The US has decided to declare Russia in default by defaulting on the interest on the bond coupon, which amounts to 1.9 million dollars, given the impossibility of using dollars due to the sanctions. Russia paid the coupon on May 2, but the interest and principal due date was April 4. International sanctions that block access to dollars and euros are making life difficult for Moscow to meet its financial commitments. Following this decision, the CDS (Credit Default Swap) were activated, which currently cover 1,500 million dollars of Russian debt.
The US bank declares the Russian Federation in default, after Moscow so as not to neglect its foreign debt due to the ban on using dollars due to sanctions. The large Wall Street banks and large Hedge Funds make up the CDS Committee, default insurance used by investors for the risk of bond default. This body decides in the last instance if the conditions of the contract are fulfilled due to the non-payment of the issuer, in this case Russia, so that the investor collects.
By a score of twelve to one, the Committee has declared Russia bankrupt. On May 11, 2022, holders of Russian 4.5% sovereign bonds due 2022 filed a notice of default through Euroclear demanding payment of approximately $1.9 million in accrued interest payments with respect to the delayed payment of the principal at the maturity of the bonds, they explain from the organization.
The agency explains that the bonds matured on April 4, 2022, but the payment of the principal and interest due at maturity was not made until May 2, but Russia did not include in its payment the interest accrued for the delay beyond the April 4, 2022, which “presupposes a default on the bonds.”
Russia has had a difficult time dealing with its external debt due to international sanctions, which in practice means that they cannot use dollars or euros to pay their creditors.
Within the Committee there are European creditor representatives such as Deutsche Bank, BNP or Barclays, but also from Japan, with Mizuho. “Following the bondholders’ demand, Russia has not paid the interest owed,” the CDS Committee has ruled.
Pacific Investment Management, Citadel, Elliot Management, Goldman Sachs, Bank of America and JPMorgan Chase are among the 12 voters who agreed a “non-payment” event occurred. Citi was the only entity that voted against it.
What are CDS?
CDS are a common instrument for large investors who invest in private and public debt. It is a financial derivative that hedges the position to reduce the risk of default of an issuer. In practice it works like insurance. A small proportion of the invested principal is paid and activated when a default event arises.
CDS are listed on their own secondary market. Its price rises and is more valuable to the investor when the issuer approaches default. They acquired a major role in the 2012 crisis, when the price of the CDS of Greece, Ireland, Portugal and Spain skyrocketed, before being rescued.
According to the Bank of Russia, the volume of dollar bond issues amounts to 19,959 million dollars. The unpaid amount is not clear, it is only clear that there was a delay in the interest on the coupon and that Moscow did not include the interest on arrears. It may be a very small amount, compared to the amount of bonds that is in the hands of investors, but after the Committee’s decision, investors holding CDS can execute the contracts. The next meeting of the Derivatives Committee will be on June 6. At that meeting, it will be addressed whether there have been new defaults and whether there is an auction to set the compensation for the execution of the CDS. According to Depository Trust & Clearing Corp, the swaps cover $1.5 billion of Russian debt in dollars.
The CDS contracts in euros detail, reports Bloomberg, the amount of 1.9 million dollars is insufficient to trigger the process of activation of the default contracts. The limit to activate would be at least 75 million dollars.
The . When the risk of default increases, as happened in 2012 with Greece, after the invasion of Ukraine and with the imposition of economic sanctions, the price of bonds fell faster than the price of CDS increased. The most aggressive investors flocked to buy swaps, while buying Russian debt at bargain prices.
These days a golden opportunity presented itself. Acquiring Russian debt was a bargain and with very limited risk if you also acquired CDS, even if they were skyrocketing. The holders of the bond classified as defaulted will collect the interest on the one hand and, in principle, the CDS insurance.
The yield of the bonds and their CDS skyrocket
Russia’s dollar bonds due June 2028 and April 2042 have each lost about 80% this year, while , according to data compiled by Bloomberg.
The US and EU sanctions were intended to force Russia to default and the market to turn its back on the country. Moscow has tried by all means to continue dealing with foreign debt and at the beginning of the week presented a plan to avoid defaults in the face of upcoming maturities. s. The Derivatives Committee has already warned that it was going to consider the payment in rubles as “an event of default.” The next key dates for the debt are the dollar bond coupon maturities on June 23 and 24.
Facebook Comments
Disqus