(Bloomberg) -- Russian Railways JSC, EuroChem and Chelyabinsk Pipe Plant have missed deadlines to complete interest payments on their foreign-denominated bonds as the cash got stuck for compliance checks on its way to investors.
The companies now face the risk of creditors declaring they are in default, since the funds failed to reach bondholders before the end of the grace period.
The specter of default has been hanging over Russia for weeks in the wake of sanctions imposed in response to the invasion of Ukraine. The restrictions have hampered companies' ability to pay creditors, because banks have been holding up funds for additional scrutiny to make sure they aren't breaching any rules.
Last week, Severstal PJSC became the first Russian corporate to fail to meet debt obligations on time since the beginning of the war. As in that case, the three companies and others that may come shortly aren't linked to the firms' inability or willingness to repay, but rather to delays as correspondent banks, paying agents and clearinghouses struggle to navigate a tangled web of international sanctions.
Citi's Caution Threatens to Send More Russian Debt Into Default
Ownership structures have been complicating the issue for banks. The main beneficiaries of EuroChem and Chelpipe -- who have been targeted by Western sanctions -- recently gave up control. Severstal's controlling shareholder Alexey Mordashov is sanctioned in the U.K. and the European Union, but not in the U.S., and yet the company has been requested to get approval from the U.S.'s Office of Foreign Assets Control before the payment is processed.
The unprecedented circumstances behind the payment delays may also lead to different legal interpretations. While Chelpipe acknowledged the missed payment is a “formal event of default,” EuroChem said it doesn't consider this as such because it's “exclusively attributable to the events beyond the Issuer's control.”
Borrowers have been in talks with the banks holding up the funds to lobby for their release, and have also turned to international authorities in the U.S., U.K. and European Union to request licenses to allow the payments to go through.
Russia Debt Watch: Russian Railways, EuroChem, Petropavlovsk
- Russian Railways
- State-owned railway operator, under sanctions
- Issued by Ireland-based RZD Capital
- Payment of 2.1 million Swiss franc payment on green bonds originally due on March 12 (payable next working day, March 14); grace period of 10 business days excluding two public holidays in Ireland
- Russian Railways attempted to transfer the money to RZD Capital and the payment was not processed “due to legal and regulatory compliance obligations within the correspondent banking network,” according to a company filing on March 29
- Separately, a $30.8 million equivalent coupon due on March 25 for a sterling-denominated bond was frozen by paying agent Deutsche Bank London Branch due to U.K. sanctions regulations
- Company submitted an application to the U.K.'s Office of Financial Sanctions Implementation (OFSI) to obtain a license permitting the payment of an interest due on its sterling bond, according to a filing on March 30
- Russian Railways managed to wire euro- and dollar-denominated bond coupons earlier this month. Payment for both was received with a delay
- EuroChem
- Fertilizer maker
- Founder and former main beneficiary Andrey Melnichenko under European Union-sanctions; former CEO Vladimir Rashevsky is also on EU sanctions list
- Issued by Ireland-based Eurochem Finance DAC
- Payment of $19.25 million on dollar-denominated bonds originally due on Mar. 13 (payable next working day, Mar. 14); grace period of 10 business days, excluding two public holidays in Ireland
- Citibank NA London Branch, as principal paying agent, suspended the payment of interest “pending completion of compliance procedures,” the company said on Thursday
- The suspension of payment is “purely of an administrative nature” and doesn't consider this as a payment default, Eurochem said
- Company filed requests to the Central Bank of Ireland and the U.K.'s Office of Financial Sanctions Implementation (OFSI) to clear coupon payment
- Chelyabinsk Pipe Plant
- Steel pipes and tubing maker
- Owned by TMK Group, whose founder and former main beneficiary Dmitry Pumpyansky is under EU sanctions
- Issued by Ireland-based Chelpipe Finance DAC
- Coupon payment of $6.75 million on dollar-denominated bond, originally due on Mar. 19 (payable next working day, Mar. 21); grace period of 7 business days
- Cash stuck at correspondent bank Citibank, New York, due to compliance reasons, the company said in a statement on Thursday
- Citigroup said compliance checks are pending completion, Chelpipe said
- “The delay in payment is purely of a technical nature and the Event of Default is solely attributable to the correspondent bank's compliance procedures having extended beyond the due date and the available grace period,” the company said
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