Hedge funds search for bargains in Russian and Ukrainian bonds

Hedge funds have been scooping up beaten-down Russian and Ukrainian bonds after the conflict between the two countries sent many traditional investors racing out of the markets.

Distressed debt specialists Aurelius, GoldenTree and Silver Point are among those that have been buying Russian corporate bonds, according to several people familiar with the matter.

The investments follow a rout in Russian assets that was sparked by President Vladimir Putin’s invasion of Ukraine and powerful sanctions that were put in place by western allies in response to the incursion.

Bonds issued by major companies such as Russian Railways are trading at prices that suggest many investors are not expecting to receive interest payments or even their initial investment back as groups are either unwilling or unable to service their debt.

One hedge fund manager said long-only investors — which hold assets with a view to their prices rising — had decided to “sell [Russian assets] at any price”, on concerns that capital controls implemented by Moscow would make it difficult for companies to service their dollar debt.

Many traditional asset managers have said they plan to divest their Russian assets, while others have sharply written down the value of their holdings. The country will also be removed next week from the JPMorgan emerging market bond indices that foreign investors use as a benchmark for their portfolios.

It was not immediately clear which corporate bonds Aurelius, GoldenTree and Silver Point had bought. All three declined to comment.

Analysts said it was likely other investors were also making bets that there is some value in Russian corporate debt, as well as bonds issued by Ukrainian companies, which has also been beaten down in recent weeks.

Bond trading data reported to industry watchdog Finra showed roughly $4.5bn of Russian and Ukrainian bonds changing hands since February 21, up substantially from $1.7bn in the earlier weeks of 2022, according to data compiled by MarketAxess.

Meanwhile, funds including Broad Reach and Gramercy have been buying Ukraine’s sovereign dollar-denominated debt. Prices of 10-year bonds issued by the country fell as low as 18 cents on the dollar in early March and have been trading between 20 and 40 cents in recent weeks, down from more than 80 cents before Moscow’s invasion on February 24.

“All but the unthinkable is in the price” of Ukraine’s dollar bonds, said Bradley Wickens, founder of London-based Broad Reach and former founding principal of Spinnaker Capital.

Wickens, whose main fund was up 15.5 per cent in 2021 and is up a further 1.5 per cent this year, bought a small “place holder” position in Ukraine’s bonds at about 19 cents recently and is considering buying more. He said he expected “some form of sovereign state of Ukraine” to exist in future, adding that it would take Russia permanently occupying the country and repudiating its debt for Ukraine’s bonds to lose all of their value.

Ukraine's government debt tumbles

Gramercy’s chief investment officer Robert Koenigsberger said: “We don’t know what’s going to happen with Ukraine — but I would expect it to be a massively western-supported entity.”

Gramercy has built a position in Ukraine’s sovereign debt at prices of about 20 to 30 cents on the dollar.

At the end of last month, Ukraine’s government commissioner for public debt management told investors that Ukraine’s treasury operations were “fully functioning” and it was not planning a debt restructuring.

One hedge fund manager, who did not want to be named, said they believed Russian president Vladimir Putin had made a “massive miscalculation” in underestimating Ukraine’s military. They also pointed to the Ukrainian debt management office’s determination to honour its debt.

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

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