March 1, 2017. REUTERS/Maxim Shemetov/File Photo
LONDON, April 11 – Investors on Monday came one step closer to a potential payout of billions of dollars in default insurance on debt issued by the Russian government and its entities as the country teeters on the brink of its first external default since over stands a century.
The EMEA Credit Derivatives Determinations Committee (CDDC) ruled on Monday that state-owned Russia Railways is in default on a missed bond payment, a key step in triggering credit default swaps (CDS) — a default risk hedging instrument.
The decision, which marked the first time a Russian debt was officially declared defaulted since the country’s invasion of Ukraine, was closely watched by creditors waiting to see if the country’s sovereign external debt could follow the same path.
Just hours later, the same committee was asked if there had been a possible default on hard-currency bonds issued by the Russian government. Continue reading
The CDDC, whose membership includes some of the world’s largest investment banks, said Monday it had ruled that a “default” credit event had occurred on participation certificates for Swiss franc loans related to Russia’s state-owned railways.
The Loan Participation Notes, due 2026, were issued by RZD Capital to fund a 250 million Swiss francs ($268 million) loan to Russian Railways.
According to data from IHS Markit, there are $21.1 million in notional CDS in 17 outstanding contracts for Russian Railways.
Western sanctions against Russia following the invasion of Ukraine, which Russia calls a “special military operation,” as well as countermeasures by Moscow, have weighed on the Russian economy and raised questions about the possible default of many bonds issued by Russian companies.
Bank of America (BAC.N), Goldman Sachs International (GS.N) and JPMorgan Chase Bank (JPM.N) are some of the committee members who voted “yes” to the question of whether a default occurred on Russian railways . The committee met on Friday.
Some analysts see this as a test case for whether a solvent issuer that could not physically make the payment due to sanctions is considered defaulted.
“Apparently CDDC says yes… and probably means something similar will happen if the Russian sovereign tries to pay a USD coupon – but doesn’t,” said a source, who spoke on condition of anonymity.
A spokesman for UBS AG, the paying agent for the Notes, declined to comment.
Russian Railways, which operates both freight and passenger trains on thousands of kilometers of railway line, said it was attempting to make interest payments, which on April 14, an official memo from the SIX Swiss Exchange referenced in the application to the committee.
While outstanding CDS on Russian Railways are relatively limited, there is currently a net $3.43 billion in notional Russian CDS to be cleared, investment bank JPMorgan said in a statement Monday.
The issue of Russia’s sovereign debt still awaits approval from the decision-making committee and no date has been set for a meeting, according to its website.
Russia could face its first sovereign default in over a century after making arrangements last week to make an international bond repayment in rubles despite the payment being due in US dollars.
Russian Finance Minister Anton Siluanov said the country would take legal action if the West tried to force it to default on its sovereign debt. Continue reading
($1 = 0.9335 Swiss Francs)
Reporting by Karin Strohecker; Editing by Jorgelina do Rosario, David Holmes, Jonathan Oatis and Chizu Nomiyama