Swiss Add to Russian Corporate Despair as Debt Costs Jump

By Ksenia Galouchko

Photographer: Philipp Schmidli/Bloomberg

Thomas Jordan, president of the Swiss National Bank.

Thomas Jordan just cost some of Russia’s biggest state-run companies half a billion dollars.
The Swiss National Bank president’s surprise decision to ditch the franc cap last week swelled what Russian corporates owe through the end of next year on debt denominated in the currency by 33 billion rubles ($502 million). Since the Jan. 15 change, the extra yield investors demand to hold OAO VTB Bank’s franc notes due in May 2018 versus its dollar debt jumped 2.70 percentage points. As recently as Dec. 24, the rate was at a record discount of 2.63 percentage points.
Rising costs for the debt is another hurdle for at least nine companies already reeling from the fallout of sanctions over the war in Ukraine, plunging oil prices, the slumping ruble
and an economy teetering on the edge of a recession. Beyond driving up the cost of servicing franc bonds by 17 percent, the move damps the appeal of selling securities in Switzerland, which hasn’t imposed penalties on Russia.
“The spike in the Swiss franc is the last thing Russian companies needed,” Richard Segal, the head of emerging-markets credit strategy at Jefferies International Ltd. in London, said by e-mail on Jan. 19. “It’s another storm on top of a perfect storm, because the economy was weakening anyway. Then sanctions occurred, followed by the decline in oil prices and then the ruble devaluation.”

Higher Costs

Switzerland’s surprise move sent shockwaves across eastern Europe as concern mounted that companies and individuals would struggle to repay franc liabilities. About 46 percent of total home loans in Poland are denominated in the Swiss currency. Companies in Russia have about $5.9 billion of franc-denominated debt outstanding, 4.5 times higher than Brazilian counterparts.
The franc’s low currency volatility lured borrowers including Russia’s natural-gas export monopoly OAO Gazprom and state-backed lenders OAO Sberbank and OAO Gazprombank. Russian bonds have been the worst performers in emerging markets since President Vladimir Putin seized Crimea in March, which sparked the standoff with the U.S. and European Union.
VTB, Russia’s second-biggest lender, hasn’t suffered losses due to the currency’s move although it has no plans to borrow more in francs, its press service said yesterday. Sberbank is meeting all its debt obligations, the company’s press service said by e-mail. Gazprombank doesn’t currently view the public European debt markets as a funding source due to sanctions, Ignat Dirks, executive vice-president, said by e-mail. Gazprom didn’t immediately respond to questions.

‘Tough Spot’

The SNB move, which sent the ruble plunging 21 percent versus the franc last week, added to pressure on Russian bonds in a month when Standard & Poor’s is due to decide whether to cut the sovereign’s credit rating to junk. Fitch Ratings and Moody’s Investors Service both downgraded Russia to the lowest investment grade this month after oil slid and the ruble tumbled the most since 1998 last year.
While companies are in a “tough spot” because of the Swiss franc’s gains, the selloff has created an opportunity to buy, Dmitry Dudkin, the head of fixed-income research at UralSib Financial Corp. in Moscow, said.
“We see weakness in Swiss franc bonds because of fears about the rise in the cost of servicing their debt,” he said by e-mail on Jan. 19. “But just like the nervousness surrounding the credit rating, it’s rational to use this as a chance to buy such debt.”
Gazprombank’s Swiss franc notes due in August handed investors a 1.6 percent loss in January, while OAO Russian Agricultural Bank’s securities maturing the same month retreated 3.2 percent. Russian corporate debt is little changed this month, according to data compiled by Bloomberg. The ruble slid 0.8 percent to 65.7445 against the dollar by 2:21 p.m. in Moscow.
“Switzerland was a safe haven for Russian corporates,” Anton Tabakh, a director at RusRating, an independent Russian credit-ratings firm, said by e-mail on Jan. 19. “Now the jump in yields has limited their ability to raise funding there.”