A number of banking sources have stated that banks are in discussions with potential buyers about how to get rid of their exposure to Russian corporate loans, but that fears of retaliatory sanctions and pricing uncertainty are limiting trading activity and the ability of buyers to act, according to the sources.
Some distressed debt buyers have approached banks that hold Russian loans to gauge their interest in possibly selling that exposure at a discount as a result of Western sanctions imposed in response to Russia’s invasion of Ukraine, according to two bankers who spoke on the condition of anonymity.
Another banker said that he had a chance to purchase certain Russian company debts, but turned down the offer because he was concerned that more sanctions would make it much more difficult to recoup the value of the loans.
The conversations, albeit preliminary, show Western banks’ anxiety about how to handle their exposure to Russia, which, according to figures from the Bank for International Settlements, amounts to $120 billion.
On order to avoid being seen as dumping paper in the market, banks often maintain loans in their portfolios, only selling down their exposure in a discreet manner via bilateral transactions.
Several sources told Dailion that he had been contacted by distressed debt desks at two American banks last week to explore any possible interest in selling loans, but he was doubtful that the discussions would result in anything.
According to the banker, who spoke on condition of anonymity because the discussions are private, “I believe they’ll say they’re interested, and it’s wonderful for troubled markets, but I think we’re a long way off from seeing any meaningful liquidity.”
Global banks are familiar with sanctions, but the restrictions imposed on Russia are unprecedented in terms of scope, speed, and complexity, and they are certain to rise in the future, requiring banks to exercise extraordinary prudence in any transactions involving Russian businesses or assets.
Despite the fact that there have been some discussions about transacting Russian bank debt on the secondary market, a loan banker at a major U.S. lender said that activity has been restricted in part due to a lack of understanding on how any deal would be closed.
Adding, “Every distressed desk in this circumstance may see something that they can purchase for 20, 30 cents on the dollar… they will go to banks, but they are not necessarily going to agree to anything.”
As a result of the prospect of sanctions, activity has been further restricted since it is difficult to place a price on Russian assets, as some investors believe price decreases are transitory and prefer to stay on rather than selling at deep discounts, according to some sources.
It is not only bank loans that are being discussed; firms specialized in distressed debt have also shown an interest in purchasing Russian bonds, according to a lawyer in London who claimed his company had been approached by funds interested in making such deals.
In the words of the attorney, “I don’t know of a single distressed fund that is doing nothing right now, just sitting around.”
It was announced this week that all Russian bonds would be banned from JPMorgan’s emerging markets indexes by month’s end, a move that will impose further restrictions on the trading of Russian debt securities.
According to Marcelo Assalin, head of Emerging Market Debt at William Blair Investment Management, “liquidity isn’t tremendous right now, but there is a bid and an offer in the market today.” Russian bonds are being sold at a rate of roughly 15 cents on the dollar, he said.
“The absence of the index will result in further forced selling… It is certain that bond prices will fall to zero or near to zero, and that most fund managers would no longer be able to retain them “he said.