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Chris Haffenden

Over the past two weeks, the workings of global payments systems and the effects of unilateral moves against Russia have come into sharp relief. Sanctions work better with little warning before they become effective, but what happens to those with open positions and obligations if there is no ceasefire or safe corridors for exit? If a sanctioned company or Sovereign is unable to pay its bonds because of a roadblock not under its control, can holders call a default, and even if they can, are they allowed to act/settle their CDS?

Last week, most of the analysis in LevFin was on companies with operations in Russia and Ukraine, or where they represented a significant portion of their revenues. Names we had flagged last week – such as Oriflame, Recordati, Stada, Hilding Anders all came under pressure. Attention then shifted to those companies which were over-reliant on the region for their inputs, and more lately the wider impacts of the surge in energy and commodity prices and the knock-on effects in supply chains and counterparty risk. 

It is yet another perfect storm for Boparan (gas prices, Co2, feed, migrant labour) with their bonds now back below 80. Other names whose moves were not peanuts, included KP (Kloeckner Pentaplast) whose SUNs now yield 12.5%; Upfield Flora, (11.125% YTW) likely affected by vegetable oil price surges, and potential supply issues with Ukraine – a significant producer of sunflower oil. The more you look, the wider the effects are economically, Ukraine is a big producer of Neon which is important in chip making – there goes any optimism on reducing semiconductor shortages, not great news for some EHY Automotive names.

Commodity traders were relatively unscathed by events, but that changed completely earlier this week. Remember, Trafigura and Vitol have stakes in a Rosneft Arctic oil project and are significant traders of Russian oil, as is Gunvor. Glencore owns 10.55% of En+, the metals group formerly controlled by Oligarch Oleg Deripaska, plus a small Rosneft equity stake. Louis Dreyfus and Cargill have substantial wheat and grain trading businesses, with heavy exposure to Ukraine and Russia, in particular. 

As an excellent article in The Economist outlined, while Russian sanctions excluded oil & gas, news on 1 March that seven Russian lenders named as potentially being blocked from the SWIFT system saw energy transactions grind to a halt. Worse still many of the traders were stuck with cargoes of Russian oil with the whole system frozen after the imposition of sanctions, with auctions for Russian crude finding no buyers, even at $18 below Brent. “Russian cargoes became Kryptonite,” commented the Economist.

In common with moves from oil majors, BP and Shell, and perhaps reflecting the prevailing mood, Trafigura said on Wednesday that it had immediately frozen its investments in Russia. It added, “We are now reviewing the options in respect of our passive shareholding in Vostok Oil in which we have no operational or managerial input.” The retreat in its 2026 SUNs (price graph below) this week was arrested by news it had refinanced $5.295bn of debt, an impressive expression of confidence from banks, with 55 lenders participating, which should provide a decent liquidity buffer for the commodity trader. 


The wider economic impacts of Russia’s incursion into Ukraine, sanctions and the unilateral cutting off of ties by banks and corporates above and beyond the actions of politicians became more apparent this week. Commodity prices soared, and there was a massive short squeeze in government bonds as the growth impacts outweighed further inflationary pressures, and expectations for rate hikes subsided. 


German five-year bund yields in mid-week saw intra-day moves of almost 0.3% and moved well back into negative territory. With HY moribund, spreads automatically widened, crossover closed yesterday at 370bps. Oil and gas prices soared, with Brent hitting $118 (up 25% this year) at one point (now around $110) and European Natural Gas futures up 25% on Thursday alone at one point, trading in a €135-200 daily range! Wheat futures rose 21.8% yesterday. 


The impacts according to Deutsche are marked and are probably not fully understood by markets. Their economists project that a 50% spike in oil prices and 100% rise in gas which lasted for a year would reduce European Growth by 2.5-3% for 2022. Factor that into your single-name models, with further rises in inflation (5.8% in Eurozone in February) and the 100-150 bps widening in HY spreads this year is probably not enough to compensate. European inflation expectations are now 6.1% for FY 22, surely 2.5% for FY 23 must rise too?


Given the inherent trader in me, and my EM-leaning preferences, I was sparked into life this week by FinTwit, with some questioning if buying Gazprom long-dated dollar bonds in the 30s was the trade of the century. After all, payments for energy are still allowed under sanctions and Gazprombank remains open for business. There is a 7 March coupon payment for two of their bond issues. The key question is whether the money has been already wired to Agent Bank Deutsche London Branch or not.

We also had the bizarre situation of Ukraine raising war bonds in local currency, while at the same time saying it would still honour $300m of repayments due on its restructured Eurobonds this week – surely EM the market could do its bit and waive the payments? 

