Russian Railways Ruled in Default Over Missed Bond Payment

(Bloomberg) -- Russian Railways JSC has been ruled in default by a derivatives panel after missing a bond interest payment, the first such decision since Russia was slapped with extensive sanctions that complicated financial transactions.

A failure-to-pay credit event occurred after a coupon due on March 14 failed to reach investors by the end of a 10-day grace period, according to the Credit Derivatives Determinations Committee.  

The decision could set a precedent for the Russian government and local companies which have found themselves in a similar position. Since the beginning of the war in Ukraine, Western banks and other financial intermediaries have been blocking bond payments as they pored over legal implications of the sanctions, effectively shutting Russian borrowers out of the global financial system.

State-owned Russian Railways attempted to pay the bond coupon last month, but it failed to reach holders due to “legal and regulatory compliance obligations within the correspondent banking network.”

Contracts insuring the company’s debt against default will be triggered by the committee’s decision, and holders will now wait to see how much will be paid. The ruling doesn’t have a direct impact on bond investors, which so far haven’t requested an immediate repayment of their holdings.

‘Almost Inevitable’

Russia’s Finance Ministry has accused the U.S. and others of trying to force it into a default, which would be the first on its international debt in more than a century. The country was forced to pay two dollar bonds with rubles last week to keep up with its debt obligations, even though the notes didn’t allow for it.

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

S&P Global Ratings said on Saturday that the payment in a different currency is tantamount to a default, although the government has until early May to remedy it with a conversion into dollars. Last week, credit-default swaps -- which are fairly illiquid at these levels -- showed a 99% probability of default on Russia’s external debt within 12 months. The CDS now signal an 88% chance.

A formal default, however, may trigger a legal response by the Russian government, finance minister Anton Siluanov said in an interview to Russian newspaper Izvestia. 

It would be “a completely politically-driven default with potential huge cost implications for banks and CDS hedging the market,” according to Roger Landucci, a partner at Alphamatrix Finance in Geneva. There will be “lots of work for lawyers and compliance officer with no obvious outcome.”

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