Russia’s Severstal on verge of default as Citi blocks interest payment

Severstal is on course to become the first major Russian company to default on its debt since the invasion of Ukraine, after Citigroup blocked an interest payment from the company that is majority owned by oligarch Alexei Mordashov.

The steelmaker has spent the past week attempting to pay a coupon on a $ 800mn bond, but has now exceeded a five-day grace period that means holders of the debt could force the company into default.

Severstal said on Wednesday that Citigroup, its so-called correspondent bank, had “frozen” the $ 12.6mn interest payment “due to regulatory investigations”. The bank asked the company to obtain a license from the US Office of Foreign Assets Control before it would process the cash, two people familiar with the matter said. Ofac, the agency that enforces US sanctions, can provide special authorizations to engage in transactions that would otherwise be prohibited.

The company said it was “now in the process of application to all the necessary regulators to obtain the licenses”. Citigroup declined to comment.

Mordashov has been sanctioned by the UK and the EU. The company did not apply for the Ofac license because Mordashov has not been named in US sanctions, one of the people said.

The oligarch, one of Russia’s richest men, has come under scrutiny for recently transferring a stake in German travel company Tui to Marina Mordashova. She is believed to be his third wife di lui, although that has not been publicly confirmed. Italian authorities said earlier this month that they had seized a € 65mn yacht belonging to Mordashov.

“This is a bizarre situation,” said a debt investor who sold some Severstal bonds shortly after the outbreak of war last month. “Up until now all of the Russian corporates have stayed current on their debt but now you have [been] forced into default by a US institution. ”

Investors had been anticipating a wave of corporate defaults since Russia’s invasion triggered western sanctions against companies, individuals and the government. However, Russian firms have surprised markets by continuing to make interest payment on their foreign-currency debt – although some payments have been delayed while banks seek assurances from US or European authorities before processing them.

Evraz, the London-listed steelmaker part-owned by oligarch Roman Abramovich, said this week that it had been blocked from making an interest payment on one of its bonds, before announcing the following day that the situation appeared to have been resolved.

Abramovich has been sanctioned by the UK and EU. The company is incorporated in the UK, but has steel and mining operations in countries including Russia, Ukraine, Kazakhstan, the US and Canada.

When a company misses a payment on its bonds, it has a set grace period in which to rectify the issue. If the payment does not reach its bondholders in this time, then they can call a default and demand repayment upfront of the full amount outstanding under the bond.

Severstal’s bondholders may give the company more time to attempt to resolve the issue, however, rather than risk a messy confrontation over the blocked payment.

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