Move over to Russia, and its sovereign Eurobonds and it gets even weirder. As IFR explains CDS prices imply a 60c recovery, but bonds are trading around 30. There are $700m in payments due in March, amid concern about ability to trade bonds in secondary and after sanctions if money can be wired for interest payments if Russia remains willing to do so (remember there are a number of domestic holders as well as foreigners). 

If that wasn’t problematic enough, as my former colleague David Graves, now at REDD outlined in a recent piece, some Russian bonds have alternative payments currency clauses, meaning that they could decide to pay in RUB. But with the rate determined by the National Settlement Depository that might be out of line with market rates. Holders might be ripped off on the FX, but there is a counter argument that they offer a further layer of protection if Russia can’t pay in hard currency, says Vikram Lopez, a senior analyst at REDD. 

State-owned bank VEB is the payment agent on behalf of the Russian state for most Eurobonds (those issued after 2016 do not have a fiscal or paying agent), but is sanctioned, as is the Russian Central Bank, which could mean a significant part of the estimated $630bn Russian FX reserves buffer could be inaccessible. Perhaps the Russian CB will tell dollar bondholders they are unable to roll, and default and provide one of the severest tests for the efficacy of the Sovereign CDS market?

There could be around $6bn of CDS to settle. But, if you can’t trade and deliver reference bonds, what is the right settlement price? And we thought Europcar was a bizarre result?

We may be seeing a repeat of events in 2018 where sanctions from the US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned a number of oligarchs leading to investors stuck holding bonds which they were unable to trade. 

The most notable was RUSAL, indirectly owned by Oleg Deripaska, with bondholders initially given a month to divest their holdings, but with no route to do so, with Clearstream and Euroclear unwilling to settle trades. OFAC’s General License 13 didn’t authorise US investors to sell, purchase or invest in the US debt of the Aluminium producer. Moscow-based traders at the time told us couldn’t buy the debt as they were FCA regulated, leaving just Russian funds as the only potential buyers. There was also concern if coupon payments could be made via Euroclear and Clearstream that May. Eventually, Deripaska disentangled himself from RUSAL and OFAC restrictions were finally lifted a year later. 

Matt Levine explored some of these issues in his posts on Tuesday and Wednesday. The Russian central bank has now issued capital controls, telling brokers that there will be a six-month minimum temporary ban on the transfer of payments abroad. There was also a ban on hard currency payments to foreigners “in connection with loan agreements” though that was later clarified to apply just to new loans and not the servicing of existing debt.  

Clearstream and Euroclear say they are no longer settling local Russian assets. Therefore, if you own any local shares or bonds, you cannot trade or get paid. It gets even worse for BP and Shell and other oil companies who are taking the view that they would completely write down their stakes to zero – that’s $25bn for BP’s 20% stake in Rosneft! But as Matt says:

I don’t quite know what that means. You can say “we paid $25 billion for these assets, and now we can’t sell them, so we are going to forget all about them and mark them on our books at zero,” but … you still own them, right? (If eventually things normalise and you are able to sell the stake and reverse the writedown, what did your big public announcement that you’re divesting actually mean?)

I suppose you could donate them back to the company — call up Rosneft and say “cancel our shares, don’t bother paying us” — but I am not sure that that’s a good way to impose sanctions on Russia; it is in some sense good for Rosneft (or Shell’s Russian partners in its joint ventures, etc.) to cancel equity claims on its business for free. If you’re writing the assets down to zero anyway, I suppose one option (depending on the mechanics of the sanctions regime) is to give them to charity; there would be something a bit satisfying about a Ukraine relief charity owning 20% of Rosneft. 

Less than 18-months after it completed its restructuring, with lenders writing off €660m of debt, Technicolor has seen an impressive turnaround. Last Friday it announced plans to split into two and to substantially deleverage, enabling it to refinance post-restructured debt. 


It is listing its Technicolor Creative Solutions (TCS) business on Euronext which will be spun off with 65% to shareholders via a special distribution, with 35% being retained. The proceeds, plus a €300m mandatory convertible and €100m in cash from the sale of its Trademark Licensing operations will be applied to reduce debt. 


TCS provides animation and CGI services for the film, animation and gaming industries and is forecast to generate €180-190m of EBITDA in 2022, whereas the remainder of the business – comprising the digital broadband set-top boxes and DVD divisions is expected to top €160m. 


