Within our coverage, names with Russian and/or Ukrainian exposure include Guala Closures and Frigoglass (bottles and containers), Canpack (packaging), Oriflame (beauty products retail), Stada and Recordati (pharmaceuticals), HSE24 (retail), Profine (PVC windows), Maire Tecnimont (engineering), YIT (apartment development), Mytilineos (industrial conglomerate) and Hilding Anders (bedding).

We examine these in more detail below.

The effects of the deteriorating international situation are likely to be complex, and act through several different channels.

For issuers with significant Russian earnings, the most obvious hit will come through FX — the Ruble is already at record lows vs dollars and euros, meaning a straightforward hit for companies that report in either of those currencies. Sanctions may also make it harder to finance local subsidiaries, move capital in or out, or invest in local manufacturing. 

Specific sanctions going beyond the financial sector could also hit issuers in various ways — though reports from the New York Times suggest EU nations are heavily divided on which sectors should be excluded from a new sanctions package, so individual corporate impacts will depend on the details of broader sanctions measures.

Sanctioned banks

The US sanctions announced on Wednesday hit two state-owned banks, Vnesheconombank and Promsvyazbank. Neither entity appears in our library of European high yield documents, except in connection with onshore Russian issuers like RusHydro, Sibur, Brunswick Rail and Alrosa. The one exception is a guarantee facility for Renault, which appears in 2017 reporting in connection with Renault’s acquisition of Russia’s Avtovaz company, which makes Lada-branded vehicles.

Partial sanctions are already in place relating to Sberbank, VTB Bank,  Gazprombank, and Russian Agricultural Bank (Rosselkhozbank), which could be expanded in response to Thursday’s invasion. 

Sberbank lends to non-Russian HY issuers including Frigolass, Energo-Pro, Nostrum Oil & Gas and RCS & RDS (Digi), VTB Bank lends to Signa Development and United Group. We could not locate any recent mentions of Gazprombank or Rosselkhozbank lending to names outside Russia within our coverage.

We also note Russian involvement in European leveraged credit as a sponsor, most significantly from LetterOne, the investment vehicle of oligarch Mikhail Fridman. Fridman was not sanctioned after the first Russian invasion of Ukraine in 2014 and the annexation of Crimea, and has not been sanctioned in the latest wave announced Wednesday in response to the Russian recognition of the breakaway separatist republics. 

But if there was a comprehensive attempt to sanction the entire Russian financial system, including private banking institutions, this would inevitably include Alfa-Bank, which Fridman founded and controls, and which is the largest non-state-owned financial institution in Russia.

LetterOne is a cornerstone investor or owner of several European LevFin names, including Veon, Spanish retailer DIA, oil E&P Wintershall Dea, and health retailer Holland & Barrett.

Gas prices and Nord Stream 2

A quick text search in our document database uncovered some high-yield names potentially relying on the completion of Nord Stream 2 - an undersea natural gas pipeline meant to transport gas from Russia to northern Germany across the Baltic sea. The pipeline was completed last September but is not operational yet. German Chancellor Olaf Scholz has now announced they are withdrawing the pipeline’s certification, and likely causing additional cost pressure to companies exposed to natural gas prices.

Nord Stream 2 has been quite a controversial project, with countries like the US, UK, Poland and Ukraine strongly opposing it over fears of handing Russia additional control over gas supply in Europe, given the pipeline is owned by Russian state-owned Gazprom. Germany’s Merkel on the other hand, was a strong supporter, similar to the country’s much disputed approval of the first Nord Stream pipeline in 2005. Germany already imports roughly half of its natural gas from Russia, with the rest coming from Norway and the Netherlands. Gas is reportedly its second most important energy source, with 95% of the country’s gas needs being imported.

Russia’s influence aside, Nord Stream 2, if it becomes operational, would double the annual capacity of the existing Nord Stream and help keep pace with the record demand by essentially diversifying energy supplies to the continent, and potentially reduce the all-time high prices in the region.

Returning to Nord Stream’s impact on European high yield, the main businesses exposed are unsurprisingly manufacturers using natural gas as a raw material such as OCI and Tereos, as well as oil and gas players including Raffinerie Heide and Harbour Energy (more on these two names below).

Dutch fertiliser producer OCI makes natural gas-based fertilisers and industrial chemicals, and is relying on the recovery of gas prices to stabilise its cost base. In its Q4 2021 results presentation, OCI illustrates the steep rise in Ammonia marginal costs, with the risk of further increases “skewed to the upside”, given Nord Stream 2 delays.

