(Bloomberg) — Russia was judged to have breached the terms on a bond after missing a $1.9 million interest payment and triggering an insurance payout potentially worth billions of dollars.
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The Credit Derivatives Determinations Committee said a “failure-to-pay” event occurred on credit-default swaps because Russia didn’t include the additional interest in a late bond payment made at the start of last month.
The trigger is a boon for those that entered into a popular trade pitched by banks in the weeks following Russia’s Feb. 24 invasion of Ukraine — the so-called basis trade where investors buy both the bonds and credit default swaps. The debt in question has already matured, so holders stand to be paid twice — first on the notes themselves and again on the insurance.
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The ruling comes as Russia struggles to stay current on its foreign debt payments amid sweeping sanctions over its invasion of Ukraine.
While a comparatively small amount, the missed interest will trigger all of Russia’s outstanding credit default swaps, with the final amount likely to be set at auction. Credit-default swaps covered a net $1.5 billion of Russian debt in total as of the end of last month, according to the Depository Trust & Clearing Corp. That compares with $3.2 billion at the end of April.
At the same time, a failure to pay $1.9 million isn’t sufficient to trigger a cross-default across other instruments. The minimum threshold is an amount of at least $75 million, according to documents for other Russian eurobonds and reviewed by Bloomberg.
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After the invasion, investors piled into Russia’s credit default swaps, while also buying the beaten-down government or corporate debt the swaps are tied to. In normal times, the economics of such a transaction don’t make much sense. The cost of the debt and the hedges move…
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