Banks are having conversations with potential buyers on how to get rid of their exposure to Russian corporate loans, but sanctions fears and pricing uncertainty are limiting trading activity and the ability of buyers to act, several banking sources said.
Punishing Western sanctions on Moscow in the aftermath of its invasion of Ukraine have prompted some distressed debt buyers to approach banks holding Russian loans to sound out their appetite to potentially sell that exposure at a discount, two bankers said.
Another banker said he had an opportunity to buy some Russian companies’ loans but dismissed the offer because of fears that more sanctions could further limit the ability to recover value.
The discussions, though tentative, highlight foreign banks’ uncertainty on how to manage their exposure to Russia, which according to Bank for International Settlements data is to the tune of $120 billion. read more
Banks tend to hold loans in their portfolios, only selling down their exposure quietly through bilateral transactions as they do not want to be seen as dumping the paper in the market.
One of the sources said he was approached by distressed debt desks at two U.S. banks last week to discuss any potential interest in selling loans, but he said he was sceptical talks would lead anywhere.
“I think they might say they’re interested, it’s exciting for distressed markets, but I think we’re some way off from seeing any real liquidity,” the banker said, speaking on condition of anonymity as the talks are private.
Global banks have experience with sanctions but the curbs on Russia are unmatched in their scale, speed and complexity and may yet grow, prompting banks to adopt extreme caution in all of their dealings involving Russian entities and assets.
A loan banker at a U.S. lender said that while there had been some talks on transacting Russian bank debt in the secondary market, activity was limited also because of lack of clarity on how any deal would be settled.
“Every distressed desk in this situation, they can see something that they can buy at 20, 30 cents on the dollar … they will talk to banks but not necessarily agreeing anything,” he added.
In addition to sanctions risk, activity is further constrained because it is difficult to put a price on Russian assets, as some hope drops are temporary and prefer to hold tight rather than sell at huge discounts, some sources said.
The discussions are not limited to bank loans: funds specialising in distressed debt have also been looking at buying Russian bonds, said a lawyer in London who said his firm was contacted by funds looking at such trades.
“I don’t know a single distressed fund that is doing nothing right now, sitting around,” said the lawyer.
JPMorgan this week said all Russian bonds will be excluded from its emerging markets indexes at the end of the month, a move that will add more constraints to trading Russian paper.
“Liquidity isn’t great obviously, but there is a bid and there is an offer in the market today,” said Marcelo Assalin, head of Emerging Market Debt at William Blair Investment Management, adding Russian bonds were being sold at around 15 cents on the dollar.
“Index exclusion will cause more forced selling… Sooner or later the bond prices will be close to zero and most fund managers won’t be able to hold them,” he said.
Source: REUTERS