Severstal Could Become First Russian Company to Default on Foreign-Currency Debt

Russian ruble coins and banknotes pictured next to Russian ruble sign in Moscow on Aug. 13, 2021. (Kirill Kudryavtsev /AFP via Getty Images)

Severstal, a steel and mining company, could become the first Russian company to fail to make a critical interest payment on foreign-currency debt.

The domestic firm had a $12.6 million coupon payment due on March 16, but was granted a five-business-day grace period. The industrial giant possesses $800 million in loan participation notes that mature in 2024. The company has urged bondholders to contact Citigroup, the financial institution that blocked the payment and requested an ironclad permit from the U.S. Treasury to cover the obligations, Bloomberg reported, citing two people familiar with the discussions.

Should it default on its debt, Severstal’s global operations and claims would cover less than one-fifth of its foreign unsecured debt, JPMorgan Chase analysts estimated earlier this month.

If interest payments aren’t processed, Severstal officials announced that the company would search for alternative options to pay its creditors.

Making payments for bonds issued by Russian companies has turned into a complicated process. Because of Western sanctions and the Kremlin’s retaliatory sanctions, many bond payments could be delayed or become frozen in transit.

A photo taken on March 14, 2022, shows the logos of Visa, Mastercard, and Russian Mir payment systems on bank cards in Moscow. (AFP via Getty Images)

Russian investors holding domestic corporate Eurobonds could experience delays in receiving payments completed through international agents amid Western sanctions, Russia’s National Settlement Depository (NSD) said in a statement to Reuters.

Russian firms would need to manually process orders and receive clarifications from European regulators in this restrictive environment.

Clearstream and Euroclear, two international clearing and settlement organizations, had previously processed Russian sovereign and corporate Eurobond payments. However, the two entities confirmed that they would stop settling transactions in Russian securities because of sanctions from the European Union.

It’s estimated that Russian corporations are scheduled to pay approximately $18.5 billion in external debt, including interest payments, by the end of 2022. The Russian Ministry of Finance is also poised to pay about $3.4 billion in sovereign Eurobonds after recently executing $117 million and $66 million Eurobond coupon payments, with foreign investors receiving their funds.

Other companies are bracing for challenges to execute coupon payments on foreign-currency debt.

NLMK, Russia’s top steelmaker, confirmed that it had paid a coupon on its Eurobond due in 2024. The business stated that foreign noteholders started receiving interest payments, while domestic investors didn’t.

It’s widely anticipated that state-owned Russian Railways, Polyus Gold, and fertilizer producer EuroChem will struggle to send payments to corporate bondholders in this current marketplace.

Russian Railways and Polyus Gold are scheduled to make coupon payments on March 25 and March 28, respectively. The Russian government is also expected to make an international bond payment on March 28.

“Perhaps the bigger risk is that it may be a prelude to defaults by Russian corporates, whose external debts are more than four times larger than those of the sovereign,” William Jackson, chief emerging markets economist at Capital Economics, wrote in a note last week.

Last week, rating agency S&P Global downgraded the creditworthiness of the Russian government and a plethora of companies into junk territory because of the country’s invasion of Ukraine. This makes it harder for the government and companies to raise capital on international markets.

S&P Global cut the country’s credit rating to “CC.” This is defined as “default imminent with little prospect for recovery.”

Thirty “fallen angels” have already occurred because of the Ukraine–Russia military conflict. This refers to a firm with a credit rating that has been cut from investment grade to speculative grade (junk).

Many of these corporations have stopped trading in London or New York, or have witnessed their shares collapse to nearly zero.

But S&P Global analysts say that there’s still plenty of uncertainty regarding how damaging Moscow’s invasion of Ukraine will be for the future of domestic companies.

“In terms of creditworthiness, the Russian–Ukraine conflict has had the largest impact on banks, with 28% of total related rating actions,” the agency noted.

“Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time. Potential effects could include dislocated commodities markets—notably for oil and gas—supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility.”

Will It Be 1998 All Over Again?

Many U.S. financial institutions have some exposure to Russian corporate debt.

Citigroup stated that its investment in Russian sovereign and corporate debt could result in losses totaling as much as $9.8 billion.

“We have been managing that [exposure] very proactively to bring that number down,” Citi CFO Mark Mason told attendees at an investor event.

PIMCO, a California-based asset manager, amassed about $1.5 billion of Russian debt. With this immense exposure, it could face tremendous losses in coming years.

Flags are seen outside of the New York Stock Exchange (NYSE), where markets were roiled after Russia attacked Ukraine on Feb. 24, 2022. (Caitlin Ochs/Reuters)

Goldman Sachs has approximately $650 million in exposure, a small percentage of its overall $2.8 trillion credit balance.

Could it be 1998 all over again? This was the last time that Russia defaulted on its debt, causing Wall Street to suffer tremendous losses. However, despite market analysts’ glowing forecasts for the country’s economy, banks have been more cautious about investing too much into the nation.

Morgan Stanley stated that the Russian economy is in such a terrible state that it could default on its foreign debts soon.

Earlier this month, Simon Waever, Morgan Stanley’s global head of emerging-market sovereign credit strategy, wrote in a note that the Eastern European economy is edging closer to default amid talks of additional Western sanctions and expectations of a deep recession.

“We see a default as the most likely scenario,” he wrote. “In case of default, it is unlikely to be like a normal one, with Venezuela instead perhaps the most relevant comparison.”

JPMorgan analysts echoed these sentiments in a note, writing that “sanctions have significantly increased the likelihood of a Russia government hard currency bond default.”

Thus far, Russia has averted technical defaults by making coupon payments on dollar bonds that are set to mature in 2023 and 2043.