Severstal, the first Russian firm whose deadline to repay debt has expired

(Bloomberg) — Severstal PJSC became the first Russian company to have run out of time to pay interest on foreign currency debt since the war began in Ukraine, after Citigroup Inc. blocked the transaction. Now you run the risk of your creditors asking for a default.

Although it had a lot of liquidity, the steelmaker was unable to pay a $12.6 million bond coupon within a five-business-day grace period ending Wednesday. Severstal said it is willing to pay, but Citigroup, which acts as the correspondent bank for the debt-issuing unit, is blocking the payment. One person familiar with the matter said Citigroup asked the company to obtain authorization from the U.S. Office of Foreign Assets Control (OFAC) before it could send the cash. But neither the firm nor its majority shareholder is sanctioned by the US.

“This is an extraordinary situation for us,” said Executive Director Alexander Shevelev in an emailed statement. “We continue consultations with partners and make every effort to ensure that bondholders receive funds in accordance with the terms of the bond issue. I hope that this injustice will soon be resolved and the rights of bondholders will be respected.”

Two bondholders confirmed on Thursday that they had not received payments.

While the company itself does not appear on any sanctions list, the majority shareholder Alexei Mordashov is on the sanctions lists of the European Union and the United Kingdom and, in those places, sanctions on individuals are generally extended to all companies they own or control. However, since it is not included in any US sanction, Severstal did not preemptively request authorization from OFAC, according to a person familiar with the matter. On Wednesday, a US Treasury spokesman was unable to comment on agreements with a company or individual that the nation has not sanctioned.

Promissory notes are denominated in US dollars. Citibank N.A. New York is the correspondent bank of the Luxembourg-based unit that issued the promissory notes, while Citibank N.A. London Branch is the paying agent and trustee of the promissory notes, the company said in a statement.

“Severstal has two options: get a license from OFAC to make payments, and then the coupons will start to pass again,” said Dmitri Dorofeev, portfolio manager of Alfa-Capital Asset Management, a Moscow-based bondholder. “If that fails, there will be formally a default, plus the creation of a creditor committee, the hiring of consultants and communication with the restructuring company. But it's a long process.”

In the event of default, Severstal's outstanding collections and international operations would only cover 16% of the company's unsecured external debt, according to estimates by analysts at JPMorgan Chase & Co. released on March 4. Since Severstal's production facilities are located in Russia, analysts relied on receivables receipts from export sales to calculate the recovery value.

The US$800 million debt, which pays an annual rate of 3.15%, was issued by Steel Capital, a Luxembourg-based unit of Severstal.

Original Note:

Severstal First Russian Firm to Run Out of Time to Pay Debt (1)

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