Rusal Risks Bond Default as Sanctions Make Payment Difficult

(Bloomberg) -- United Co. Rusal will have a hard time making a dollar bond payment next month after being hit by U.S. sanctions.

The aluminum producer, owned by Russian billionaire Oleg Deripaska, needs to pay a coupon on May 3. “While the amount is insignificant -- $13.25 million -- the payment should be in dollars, which is the issue for the company," Maria Radchenko, a fixed income analyst at BCS Global Markets, said by phone.

Rusal had almost $1 billion of free cash flow at the end of 2017, but has been rocked by Friday’s U.S. sanctions, which give Americans one month to sell their holdings and threaten non-U.S. persons with penalties if they facilitate transactions for sanctioned firms. Rusal on Monday asked its international customers to stop payments while it investigates the consequences of the penalties and said the sanctions may result in technical defaults on some credit obligations.

Read more: Rusal’s foreign creditors face losses after U.S. sanctions

Bond clearing system Euroclear Bank SA is assessing the sanctions to ensure that it remains fully compliant with the requirements and is taking appropriate steps, its press service said. It declined to comment on whether it’s clearing Rusal bonds. Clearstream said it will stop transactions with Rusal and En+ Group Plc global depositary receipts.

The aluminum producer has some options to avoid default, according to BCS. It could try to offer amendments to bond issues ahead of coupon payments and offer clearing and payments in other currencies through a Russian depository, as was done with a recent eurobond, Radchenko said.

Debt will remain a main issue for Rusal, since dollars make up 90 percent of its $8.5 billion in total liabilities. The company could face technical defaults even under loans from domestic banks, and it would also be difficult for Sberbank PJSC or VTB Bank to refinance Rusal as they may face penalties, Egor Fedorov, an analyst at ING Bank in Moscow, said by phone.

Rusal, VTB and Sberbank declined to comment.

On Monday, Rusal said that the Office of Foreign Assets Control issued it two general licenses, which can allow "certain limited activities and transactions involving the company or its subsidiaries." Rusal’s press service also declined to comment on whether those licenses may be used for coupon payments.

Rusal’s 28 percent stake in MMC Norilsk Nickel PJSC will remain a good source of cash for the company. Nornickel, as the nickel miner is known, distributes dividends to shareholders in rubles through a Russian depository, and has one of the highest payouts in the industry. Even after share prices slumped in the wake of the sanctions, the value of Rusal’s stake in Nornickel still covers most of the aluminum firm’s debt.

--With assistance from Ksenia Galouchko

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin

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