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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)
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