Hedge funds look for bargains in Russian and Ukrainian bonds

Hedge funds bought back Russian and Ukrainian bonds after the conflict between the two countries sent many traditional investors racing out of the market.

Bad debt specialists Aurelius, GoldenTree and Silver Point were among those who bought Russian corporate bonds, according to several people familiar with the matter.

The investments follow the Russian wealth movement sparked by President Vladimir Putin’s invasion of Ukraine and the harsh sanctions introduced by Western allies in response to the invasion.

Bonds issued by major companies like Russian Railways are trading at prices that suggest many investors don’t expect an interest payment or even their original investment back because groups are unwilling or unable to pay their debts. Steelmaker Severstal on Thursday moved closer to becoming the first major Russian company to default on its debt since the invasion after a grace period for interest payments on a foreign currency bond expired.

One hedge fund manager said that longtime investors – holding assets with the view of their prices rising – decided to “sell [Russian assets] at any cost”, due to concerns that capital controls implemented by Moscow would make it difficult for companies to repay their dollar debt.

Many traditional wealth managers say they have a plan divest their Russian assets, while others specified the value of their holdings. The country will also be removed next week from JPMorgan emerging market bond index that foreign investors use as a benchmark for their portfolios.

It remains unclear which corporate bonds Aurelius, GoldenTree and Silver Point purchased. All three declined to comment.

Trading of corporate bonds of Russia and Ukraine skyrocketed

Other investors are also likely betting that there is some value in Russian corporate debt, as well as bonds issued by Ukrainian companies, which have also been depressed in recent years, analysts say. recent week.

Bond trading data reported to industry watchdog Finra shows about $4.5 billion in Russian and Ukrainian bonds changed hands since February 21, a significant increase from 1.7. billion in the first weeks of 2022, according to data compiled by MarketAxess.

Meanwhile, funds including Broad Reach and Gramercy bought the debt in Ukraine’s sovereign dollar. The price of 10-year bonds issued by the country fell to 18 cents against the dollar in early March and has traded between 20 and 40 cents in recent weeks, down from more than 80 cents before the election. Moscow’s invasion on February 24.

“All but the unthinkable is the price of the bond in Ukrainian dollars,” said Bradley Wickens, founder of London-based Broad Reach and former founding principal of Spinnaker Capital.

Wickens, the fund’s main fund that has grown 15.5% in 2021 and is up 1.5% this year, bought a small “placeholder” position in Ukrainian bonds for about 19 cents recently and is currently trading. consider buying more. He said he expected “some form of sovereign statehood of Ukraine” to exist in the future, adding that Russia’s permanent occupation of the country and aversion to debt made Ukraine’s bonds lose value.

“We don’t know what will happen with Ukraine – but I would expect it to be a widely supported Western entity,” said Gramercy investment director Robert Koenigsberger.

Gramercy has established a position in Ukraine’s sovereign debt at about 20 to 30 cents against the dollar.

Line chart of 10-year government bond prices (cents per dollar) showing a decrease in Ukrainian government debt

At the end of last month, the Ukrainian government commissioner for public debt management tell investors that Ukraine’s treasury operations are “fully operational” and that it has no plans to restructure its debt.

One hedge fund manager, who did not wish to be named, said they believe Russian President Vladimir Putin made a “major miscalculation” by underestimating Ukraine’s military. They also point to the determination of the Ukrainian debt management office to honor its debt.

Ukraine “survives in any scenario,” added the fund manager, who has also picked up the country’s bonds in the weeks since the invasion.

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