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One of every five distressed corporate bonds worldwide call Russia home following a more than tenfold increase since November as sanctions bite further into economic growth.
Yields on foreign-currency securities for 68 bonds were trading at least 1,000 basis points above Treasuries on January 16, up from about five notes on December 1, according to data compiled by Bloomberg. The biggest contributors were lenders OAO VTB Bank and Vnesheconombank, both under US and European Union sanctions stemming from President Vladimir Putin's support for pro-Russian separatists in Ukraine.
Russian companies are struggling to cope with borrowing costs that have soared the most in emerging markets in the past year as the penalties cut them off from foreign capital and the central bank tripled interest rates to 17 per cent. Funding costs may climb further as Standard & Poor's weighs whether to cut the sovereign credit rating to junk amid a six-month plunge in oil prices and a looming recession.
"Corporates look distressed because of the sanctions and because big institutions can't buy Russian debt," Dmitry Postolenko, who helps manage about $3 billion in Russian debt at Kapital Asset Management in Moscow, said over phone on January 16. "We could see some defaults in the second half of this year."
Moody's Investors Service lowered Russia one step to Baa3, the lowest investment grade, on January 16, and placed it on review for a further downgrade. The credit ranking matches those of S&P and Fitch Ratings.
Near threshold
In addition to the distressed bonds, about 30 more trade within 100 basis points of the threshold, data compiled by Bloomberg show. State-run VTB and Vnesheconombank account for about 43 per cent of Russia's $44 billion of distressed debt, according to the data.
"VTB is fully committed to servicing its debts, and this commitment covers all of our outstanding bonds," its press office said in an e-mail. "The bank will repay all of its bonds to schedule."
Vnesheconombank didn't immediately respond to an e-mailed request for comment sent after working hours in Moscow on January 16.
The yield on VTB's dollar bonds maturing in April 2017 rose 14 basis points to 12.97 per cent at 4:13 pm in Moscow, taking its jump since Russia's March invasion of Crimea to 898 basis points. The rate on similar-maturity securities for Turkey's Akbank TAS fell 118 basis point since February to 3.31 per cent, trading at a spread of 232 basis points over Treasuries.
'Lacking access'
The jump in distressed bonds primarily signals a "lack of market access" and "risks of default," Dmitri Petrov, an analyst at Nomura Holdings Inc. in London, said by e-mail on January 15. "For quasi-sovereigns Russia would potentially need to step up with some form of a bailout in case of default, which also puts pressure on its own resources, so is credit-negative."
Russia's parliament approved a 1 trillion-rouble ($15 billion) bank recapitalisation plan last month to stop the currency crisis from spilling over into the financial system. The plan will allow the Deposit Insurance Agency to buy stakes in banks.
Bank bailout
National Bank Trust, the country's 15th-biggest based on retail deposits, was placed under the agency's management in December and Bank FC Otkritie was selected to oversee a 30 billion-rouble bailout.
Some of Russia's smaller companies have already missed debt payments as sanctions and higher rates curtail economic growth. OAO RZhD-Razvitie Vokzalov, a Russian Railways affiliate, failed to redeem bonds in November and unit of UTair Aviation JSC, a Russian airline and helicopter company, missed a payment. Thirty-eight per cent of investors in a poll conducted by Raiffeisen Capital said they expect defaults at consumer lenders, according to an e-mailed note last week.
Some of the distressed levels are unjustified because the Russian government will likely provide funding to support big state banks, according to Peter Varga, who manages over $1 billion in emerging-market corporate bonds at Erste Sparinvest in Vienna.
'Market overreacted'
"The market has overreacted in some cases," Varga said by e-mail on January 14. "You have a lot of tourists here in emerging-market credit who are only buyers on sunny days and sellers if bonds start to drop."
S&P last month put Russia's sovereign rating on negative watch, signaling a potential downgrade to junk. The decision reflected the rapid deterioration of Russia's monetary flexibility and the impact of the weakening economy on its financial system. A decision will be made by the end of this month, S&P said January 16.
There is a "fairly high" risk that S&P will downgrade the world's biggest energy exporter below investment grade, Economy Minister Alexei Ulyukayev said on January 14.
"The rating agencies will soon be downgrading quite a few corporates," Richard Segal, the head of emerging-markets credit strategy at Jefferies International Ltd, said by e-mail on January 16. "Most distressed credits will have to restructure."
GLOOMY SCENARIO
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Yields on foreign-currency securities for 68 bonds were trading at least 1,000 basis points above treasuries on Jan16, up from about five notes on Dec 1
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About 30 more bonds trade within 100 basis points of the threshold
