Sistema Yields Surge as Dispute with Rosneft Triggers Technical Default

  • Asset freeze means covenants breached on $66 million of loans
  • Yields jump, shares head for lowest since December 2014

Sistema PJSFC, Russian billionaire Vladimir Evtushenkov’s holding company, dropped to a three-week low and its Eurobond yields surged as a dispute with the nation’s biggest oil producer forced it into technical default on 3.9 billion rubles ($66 million) of loans.

Sistema continues to met its financial obligations, and the technical default is “purely formal in nature,” the company said in a regulatory statement Monday. It no longer complies “with certain conditions of some of its credit facilities” after Rosneft PJSC won an injunction to freeze shares in three of Sistema’s subsidiaries including Mobile TeleSystems PJSC, according to the statement.

“We plan to service all of our debt obligations in a timely manner and in full," Sistema Chief Executive Officer Mikhail Shamolin said in e-mailed comments. "The situation we have found ourselves in is a direct result of the actions of the claimants, who, when demanding the arrest of our assets, could not have been unaware that their actions would lead to a technical default.”

Sistema has lost more than half its value and its Eurobond yields have quadrupled since Rosneft -- headed by President Vladimir Putin’s ally Igor Sechin -- brought a 170.6 billion-ruble ($2.9 billion) damages suit against it at the start of May. The technical default means Sistema may be forced to give similar warnings on other credit lines worth as much as 34 billion rubles, potentially pushing the company into default on its foreign debt, according to Otkritie Capital analyst Alexander Vengranovich.

Sistema’s $500 million Eurobond due May 2019 tumbled on Monday, lifting the yield 390 basis points to 13.36 percent as of 4:19 p.m. in Moscow, the biggest increase since September 2014. The shares traded down 2.3 percent at 11.64 rubles in Moscow, set for their lowest level since December 2014.

Read More: MTS Shares Fall as Sistema’s Stake Is Frozen in Rosneft Suit

Rosneft is suing for damages allegedly suffered by its Bashneft PJSC oil unit during a period when Sistema owned the oil company and was reorganizing its assets. The Rosneft claim is “unfounded” and the company is taking “all necessary steps” to lift the share freeze, Sistema said in its statement on Monday.

According to clause 10 of Sistema’s prospectus for the 2019 Eurobonds, cross-default occurs if the borrower fails to make a payment on any of its debts. The company would have 30 days to “remedy” any failure to meet its debt obligations, according to the prospectus.

“It doesn’t necessarily follow from here that this event will lead to a default on the Eurobonds,” Yakov Yakovlev, an analyst at Moscow-based Aton LLC, said by email. It’s possible the technical default was triggered because some of the assets seized from Sistema were collateral for the company’s debt, he said. If there’s no acceleration of payment, this may not become an event of default. “In any case, in all such questions, the Trustee has the final say,” he said.

Sistema spokesman Sergey Kopytov said the technical default doesn’t apply to the company’s bonds, but declined to specify which loans are affected. Lenders have the right to demand early repayment, he said.

“It’s possible that in Sistema’s credit agreements with banks there’s a clause stating that the loans are subject to early repayment in the event of an asset seizure,” said Maria Radchenko, an analyst at BCS Financial Group in Moscow. “Given the uniqueness of the situation, I think Sistema will sign waivers with the banks so that the loans don’t have to be paid ahead of schedule.”

— With assistance by Natasha Doff

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