Technicolor generated €268m of EBITDA in FY 21, an impressive turnaround from just €163m in FY 2020. The €375m FY 22 EBITDA forecast tops the pre-Covid €324m posted in 2019. Leverage reduced to 3.87x from 5x in FY 20. Cost savings were one of the main drivers with €287m already booked, with €325m of total run-rate savings projected by the end of this year. 


But despite the impressive growth, there are some potential headwinds. 

There is competition for talent for those working on visual effects, which is impacting every business operating in the sector. As the business grows strongly – around two-thirds of 2022 capacity is already secured, there is a need to increase staffing levels, which rose from 7,700 to 10,560 in the past year. Revenues in the Connected Home division fell 10% during 2021, which the company put down to shortages in semiconductors and supply chain disruptions. Chip problems are easing but are unlikely to clear until early 2023, says the company.  

In conjunction with the split, the remaining debt will be refinanced, with new debt sitting at the two new entities. Management said that the exact split and new capital structures are yet to be decided, but commented their aim is to put Ex-TCS in a much better financial position, with the remainder being supported by TCS. More detail will be provided at the forthcoming Capital Markets Day in May.

Price action in European High Yield lately has all been in one direction - down, down, deeper and down, after the status quo was broken. But in skittish markets, trading names in the 80s can sometimes be tough, they can easily gap down into the 60s, but conversely positive news flow can provoke sharp short squeezes. 

Raffinerie Heide is a great example, its 6.375% December 2022 bonds were friendless earlier in the week as its refinancing prospects looked ever bleaker. But news that sponsor Klesch had finally decided to contribute the Kalundborg Danish Refinery to the restricted group, saw the bonds rally 10-points from 82 to 92 yesterday, however, they have pulled back to 85 today, a 30% yield, which suggest traders share our scepticism.  

In our blessed to be stressed report on 9 February, we suggested that it would be the easiest option as a route to refinancing for the German refiner. We said: “with the rhetoric from Heide since the FY 20 report suggesting the refinancing could contain a green element, we wonder whether the Danish assets do have a role to play in a new bond.”

Until this week, the sponsor had kept its cards close, perhaps we might suggest, exploring other options before contributing their new asset. A press release dated 3 Jan 2022 revealed that the Managing Director for Kalundborg will be an ex-Heide director, previously working closely on the German refinery’s clean energy efforts. It emphasised the green credentials of the Kalundborg refinery, with “industrial symbiosis” a special feature of the project. 

Furthermore, Klesch Group chairman Gary Klesch had said: “given the proximity of our refinery in Germany [to the Danish asset], I'm sure there will be lots of opportunities for both refineries to work together; especially when it comes to deploying our decarbonisation strategy”.

Little information is available on the financials for the Danish refinery and how much headroom it could give for a refi. Former owner Equinor does not give enough granular detail in its earnings reports. No details were given in Heide’s announcements. Prax showed how difficult it is to convince investors to finance refineries whose earnings are notoriously volatile. This might explain why the current bonds are still yielding in the double-digits. Time to dig out the contact details for Sculptor?

There was a slight bounce in Ontex bonds into the low 90s yesterday following a piece in Bloomberg (albeit light on detail) suggesting that Groupe Bruxelles Lambert, the largest shareholder with just under 20%, was looking to find buyers to take the Nappy maker private. This report comes in the wake of recent changes in the group’s strategy, including a divestment process for Ontex’s emerging markets business, as discussed in Emmet Mc Nally’s deep-dive and Q4 2021 earnings review. If you are not a client, you can request a copy of our deep dive here. 

This prompted a number of inbound questions to 9finHQ about whether this could trigger a change of control under the 3.5% notes. The bonds do not include a portability provision and are cheap funding that any bidder would like to keep in place.

Our initial view was that GBL would not be a permitted holder and therefore a “group” is formed when multiple persons agree to act together for the purpose of acquiring, holding, voting or disposing of shares, so we’d expect that any consortium created for the take-private would likely constitute a “group” for purposes of the Change of Control definition. 

We were then informed that GBL had a non-executive director on Ontex’s board, which under certain interpretation of the docs would satisfy the permitted holder requirements as ‘management investors’ and their ‘related persons.’ The term “Management Investors” includes (among others) “the officers, directors, employees and other members of the management of, or consultants to, the Issuer or any of its Subsidiaries […] who at any date beneficially own or have the right to acquire, directly or indirectly, Capital Stock of the Issuer or any Restricted Subsidiary” and the term “Related Persons” includes “any investment fund or vehicle managed, sponsored or advised by” a Management Investor.

