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Severstal PJSC has become the first Russian company to run out of time to pay interest on foreign-currency debt since the war in Ukraine began after Citigroup Inc. blocked the transaction. It’s now at risk of creditors calling a default.
Although flush with cash, the steelmaker was unable to settle a $12.6 million dollar-bond coupon within a five-business day grace period that ended on Wednesday. Severstal said it’s keen to pay, but Citigroup, acting as correspondent bank of the unit issuing the debt, is blocking the payment. A person familiar with the matter said Citigroup
asked the company to get permission from the U.S. Office of Foreign Assets Control before it could remit the cash.
But neither the firm nor its controlling shareholder are sanctioned by the U.S.
“This is an extraordinary situation for us,” Chief Executive Officer Alexander Shevelev said in an emailed statement. “We continue consultations with partners and do our best to ensure that bondholders receive funds in accordance with the terms of the bond issue. I hope that this injustice will be resolved soon and the rights of bondholders will be respected.”
Two bondholders confirmed on Thursday that they hadn’t been paid.
Alexey Mordashov
Source: Bloomberg
While the firm itself does not appear on any sanctions list, majority shareholder Alexey Mordashov is on the European Union and U.K.’s sanctions lists, and in those jurisdictions, sanctions on individuals generally extend to all companies they own or control. Still, because he’s not included in any U.S. sanctions, Severstal didn’t preemptively apply for an OFAC permit, according to a person familiar with the matter. A spokesperson for the U.S. Treasury on Wednesday couldn’t comment on dealings with a company or individual the nation hasn’t sanctioned.
The notes are denominated in U.S. dollars. Citibank N.A. New York is the correspondent bank for the Luxembourg-based unit issuing the notes, while Citibank, N.A., London Branch is the paying agent and trustee of the notes, the company said in a
statement.
The missed payment is an unwelcome milestone for investors and Russian corporates alike. Despite the many sanctions and new capital controls that companies have been navigating since Russia’s invasion of Ukraine, most Russian companies have been settling their foreign-currency debts on time. Some, like Russian Railways, have been late in paying interest but eventually managed to wire funds to bondholders before the end of the grace period. For Severstal, the grace period on its so-called loan participation notes that mature in 2024 proved too short to resolve the issue Citigroup raised.
Read More: Russia Debt Watch: Sovereign Dollar Bond, Severstal, Gazprom
“Severstal has two options -- to obtain an OFAC license to make payments, and then the coupons will begin to pass again,” said Dmitry Dorofeev, portfolio manager at Alfa-Capital Asset Management, a Moscow-based bondholder. “If this fails, then formally there will be a default, further creation of a committee of creditors, hiring consultants and communication with the restructuring company. But it’s a long process.”
In the event of a default, Severstal’s international operations and claims would only cover 16% of the company’s foreign unsecured debt, according to estimates by JPMorgan Chase & Co. analysts on March 4. Because Severstal’s production facilities are located in Russia, analysts relied on receivables claims from export sales to calculate the recovery value.
The company said in a separate
statement on Wednesday it’s seeking to “liaise with the relevant authorities to pursue a broader solution in order to minimize unintended effects of the sanctions restrictions on the Noteholders.” It also encouraged bondholders to reach out to Citigroup to request it “to cooperate with the company in its efforts to obtain the licenses from the relevant authorities” to make the payments.
The $800 million debt, which pays an annual rate of 3.15%, was issued by Severstal’s Luxembourg-based unit Steel Capital.
— With assistance by Irene Garcia Perez, Yuliya Fedorinova, Jack Farchy, Olga Voitova, and Giulia Morpurgo
(Updates with recovery estimates in 9th paragraph.)
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