First Default by a Russian State-Owned Company Since ‘98: The Wax Begins to Melt on Sovereign Bonds

Non-state owned Russian companies with heavy borrowings started to nose-dive last autumn, as fears rose over their ability to finance a combined $500bn in corporate debt. As it became clear that Russian private companies had flown too close to the sun, nervous international investors clung to the comforting assumption that state-related Russian companies represented a relative flight to quality.

But the news of the default by Financial Leasing Company (FLC), the first by a Russian state-owned company since the 1998 financial crisis, is now a worrying sign for investors that the wax holding the bonds of state-owned companies may also be starting to melt.

The Russian state owns a 29% stake in FLC, an airplane leasing company, with an additional 52% owned indirectly through United Aircraft Corporation. As such, FLC’s debt was touted as ‘quasi-sovereign’. FLC in fact defaulted on $250 million in bonds in December 2008, but news has broken now as investors, according to Bloomberg, push for “accelerated” repayment.

For international investors, the chilling significance is that the Russian government allowed this default to happen. And investors are now issuing a warning to the Russian policymakers attempting to pilot the economy through the crisis: this could be very costly in terms of borrowing expenses as investors become even more unwilling to lend to Russian companies.

The Russian economy as a whole – not to mention certain high-profile individual companies - soared on the heady thermals of foreign debt in recent years, but the hot air has now rushed out of the debt bubble. And the clear message coming from investors and lenders is that the situation with FLC needs to be rectified. Otherwise, other seemingly “safe” companies could also be in for a very hard landing.

Possibly related posts:

1. Putin’s First Annual Address to the State Duma
2. [Kazakhstan’s Banking Sector] #3 Astana Finance
3. Russia-Focused Cross-Border M&A: Russian Companies Have Remained Acquisitive, But 2009 Outlook Is Bleaker
4. Et Resurrexit? The Return of the Russian Equity Offering
5. No Water, No Float – Russian Regulator Set to Revise Listing Rules