Credit committee quizzed on Russian government bonds after railways decision

A view shows train carriages, owned by the Russian Railways Company, on the side tracks in Moscow, Russia, March 1, 2017. REUTERS/Maxim Shemetov/File Photo

LONDON, April 11 (Reuters) – Investors edged closer on Monday to a potential payout of billions of dollars in default insurance on debt issued by the Russian government and its entities as the country teeters on the brink of its first external default for more than a century.

EMEA’s Credit Derivatives Determination Committee (CDDC) ruled on Monday that state-owned Russia Railways has defaulted on a defaulted obligation, a key step in triggering credit default swaps (CDS). ) – an instrument to insure exposure to the risk of default.

The decision, which marked the first time a debt instrument issued by Russia was officially classified as defaulted since the country invaded Ukraine, has been closely watched by creditors waiting to see whether foreign debt sovereign of the country could follow the same path.

Only hours later, the same committee was asked whether a possible default had occurred on hard currency bonds issued by the Russian government. Read more

The CDDC, whose members include some of the world’s largest investment banks, said on Monday it had decided that a “default” credit event had occurred on loan participation notes in Swiss francs related to Russian state-owned railways.

The Loan Participation Notes due 2026 were issued by RZD Capital to fund a 250 million Swiss Franc ($268 million) loan to Russian Railways.

There are $21.1 million in net notional CDS on 17 outstanding contracts for Russian Railways, according to IHS Markit data.

Western sanctions against Russia following the invasion of Ukraine, which Russia describes as a “special military operation”, and Moscow’s countermeasures have strained the Russian economy and raised questions about the possible default of many bonds issued by Russian companies.

Bank of America (BAC.N), Goldman Sachs International (GS.N) and JPMorgan Chase Bank (JPM.N) are some of the committee members who voted “yes” to the question of whether a default happened on Russia. Railways. The committee met on Friday.

Some analysts see it as a test to determine whether a creditworthy issuer who cannot physically make payment due to sanctions is considered in default.

“Apparently the CDDC is saying yes…and likely means they’ll do something similar with the Russian sovereign trying to pay a coupon in USD – but failing,” a source said, speaking under cover of the statement. ‘anonymity.

A spokesperson for UBS AG, the paying agent for the tickets, declined to comment.

Russian Railways, which operates both freight and passenger trains on thousands of miles of track, said it tried to pay the interest due on March 14, but was unable to could not do so due to “legal and regulatory compliance obligations within the correspondent banking network”, according to an official announcement published by the SIX Swiss Exchange and referenced in the request to the commission.

While the stock of CDS on Russian Railways is relatively small, there is currently $3.43 billion of net notional CDS on Russia to settle, investment bank JPMorgan said in a note on Monday.

The Russian sovereign debt issue is pending approval by the Determinations Committee and no meeting date has been set, according to its website.

Russia could face its first external sovereign default in more than a century after arranging to repay an international bond in rubles last week, even though payment was due in US dollars.

Russian Finance Minister Anton Siluanov said the country would take legal action if the West tried to force it to default on its sovereign debt. Read more

($1 = 0.9335 Swiss francs)

Reporting by Karin Strohecker; Editing by Jorgelina do Rosario, David Holmes, Jonathan Oatis and Chizu Nomiyama

Our standards: The Thomson Reuters Trust Principles.