Michael Bredael, an Investment Director at GBL since 2016, is also a non-executive director of Ontex. Assuming that he owns Ontex shares, or the right to acquire such shares (or could be granted shares prior to any take-private), he could fall within the definition of “Management Investors”. To the extent that GBL is interpreted as an investment vehicle he “manages” or “advises” by virtue of his position there, it would be his “Related Person” (and therefore be a “Permitted Holder”). 

However, some other 9fin subscribers disagree with this interpretation, questioning whether one director would satisfy the clauses and expressing that this reading seems outside the intent of the clauses. 

We have asked the company to help clarify. Ontex has responded, stating that they "do not comment on market rumours" and "regarding the specific question on the "permitted holder" and "related person" definition, this is up to the legal interpretation for which [they] cannot help further".

In the meantime, the focus is on the divestiture of the EM business, their previous growth engine, as they pivot 180 degrees to developed markets. Our analysis suggests some wriggle room to make restricted payments and permitted investments, but this runs contrary to management’s intention to reduce leverage to below 3x by FY 23. 

More stress, beginning with the letter S. 

After SBB last week, and Saipem before that, it was the turn of Finnish Real Estate developer SRV Yhtioet Oyj this week, with its €75m 4.875% 2025 SUNs bonds dropping to a 72-handle from a 82-handle after detailing its Russian exposure. 

In a statement it said it was a partial investor in three shopping centres in Russia through associated companies, with plots of land in Russia to be developed. “In addition, SRV is responsible for leasing the premises of the completed shopping centres, marketing and operating the properties.” SRV’s revenue in Russia in 2021 was just €6.8 million, mainly revenue from the operation of shopping centres and the recognition of sales revenue from the Decathlon project. However, it added “The invested capital of the Investments segment was approximately €167 million, the majority of which consisted of investments in Russia.”

The next day it posted FY numbers, with just €4.6m of adjusted LTM EBITDA, and net leverage of 35x. “Geopolitical tensions impact the general development of the Russian economy and the exchange rate of the rouble, which might have a significant effect on SRV’s earnings trend and asset valuation,” it said.

Last week we commented that Viceroy’s short seller report on SBB didn’t include a gotcha moment. But this was a classic one-two punch, with further revelations which included an open letter to the authorities and regulators, relating to tenant agreements with SBB operating over 10% of Norway’s kindergarten facilities. 

Viceroy said the annexures will “provide background on tenant agreements and historical transactions between the Tenants and SBB, which we show has resulted in dangerously inflated rental pricing. This inflated rent is subsidised via dividends from SBB, which we believe are at risk of failure.” 

Viceroy claimed that the tenants will default on their lease obligations and cause significant damage to the taxpayer, who will inevitably end up carrying these costs. 

SBB said “it will not dignify Viceroy with yet another formal response. SBB invites all investors to reach out directly to the Company if they have any questions.” The revelations had little effect on their bonds, which remained in the low 90s. Our write-up on the earnings call last week is here.

Balta launched its tender and exchange offer for its 2024 SSNs on Wednesday. Flagged in their earnings call a week ago, it will use the proceeds from the disposal of various divisions to Victoria Plc to allow holders subject to an A&E last year to cash-out or extend their notes. Holders can tender at 98, with a 2% early tender fee (up until 16 March) or they can exchange for new notes with a 101-redemption price to 14 March 2023, with credit enhancements from Bentley Mills and ITC Co as guarantors which generate 60% of EBITDA and 41% of total assets pro forma the sale. Following the Tender Offer, Exchange Offer and Consent Solicitation, there will be €130m of Notes (including, if applicable, the New Notes) outstanding, if there are any amounts outstanding above this amount, it will redeem the rest via an optional redemption.  

After last week’s shock announcement of the Sareb contract loss, Haya Real Estate detailed the impacts of the loss, which it had baked into projections for its A&E announced a week earlier. The AUM for the Spanish real estate and NPL servicer will reduce by over €16.6bn – more than half of the existing c€30bn with a total reduction in EBITDA to 2025 of €34m, an average of €8.5m per year, and a total reduction of cash flow before debt service of €33.9m – around 15% lower per year. Our write-up on the A&E proposal is here – the €250m 5.25% 2022 SSNs are now indicated in the low 70s, from the mid-80s a week earlier. 

In its earnings report last Friday Prisa snuck in another A&E agreement with lenders, just a year after the last one. Maturities will be extended by 2.25-years with a blended cost of debt falling from 7.16% to 5.99%.  


