Can Russian steel giant Severstal avoid its first default?

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Severstal Faces Challenges in Avoiding First Default Amidst Payment Freeze

Russian steel giant Severstal is actively working to prevent its first-ever default, a situation complicated by a frozen interest payment to its eurobond holders. A test payment initiated on March 16 was blocked by Citibank, the US correspondent bank, due to regulatory investigations, preventing it from reaching the issuer's account. Severstal has stated it cannot meet the US$12.6 million interest payment deadline on time, though the company asserts its strong financial standing and commitment to meeting its debt obligations.
Payment Blocked by Correspondent Bank

The immediate obstacle for Severstal stems from a payment processing issue with its US correspondent bank, Citibank. Following a test payment on March 16, the funds were frozen by Citibank, reportedly because of ongoing regulatory investigations. This action has prevented the payment from reaching the intended issuer's account, creating a direct impediment to fulfilling the company's coupon payment obligations to its eurobond holders.
Licence Application to Facilitate Payment

To overcome the payment impasse, Severstal is reportedly seeking to initiate an application for necessary licences from relevant authorities. This process is a consequence of the complex regulatory environment surrounding international financial transactions involving Russian entities. Obtaining these licences is seen as a crucial step to enable the processing of the blocked payment and ensure funds reach the bondholders.
Sanctions Landscape and Indirect Impacts

While Severstal itself is not directly under sanctions, its principal shareholder, Alexei Mordashov, is subject to EU sanctions. These sanctions, which include asset freezes and travel bans for individuals, can create indirect complications for companies associated with sanctioned individuals. Furthermore, US Treasury regulations permit payments on sovereign debt but not on private debt under current sanctions regimes, adding another layer of complexity to international debt servicing for Russian corporations.
Company's Financial Position and Commitment

Despite the payment difficulties, Severstal has publicly affirmed its robust financial health and its commitment to honouring its debt. The company's director-general has communicated that Severstal maintains a stable financial position, possesses the necessary resources, and is prepared to meet its debt obligations in full. The current situation is described as extraordinary and arising through no fault of the company's own, highlighting their efforts to resolve the issue with financial partners.

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Can Russian steel giant Severstal avoid its first default?

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