-Russian steel giant Severstal was racing against the clock on Wednesday to avoid becoming the country’s first major corporate default since the Ukraine crisis began, with international payment lines snarled by sanctions.
Severstal, whose main shareholder Alexey Mordashov is one of a number of wealthy Russians now sanctioned by the European Union, has until the end of the day to get an already overdue $12.6 million loan ‘coupon’ payment to its creditors.
A source close to the steel firm said the money had been transferred last week but was yet to be processed and passed on by its paying agent Citibank.
“This will technically be the first default since the crisis began to unfold,” Seaport Global credit analyst Himanshu Porwal said.
“But people will know it is driven by the way the sanctions have been formulated, rather than the company’s fault,” adding Severstal might find a way to make the payment in the coming days, especially if Mordashov were to cut or relinquish his large stake in the firm, which itself is not sanctioned.
With Wednesday’s deadline fast approaching Severstal said it had been in constant discussions about the issues, and that it was looking at an application for special “licences” that may be required to make the payment.
The legal terms of the bonds state an “Event of Default” can be formally declared five working days after the March 16 coupon due date.
The latest Western sanctions and countersanctions by Moscow mean that transferring payments on Russian government and corporate bonds has become complex.
Previously payments like Severstal’s would have been processed by international clearing houses such as Clearstream or Euroclear, which confirm asset ownership, and also funnel payments for domestic bondholders to Russia’s National Settlement Depository (NSD).
However both Euroclear, owned by a group of global exchanges and banks, and Clearstream, part of Deutsche Boerse, have said they will stop settling trades in Russian securities as a result of the EU’s sanctions.
Neither Clearstream, Euroclear nor Citigroup responded to requests for comment.
DELAYS POSSIBLE
A Severstal default would be the first by a major Russian company since Moscow was blanketed by sanctions for what it calls its “special military operation” in Ukraine, but it may not be alone.
Russian companies need to make $18.5 billion of international bond payments by year-end, ITI Capital analysts estimate, while Moscow needs to pay another $3.4 billion on its foreign currency sovereign bonds.
Investors would have the right to take legal action to reclaim unpaid amounts, most likely in the United Kingdom or the United States – under whose laws most international market bonds are issued.
Payments due in coming days include from Gazprom, which made a payment without problems earlier this month, Russian Railways on March 25 and Polyus Gold on March 28, the same day as Russia’s next international sovereign bond payment falls due.
It’s not just international bondholders who are affected. Severstal, Russia’s top steelmaker NLMK, state-owned Russian Railways and fertiliser producer Eurochem are all struggling to get payments to Russian bondholders, the firms themselves and ITI Capital say.
NLMK said on Tuesday it had paid a coupon on a 2024 bond but while foreigners had started to receive their money, Russian holders hadn’t.
“This is due to the fact that… Euroclear and Clearstream are no longer settling transactions with Russia’s NSD,” NLMK said. “We currently see no legal grounds prohibiting Euroclear and Clearstream to process payments to Russian residents.”
NSD confirmed it was receiving payments from Euroclear, but said it will not process these until Euroclear gets clarifications from European regulators.
“After curbs are lifted, payments will be processed…as usual,” it said.
The daily Kommersant newspaper, citing a source at a large brokerage firm, said some Russian holders of Moscow’s sovereign bonds also hadn’t received payments. A source at a European-based fund told Reuters it too had not received a sovereign bond payment due on Monday.
The Russian finance ministry, Russian Railways and Eurochem did not reply to requests for comment.
“Delays are possible for payments cleared via international depositories,” NSD added in a statement to Reuters.
“This could be linked to ‘manual’ processing of the orders linked to Russian companies as well as with a need to get clarifications from European regulators”.
(Reporting by Reuters; Editing by Alexander Smith, Kirsten Donovan)