After providing a negative shock to lenders and bondholders in the third quarter Paysafe showed a return to growth in Q4. But buysiders are cautious, with some feeling they were sold a pup in last June’s refinancing. The digital wallet segment is under pressure, prompting some to question whether management had given the full picture during marketing. S&P had anticipated revenue from this segment to drop 15-18% in 2021 and a further 11% in 2022, as of November 2021. But for FY 2021 the segment actually dropped less severely than expectations, at -8%.


On 16 November, Howard G. Smith law offices, which specialises in US securities law class actions, announced an investigation on behalf of “Paysafe investors” into the possible violation of federal securities law on the part of the company. The company went public via a SPAC merger in March last year, meaning it probably has a large retail shareholder base. The €435m 3% SSNs due 2029 are trading around 89, which equates to a 4.8% yield. 

Does anyone know how to say in Chinese – kicking the can? 

Petition this week noted that Modern Land China is the latest developer to enter into restructuring. Cue years of back and forth of negotiations? No, $1.477bn of debt will be ‘restructured’ via a Cayman Islands Scheme and Chapter 15. 

Petition says: Addressed? Addressed how? By kicking the can, of course! Holders of Existing Notes will get (i) a pro rata share of a $22.9mm cash redemption fund and (ii) new notes in an aggregate principal amount equal to the sum of 98.3% of the Existing Notes plus accrued and unpaid interest. The new notes will be split into five separate tranches with the last having a far-dated maturity of 2029 and the richest three tranches carrying interest at 9% cash/11% PIK.

One of the main beneficiaries this week of Russian Sanctions was crypto, reportedly up on hopes that Russian entities will use digital currencies as a workaround to deal with anyone who still wants to work with them. The New York Times says that while exchanges and crypto platforms are less concerned about know-your-customer rules and tracking their activities, it could force US Authorities to get up to speed faster to educate themselves about the tech and could force them to use geolocation tools to stop customers in restricted jurisdictions. While the community is skewed to being libertarian and against restrictions and regulations, by actively helping Russia and Russian corporates linked to the state and/or owned by Oligarchs with connections to Putin, may it cause some to rethink?  

The Aviation business is already weakened by Covid and is acutely vulnerable to an escalated conflict between Ukraine and Russia, according to The Air Current. Manufacturers are heavily reliant on Russian titanium, and some aircraft lessors such as Aercap and SMBC Aviation Capital have significant exposure to Russian airlines. Key east-west flight corridors are affected, with a lot of flights previously routed over Russia on route to Asia sent over Kazakhstan instead. Finnair shares collapsed after it scrapped 2022 guidance due to difficulties rerouting Asian flights. 

Another beneficiary of the Russia/Ukraine crisis is previously unfashionable sources of Energy with many European countries having to rethink their Energy strategies and reduce their reliance on Russian Gas supplies. This will mean rethinking decommissioning nuclear power in Germany and keeping open whatever coal-fired power stations that remain. But weaning itself of Russian Gas is extremely difficult says the Economist, despite significant room to regasify LNG. Those who opposed the inclusion of nuclear energy in the EU’s green Taxonomy may be starting to reconsider. 

As London loses its cache for Russian businessmen, it has been entertaining to watch the media circus around the potential seizure of trophy assets and Oligarchs desperate attempts to dodge sanctions. Driving back from Brighton’s dismal performance against Villa last Saturday, I wasn’t as duped by many journalists when news emerged that Roman Abramovich was handing over the stewardship of Chelsea to its trustees.

Seizing of superyachts is next up, Rob Smith at the FTs has an incredible piece on Credit Suisse asking hedge funds and other investors to shred documents on a securitisation of loans backed by jets, yachts, real estate and/or financial assets. 

It's worth noting that the US Congress can “grant Letters of Marque and Reprisal and make Rules concerning Captures on Land and Water.” The Federal government can issue documents (letters of marque) that empower private individuals to legally seize foreign vessels. 

On Monday, Rep. Lance Gooden (R-Tex) suggested that it could apply to yachts and jets owned by those oligarchs. It could allow private individuals to seize the vessels and, eventually, make them their own. The Ukrainian mechanic wouldn’t need to sink his Russian boss’s yacht, he could sail away with it as the new owner. 

European HY bond preliminary OMs – we haven’t had a deal for 25-days now and counting. 

Yesterday I ran a screener on European deals trading at 800bps spread to worst - my proxy for stressed credits. It produced 90 tranches from 70 issuers, up from 55 tranches at the beginning of January. A lot of reading-up for me to do.

Skeleton arguments for Mozambique’s case against Credit Suisse, I wasn’t able to listen in. I would very much like to read them after the main event – if anyone is able to forward. 

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