Consolidated Energy, the world's second largest producer of methanol and a large producer of urea ammonium nitrate (UAN), Ammonia and Melamine is a significant user of natural gas. According to our Credit QuickTake - it is around 62% of total purchases of materials goods and services. It claims they are hedged for two-years out for ‘high-level levels of coverage.

Per its latest OM summarised in our Credit Quicktake, French sugar manufacturer Tereos’ uses natural gas as its main source of energy for production. Energy costs increased to 9% of COGS for the 6m ended September 2021, compared to 7% for the LTM ended March 2021. The company partially offsets this with commodity derivatives (€128m held at end of September 2021). In its latest Q3 2022 results, Tereos mentions significant uncertainty over supplies from Russia in 2022 and its decisive influence on gas prices over the coming months, in connection with Nord Stream 2.    

Raw material cost inflation has also hit German refinery Raffinerie Heide which reported a significant rise in refinery input prices involving Brent crude and natural gas, partially attributing it to the uncertainty over the Nord Stream pipeline. 

Lastly, news on the pipeline’s shut-down may be optimistic for UK-based oil and gas developer Harbour Energy. As per its latest OM, approximately 46% of its portfolio consists of gas production, so a delay in the pipeline maintains prospects for high natural gas prices in the near future. In Europe, Harbour has exploration assets in Norway and involves production & development only in the UK.

Russian exposed credits - a case by case analysis:

Stada (SSNs down ~3 points on week to week basis)

Among the Russian-exposed names above, we will start with Stada, as this is one of the largest Russian-exposed capital structures in European leveraged finance. 

In 2020, Russia accounted for around 14% of its sales, some €433m-equivalent.

Stata bought a portfolio of over-the-counter drugs in Russia and the CIS region from Takeda in March 2020, financed through a €600m bond issue, and has previously acquired drugs portfolios in the region from GSK. It bought Ukraine’s Biopharma In 2019. 

Stada operates two main manufacturing facilities in Russia and one in Ukraine, with a supply chain centre in Moscow, noting in its risk factors that although many sanctions regimes exempt pharmaceutical products, the Ukranian regime does not, and this has prevented it selling its Russian-made products into Ukraine since 2014. It has also prevented the financing banks of its Ukrainian operations from making payments into Russia.

The conflict since 2014 has also created regulatory obstacles for drug approvals, delays and bottlenecks in production.

Recordati by contrast has relatively little exposure, with Russian sales accounting for €33m of the €745m in net revenues for the first half of 2021.

Canpack (down ~1 point on a week to week basis)

Canpack, the Polish-based aluminium cans and packaging manufacturer, purchases a significant amount of aluminium from Russia. Fears of further sanctions have already hit London aluminium prices, reaching 13-year highs, which may prove a strain on Canpack’s raw material costs. To make matters worse, the Group H2 2021 results were also impacted by a 15% export duty introduced by Russia from August to December 2021.

Rusal, a Canpack-partnered aluminium producer which accounts for ~6% of the world's supply, has experienced US sanctions in the past. In 2018, the Office for Foregin Asset Control (OFAC) sanctioned the Russian-based company, which drove the price of aluminium up by 35% in a matter of days. Although Canpack has undertaken efforts to search for new suppliers, political unrest in South Africa and Guinea have added greater pressure on global aluminium supply in recent months. 

The Group is also exposed to the country through a facility operated in Moscow. Management on the Q3 Earnings call were pleased to announce that this facility had increased production capacity in the quarter through a $7.2m investment - which in addition included costs for staff training in the Czech Republic and the US. 

Guala Closures (down ~2 points on a week to week basis)

Another packaging firm exposed to both Russian and Ukraine markets is Guala Closures.  The Italian-based firm, which came to market in June 2021, has operations in Ukraine including an operating subsidiary and a production facility, whilst also generating sales in Russia. Any continuing or escalating military action in Eastern Ukraine could affect; (i) the ability to obtain local financing (ii) ability to collect accounts receivable (iii) ability of the Ukraine subsidiary to pay dividends. 

In 2019, Russia introduced a ban on the import of certain goods, including closures, from Ukraine, which has negatively impacted sales volumes of the Ukrainian subsidiary. 

Frigoglass (down ~1.5 points on a week to week basis)

Greek glass container producer, Frigoglass, has international operations with factories based in Romania, Russia, India, Indonesia and South Africa. The production facility in Russia serves the sizable domestic Russian market, as well as customers in certain European markets. By number of employees, the Russian production facilities are the largest in the company, accounting for 27% of operational staff.

Following a fire in its Romanian production facility, Frigolass ramped up production in Russia to fill the gap. 

Eastern European represented 37% of LTM ended Sept-21 sales. The company’s subsidiary, Frigoglass Eurasia, has outstanding credit facilities with Sberbank Russia.

