By Tommy Wilkes and Davide Barbuscia
LONDON/NEW YORK – Beaten-down Russian assets are looking attractive to some, with JPMorgan strategists touting the bonds of Russian companies with significant international operations as the best way to profit from distressed pricing, while two banking sources said that loans of Russian corporates had been offered at a steep discount.
Russian bond prices have fallen to record lows since Moscow invaded Ukraine as investors fret over their ability to pay as a result of coordinated Western sanctions. The United States has led the sanctions to limit the flow of Western money and to damage Russia’s economy, while Ukraine has called for the boycott of Russian energy exports.
Russia’s hard-currency sovereign bonds mostly traded well above par until mid-February, as investors shrugged off Moscow’s troop build-up on Ukraine’s border and U.S. warnings that an invasion was imminent. The decline since has been rapid, with longer-dated issues now indicated at around 20 cents in the dollar, although trading has all but ground to a halt.
The Ukraine crisis has raised the spectre of Russia’s first major default on foreign-owned sovereign bonds since the years after the 1917 Bolshevik revolution. Russia said on Sunday that payments would depend on Western sanctions.
But in a March 4 note to clients a team of JPMorgan’s strategists led by Zafar Nazim said their top pick was Lukoil bonds, because the energy giant had substantial standalone international operations, which generated $3.5 billion in earnings in 2021, and relatively low foreign debts.
In the note, titled “If Ifs-And-Buts-Were-Candy-And-Nuts Recovery Analysis”, the JP Morgan strategists said investors could make huge returns should the company repay its debts.
Two banking sources said there was some activity in the secondary market for some distressed Russian corporate loans last week, with some market participants trying to trade the paper at a discount.
While sanctions make it virtually impossible to trade in any sanctioned Russian entity and in rouble-denominated assets, Western investors can still trade in the bonds of Russian companies not on the sanction list and which have dollar bonds.
Lukoil bonds were quoted at a mid-price of 32 cents in the dollar on Friday, with bid/ask spreads of around 10 cents pointing to a highly illiquid market. JPMorgan strategist said they could recover to 100 cents on the dollar.
They also upgraded bonds issued by Novolipetsk Steel, saying current prices did not reflect the recovery potential, as well as steel giant MMK’s 2024 bond.
“Our analysis is based on recovery from international operations, supplemented by potential claim on international receivables,” the strategists wrote.
Russian companies are not currently prohibited from making payments to overseas owners of their debt, and many earn sizeable foreign exchange from export sales.
But that could change if Russia’s government imposes restrictions, or if the companies’ financial conditions worsen or if they become unwilling to pay, potentially leading to an “event of default (EoD)”.
“An EoD by Russian issuers is a high risk though some issuers with substantial international operations (e.g. Lukoil) could continue servicing debt,” the strategists said.
JPMorgan’s strategists added that repayment of bonds currently due, including one from gas giant Gazprom, would not necessarily mean other borrowers would repay too.
An investment firm, which held some of Gazprom’s $1.3 billion bond maturing on Monday, has received its full payment due in U.S. dollars, a person at the firm said.
(Reporting by Tommy Reggiori Wilkes and Davide Barbuscia; Editing by Megan Davies, Alexander Smith and Chizu Nomiyama)
