Bondholders With Cash Stuck in Russia Firms Have Few Options

(Bloomberg) -- International creditors of Russian borrowers that can't -- or won't -- service their debts will have a hard time getting their money back, according to analysts and investors.

That's because Russia's isolation from most of the developed world's legal and financial systems renders the traditional route bondholders take to get their investments back almost futile. So long as the nation's war with Ukraine rages on, getting local courts to enforce rulings seems unlikely, and that's prompted some investors to discount the corporates' assets in Russia.

“If you're a bondholder, you can sue them, but your ability to actually get recoveries is going to be fairly limited in many cases, especially when you can't have any rulings applied in Russia,” said Maximilian Hess, a fellow at the Foreign Policy Research Institute in London. “These bonds are rightfully being marked down to cents on the dollar or even zero.”

The best, and in some cases the only realistic option, is to wait, according to five bondholders of Russian corporate bonds, especially since companies have shown that bond-payment deadlines are being missed due to restrictions beyond the firms' control. So far, four companies have run out of time to service their debts, and in each case the firms' payments were stuck in financial plumbing due to compliance reasons. Steelmaker Severstal was the first, followed by Russian Railways, EuroChem, Chelyabinsk Pipe Plant and Suek for foreign-currency bonds.

That number will likely grow if the conflict isn't resolved and sanctions on Russia, some of its businessmen and companies, aren't lifted.

Some Russian companies have assets outside of the country. JPMorgan Chase & Co., the biggest U.S. bank, won a court order authorizing Gibraltar's port authority to detain a 73-meter (240-foot) yacht Axioma owned by Dmitry Pumpyansky. It was an unusual move by officials of the British territory, but they said they seized the vessel “in the interests of creditors with proper claims.”

Below is an outline of the options available to bondholders based on research notes and interviews with investors, analysts and restructuring advisers. Most are neither tried nor tested:

Wait and see:

• For many investors, the only solution could be to sit back and weather the storm. In cases like Severstal and Russian Railways, where the payment got stuck in the plumbing that connects companies to creditors, bondholders may just decide to wait for all the relevant checks to complete.

Seize international assets:

• The most immediate way to boost recoveries for international creditors stuck with a defaulted Russian bond could be seizing assets sitting outside the country. Lukoil, an oil firm that hasn't been targeted by Western sanctions, and VEON, a mobile operator, have been on top of the list of targets for distressed investors since early March. Analysts at JPMorgan Chase & Co. estimate that Lukoil has enough foreign assets to cover all of its international debt, while VEON's could repay more than half of its non-Russian creditors.

Claims against international trade receivables:

• Investors could also try boost their recovery laying a claim on international trade receivables, but that path has no legal precedents and the total value of receivables may dwindle over time as sanctions dent trade with Russia, JPMorgan's analysts said.

Amend and extend:

• Companies at risk of default can traditionally negotiate an extension with the help of courts. But given the breadth of sanctions in place, it's unclear whether Russian companies and their subsidiaries abroad can access Western courts. “I think we'll see a lot of selective defaults from Russia as the Kremlin eventually takes over some businesses and then says ‘we don't care', because the Kremlin has no chance of having a real market reputation or market access ever again, so what's the point?,” Hess said.

Seize Russian assets:

• A takeover of assets in Russia by foreign creditors seems an unlikely route for international creditors. “In a situation involving a blocked property or sanctions, I´m not sure there´s a clear way to get hold of the assets,” said Brian O'Toole, a nonresident senior fellow with the Atlantic Council's GeoEconomics Center.

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