Oriflame (down ~0.5 points on a week to week basis)

In FY20, Russia accounted for 15.6% of Oriflame's consolidated sales. The substantial drop in the ruble, from EUR/RUB 73.92 in 2018 to EUR/RUB 82.14 in 2020, has been further magnified due to the Russian-Ukraine crisis, reaching EUR/RUB 96.24 as of time of writing. Fluctuations in exchange rates not only impacts the financial result of the Group but also affects the competitive position of their manufacturing facilities located in Russia. 

The Russian facility, which opened in 2016, distributes a number of Oriflame's products globally. As well as Russia, the Group relies heavily on facilities based in India, China and Poland where they manufacture ~63% of total products. In these regions, Oriflames owns and leases a number of factories and distribution centres, with the one located in Russia having the highest book value of €53.1m as of 31 December 2020. 

Oriflame reported a poor set of Q4 results today (23-Feb), with sales and EBITDA down 9.8% and 16.1% YoY, respectively. In the Q&A session, management tried to reassure investors that raw materials could be sourced locally in Russia, however they did warn these may be of lower quality. In the event of further sanctions, the company would have the option to ramp up production in facilities located outside of Russia. A link to the Q4 presentation can be found here.

Profine (down ~1.5 points on a week to week basis)

Profine’s largest markets for LTM ended Sept 21, was Germany (21%), Russia (8%) and France (7%). A breakdown of the PVC industry, presented in the OM for the €340m SSNs issuance, shows Russia as the largest market by volume in the region’s Profine cover. Any impact on the economic condition in Russia or fluctuations in the Ruble may impact future results for the firm.

HSE24 (down ~1.5 points on a week to week basis)

Our HSE24 Credit QT uncovered the European live-commerce (home shopping) retailer’s exposure to Russia, where 13% of FY 20 sales were realised, while the company planned to increase its operations there. Exposed directly to fluctuations in the Russian Ruble.

YIT (down ~1 point on a week to week basis)

A Finnish residential property developer, with significant capital deployed in Russia (12% of group capital), equity investments of €297m in Russia. €55m in escrow pending completion of projects at end-2020. Housing Russia unit accounted for 10% of 2020 revenues, 20% of group personnel, 31% of group operating profit in 2020. 

Maire Tecnimont (down ~1 point on a week to week basis)

Engineering group with extensive project pipeline in Russia and CIS (22% of total forward pipeline). 52% of 2019 revenues in Europe (non-EU), reflecting largely Russian exposure.

Projects include Amursky 1 and 2 for Gazprom, which will be the largest gas processing plant in the world, Kingisepp 2, an ammonia plant for EuroChem, and a granulated urea plant for Volgafert. The Amursky contracts are worth around €1.2bn, though Maire Tecnimont is acting in consortium.

Other more recent contract wins include a Low-Density Polyethylene (LDPE)/ Ethylene-Vinyl Acetate (EVA) plant in Kazan, for approx €130m, and a Memorandum of Understanding with MC TAIF JSC to co-develop a new bio-degradable polymer plant.

Mytilineos (down ~1.5 points on a week to week basis)

Greek industrials conglomerate which operates four key business units - power & gas (47.3% of FY 21 revenues), metallurgy (25.1%), sustainable engineering (14%) and renewables and storage development (13.7%). Metallurgy business segment has a core focus on the processing of aluminium, the price of which has been significantly affected by the Russia-Ukraine conflict. Russia produces ~6% of global aluminium supply, and had been pegged as a key growth region for mining of the metal. Although the Metallurgy segment represented ~25% of sales for FY 21, it is by far Mytilineos’s highest margin business, generating 44.4% of EBITDA (24% EBITDA margin, vs 11.7% for the Power & Gas segment). The company does employ hedging strategies via the purchase of commodity and foreign exchange futures. Total hedging activities had a -€91.5m effect on the Metallurgy segment for FY 21.

Hilding Anders (down ~1 point on a week to week basis)

Global bedding and mattress group, based in Sweden. Per the company’s FY 19 report, available on 9fin here, net sales to the Russian market accounted for ~37% of revenues. As of 2019, the majority of manufacturing activity was also centred in Russia, with 55.5% of employees (5,581 of ~10,000 total) based in the country. As can be expected given the manufacturing exposure, Russian lease liabilities are also present, with 492 separate agreements as of 2019 (11 month lease periods). Their lease exposure as of FY 19 is below:

Following this report, our content and analysis team issued a further report - German military spending in HY markets. Using 9fin's text search tool, we look at impact on companies in the defence sector and related supply chains. The report also consider second order effects and broader themes such as ESG. If you would like to request a copy of this report, please complete your details here.