Russian companies face the risk of defaults due to the suspension of trading on the stock exchange

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The largest Russian Internet company “Yandex” announced the impossibility of paying off all the holders of the company’s bonds, if they all exercise the right to demand a redemption on the issue of bonds for $ 1.25 billion on Friday, March 4. Later on the prospect of a “technical default on bonds” after March 8 reported another major domestic Internet company Ozon.

Yandex, whose parent company Yandex NV is located in Amsterdam, Netherlands, described in a statement the possible risks for itself in the face of sanctions against Russia due to a special military operation in Ukraine. The statement said that if all holders of its 0.25% 2025 Class A bonds totaling $1.25 billion demanded redemption on March 4, the company would not be able to pay all of its claims.

Investors got early redemption rights five days after the New York Stock Exchange (NYSE) suspended trading in Yandex NV shares on February 28. This period was specified in the terms of the bond issue. Yandex also warned that it would not be able to redeem most of the bonds if it could impose restrictions on the transfer of funds from Yandex’s Russian subsidiaries to its parent company in the Netherlands.

In 2021, Yandex’s revenue grew by 54%, exceeding RUB 356 billion. Adjusted EBITDA at the end of the year – more than 32 billion rubles. At the same time, the maximum amount of claims of bondholders is somewhat less than the amount of Yandex’s cash. At the end of 2021, the balance of cash, cash equivalents and deposits was over $1.38 billion, the company said in its financial statements.

“As a public company, we are obliged to warn the holders of our shares about all possible risks, even hypothetical ones, that may never materialize,” a Yandex representative told Vedomosti.

Another large domestic Internet company, Ozon, also reported similar risks. But the situation with its business is different, follows from the company’s statement. Ozon has about $750 million of convertible bonds issued in 2021. Holders of these bonds, according to the terms of the issue, have the right to demand their redemption seven business days after the suspension of trading (Ozon shares are traded on NASDAQ). But Ozon has “enough money in checking accounts,” the company said in a statement. “As of February 28, 2022, the amount on the company’s settlement accounts and deposits amounted to 113 billion rubles, of which 80% are held in foreign currency,” Ozon added.

At the same time, payments to bondholders must be made by the Cypriot holding company of the Ozon group. Therefore, the company sees the risk that it will be problematic for it to make money transfers from Russia abroad – “both for technical reasons and due to regulatory prohibitions.” “If the company, for the reasons described above, is unable to meet its obligations to bondholders, this will lead to a technical default on the bonds,” Ozon said in a statement.

Ozon is one of the largest marketplaces in Russia. The company has not yet published financial results for 2021, disclosing only the total turnover of goods and services. This indicator in 2021 at the company has more than doubled – up to 445 billion rubles.

This situation, most likely, will be resolved safely for both companies, Leonid Delitsyn, an analyst at FG Finam, believes. “The composition of bondholders is sufficiently diversified, and they will not act all at once at the same time,” he said. At the same time, the expert noted that it is impossible to completely exclude the risk of such an outcome of events, which is why the companies made public statements.

If we talk specifically about Yandex, where they see the risk of non-payment of funds to all bond holders, then the company as a whole does not have a “critical dependence” on the issue of bonds, the analyst adds. With the help of this tool, the company from the very beginning financed less profitable areas such as, for example, the search business, taxis or e-commerce. Problems with this instrument now indicate that in the future, if the company decides to place bonds again, its risks will be assessed by potential investors in a different way, and Yandex will have to pay a higher percentage on these securities. This, in turn, will lead to the fact that the financing of the company’s new projects by issuing bonds will slow down many times, the expert believes.

According to Igor Taran, director of debt instruments at Alfa Capital Management Company, when buying bonds, investors often focus on two components – the company’s ability and willingness to pay for them. And if the opportunity can be calculated based on any indicators, then it is the desire to pay that is assessed by investors according to the company’s statements and the speeches of its management. This is the so-called “soft category, which is very difficult to evaluate,” Taran added. Investors, of course, can submit bonds for redemption if they conclude that the company will no longer be able or willing to pay.

“Yandex now has about $615 million in cash denominated in dollars and euros ($370 million of which is outside Russia), as well as 47 billion rubles. With a course of 110 rubles. per dollar, the ruble component is approximately $427 million. The total amount of free cash is less than the volume of issue, however, we believe that the risks of default are greatly overestimated,” says Denis Buivolov, an analyst at BCS Mir Investments. Ozon has more cash to spare and also a longer deadline to resume trading until March 8, he said.

According to Buyvolov, Yandex also has illiquid assets that, if necessary, can be sold, but the BCS analyst also strongly doubts this. He sees “long-term business development potential” for Yandex as the Russian authorities plan to “support the technology sector and provide it with additional benefits.”

But even if companies have to default on bonds, in the long run this is unlikely to lead to serious problems for their businesses in Russia, except, of course, reputational losses, says Oles Gruzdev, a lawyer at Forward Legal. If Yandex does not redeem the bonds, in which case their holders have the right to go to court, the case will be considered in a Dutch court. He may subsequently impose penalties on the accounts of the Dutch company, seize its property, but this is also unlikely to affect the development of assets in Russia, the lawyer believes. According to him, in the future, plaintiffs in Holland may demand the implementation of the decision of the court of this country in Russia by obtaining a writ of execution. “Given the current foreign policy situation, I assess the likelihood that Russian courts will enforce such a decision as low,” Gruzdev notes.

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