Tuesday, April 5, 2022

U.S. Blocks Russia's $600 Million Bond Payment

The Treasury will No longer allow Russia to make Sovereign Bond Payments using Accounts at American Banks. It ramps up the Pressure on Moscow, which is facing tough Economic Sanctions over its War in Ukraine. S&P slashed Russia’s Debt to Junk and says there are already 30 Corporate ‘fallen angels’, that have tumbled into Junk territory, as a result of the War.

S&P Global this week cut Russia's Credit Rating to "CC", which it defines as "default imminent with little prospect for recovery." Four years ago, almost to the day, the Agency awarded Russia an Investment-grade "BBB-" Rating.

It's Not just the Government that will struggle to raise Capital on the Global market. Sanctions have thrown the future of many of its biggest Companies into doubt. S&P Global said this week it had made 121 Changes to the Ratings of Companies that cited the Russia-Ukraine War, rising Energy Prices, or both as reasons. Of that total, 77 were Russian.

"In terms of creditworthiness, the Russian-Ukraine conflict has had the largest impact on banks, with 28% of total related rating actions," the Agency said.

And Investors are taking No chances. S&P Global Ratings noted the Risk Premium on European Emerging-Market Corporate Debt is now almost double its five-year average, compared to a roughly in-line reading at the start of the year. Formerly lucrative firms, such as Banks, Energy Producers and Mining Companies, have been Reduced to Junk Status. Commodity Traders are deliberately shunning Russian Shipments of Key Raw materials and Countries are scrambling to wean themselves off Russian Energy Supplies.

The Agency said there are already 30 "fallen angels" as a direct result of the Russia-Ukraine Conflict. The term refers to an Issuer whose Credit Rating has been Cut from Investment Grade to Speculative Grade, also known as Junk.

Shares in some of the Country's Biggest Corporates No longer Trade in New York or London, where stock in the likes of Sberbank, Oil and Gas producers Gazprom and Rosneft, and Metal Producers Norilsk and Rusal, plunged to almost $0 a couple of weeks ago. And it won't end there. S&P Global said there was huge uncertainty around the extent, the outcome, and the consequences of Russia's War in Ukraine.

"Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time," S&P said. "Potential effects could include dislocated commodities markets--notably for oil and gas--supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility. Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default."

The Treasury told JPMorgan, Russia's Foreign Correspondent Bank, that it did Not have Authorization to Process the more than $600 million of Payments due on Two dollar Bonds late Monday. The Treasury Spokesperson said the move "will further deplete the resources [Russian President Vladimir] Putin is using to continue his war against Ukraine and will cause more uncertainty and challenges for their financial system."

The Agency's dramatic Change of Policy raises new questions about Russia's ability and willingness to Pay its Foreign Currency-denominated Debts. Sanctions have frozen Russia out of just under half of the Country's roughly $640 billion of Foreign Currency Reserves.

Russia was due to Pay around $550 million on a Bond that matured Monday. It had originally been facing a $2 billion Maturity Payment, but bought back about $1.45 billion worth of the issue in rubles, largely from Domestic Bondholders. The Government was also due to make an $84 million Coupon Payment on a 2042 dollar Bond.

Timothy Ash, a Senior Emerging Markets Strategist at BlueBay Asset Management, thinks there's now an 80% chance that Russia Defaults.

Even if Russia finds a Bank to Pay Foreign Investors, Bondholders may Not be able or willing to accept the Money, he said. He added that a Default would be a nightmare for Russia that could Lock it out of Global Capital Markets for years to come.

The Russian Government faces more than $1.8 billion of further Payments on Foreign Currency Bonds throughout the year, with around $71 million of that due in Euros.

The Payment process could be further complicated by the fact that an Exemption that allows U.S. Bondholders to receive Russian Debt Payments is due to Expire on May 25th.

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