Pimco stands to lose billions if Russia defaults on its debt

Pimco has billions of dollars in economic fallout from Vladimir Putin’s invasion of Ukraine, having amassed a bet of at least $1 billion in derivatives markets that the country won’t default while holding 1 $.5 billion of its sovereign debt.

The California-based asset manager started the year with exposure to $1.1 billion in credit default swaps on Russian debt. Derivative contracts are intended to compensate bondholders in the event that the issuer of the underlying bond, in this case Russia, fails to make its payments.

At least five Pimco funds have sold CDS to investors, according to a Financial Times analysis of the asset manager’s holdings at the end of 2021. Pimco also holds more than $1.5 billion in tied government bonds to the Russian Federation, according to aggregate holdings data from Bloomberg.

Pimco sold the CDS to investors wishing to protect against a potential default and collects premiums on the insurance-like product. In doing so, he effectively bet that Russia would pay its creditors. The positions mean it stands to lose twice – first on its own bonds, then on CDS payments – if Russia defaults.

Pimco has already unmarked the positions based on current market valuations, although they may still recover.

The magnitude of the sums reflects the size of Pimco and its huge presence in the bond and CDS markets. The company had more than $2.2 billion in assets under management at the end of the year. Pimco declined to comment.

The majority of CDS sit in the $140 billion income fund, led by chief investment officer Dan Ivascyn, alongside Alfred Murata and Joshua Anderson.

The fund revealed that it had purchased $942 million of CDS protection on Russia by the end of 2021. Other funds to hold positions include Pimco’s total return bond fund, its emerging markets bond fund , diversified income and short duration funds.

Russia’s sovereign debt prices have crashed since it invaded Ukraine as investors bet crippling Western sanctions, which have made some of the bonds nearly impossible to trade, could push the country into default .

Russia last week made an interest payment on one of its ruble-denominated local bonds, but said the money would not reach foreign holders. The country cited a Moscow-imposed ban on its central bank sending foreign currency abroad that was instituted to bolster the country’s sovereign reserves after the sanctions were imposed.

Two interest payments on Russia’s foreign currency debt, which is covered by CDS, are due on March 16. Moscow said on Sunday that its ability to service its debt could be hampered by sanctions.

Over the past two weeks, traders and investors have expressed concern that sanctions against Russia are interfering with the CDS contract settlement mechanism.

This could potentially sideline investors who used CDS as a hedge against losses on defaulted bonds, but it would benefit Pimco and other parties who sold the contracts, as it could limit their payouts in the event of default.

If Russia defaulted on its bonds, it would not automatically trigger a payment on the CDS linked to its debt. Instead, the Determinations Committee, made up of representatives from major banks and asset managers active in the CDS market, will issue a decision. This committee includes Pimco as a member.

As representatives sit behind Chinese walls that are supposed to protect them from their company’s positions, contentious decisions often spark debates about possible conflicts of interest.

The committee is deciding whether Russia’s decision to allow certain bonds to be paid in rubles rather than other currencies would breach other rules governing credit default swaps, rendering them ineligible under any determination.

Additional reporting by Sujeet Indap in New York, and Tommy Stubbington and Robert Smith in London

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