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Severstal Giant is about to default.  The ruble closes the rally and reverses its course

Severstal Giant is about to default. The ruble closes the rally and reverses its course

One of the world’s largest steel groups, Severstal, may be Russia’s first major lag after the sanctions. The industrial giant, which generated $4.07 billion in profits in 2021, four times the figure a year earlier, failed to pay a $12.6 million coupon when the grace period expired. Or rather, the company says that it made the transfer but the money did not reach the creditors.

Today the stock rose at first by 2.28% on the Moscow Stock Exchange, and then fell decisively (-4.5%). And the list reopened limited trading on 33 shares, with short selling prohibited. Payment must be made by March 16, but the bank responsible for paying creditors, Citigroup, was not going to pay the money because Severstal (http://www.severstal.com/, website no longer accessible) has specific authorization from the US Treasury. After the five-day grace period expires, Bloomberg writes, there is no sign of payment to creditors. A fact that could lead to the country’s first major official default. For its part, the group said yesterday, that it is requesting the necessary licenses to process the reimbursement and expects to settle the situation as soon as possible.

The ruble is falling significantly today, after rising yesterday afternoon (+10%) following President Vladimir Putin’s request to receive gas payments from the EU in local currency (-9.25%, with the dollar back at 97.5). Also yesterday, Germany and Italy, the two countries most dependent on Russian energy, laid their hands on this possibility, as it would violate already signed contracts for payment in euros and the very spirit of sanctions.

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Before the Russian invasion of Ukraine, payments such as Severstal payments could be processed by international clearing houses such as Clearstream (in the hands of Deutsche Börse) or Euroclear (among the partners there are Euronext and Lse), which have the task of confirming ownership of the assets. However, the two clearing houses announced the cessation of activities with Russia in the wake of the sanctions of Western countries.

As for Severstal, the problem is not with the group, because not the steel producer was sanctioned, but the controlling shareholder, Alexey Mordashov, whose name appears on the EU and UK lists, is. However, oligarchs do not appear in any US restrictions, which is why Severstal did not request permission from the US Office of Foreign Assets Control in advance to process bond payments, according to Bloomberg.

Creditors can now choose a few days to see if the steel giant will be able to obtain the necessary permits to pay the interest, rather than ask for debt repayment, which has led to a so-called formal event of default. In the event of a default, Severstal’s international operations and credits will cover just 16% of the company’s unsecured external debt, JP Morgan analysts estimated on March 4. The figures are based on export credits, as production facilities are located in Russia.

Severstal should pay $800 million in Loan Participation Notes (LPN) expiring in 2024. The debt, which has an annual rate of 3.15%, was issued by Luxembourg subsidiary Steel Capital. LPNs are fixed income securities that allow investors to purchase portions of a loan or loan package. LPN holders participate on a pro-rata basis in the collection of interest and principal payments and are proportionately exposed to the risk of default.

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Meanwhile, holders of Russian government bonds maturing in 2029 did not receive a $65.6 million coupon credit for the March 21 issue. It is possible to pay it in rubles, according to the issued regulation. In this case, the grace period is 30 days. (All rights reserved)