Pimco could lose billions if Russia defaults on its debt

If Russia defaults on its debt, due to sanctions imposed by the US and Europe, it could take the fund manager Pimco down the road. Since he himself has a derivatives bet of at least $1.1 billion and owns $1.5 billion in Russian sovereign bonds, according to Joe Rennison and Brooke Masters in the Financial Times.

Pimco has billions of dollars at stake in the economic fallout from the Russian-Ukrainian conflict, after racking up a bet worth at least US$ 1,000 million in the derivatives markets that the country will not default and at the same time has US$ 1,500 million of its sovereign debt.

The asset manager started the year exposed to US$ 1.1 billion in credit default swaps on Russian debt. Derivative contracts are intended to compensate holders in the event that the underlying bond issuer, in this case Russia, defaults on its payments.

At least five Pimco funds they sold the CDS to investorsaccording to an analysis of Financial Times of the asset manager’s holdings at the end of 2021. He also owns more than $1.5 billion in government bonds tied to the Russian Federationaccording to aggregate data on holdings of Bloomberg.

Pimco sold the CDS to investors who wanted protection against potential breach and charges premiums on the insurance-like product. In doing so, he effectively bet that Russia would pay its creditors. The positions mean can lose twicefirst on its own bond holdings and then on CDS payments, should Russia default.

Pimco has already marked down the positions based on current market valuations, although they could still recover.

The magnitude of the sums is a reflection of the size of Pimco and its huge presence in bond and CDS markets. The company had more than $2.2 trillion in assets under management at the end of the year.

Most of the CDS is in the $140 billion revenue fund, managed by the director investment firm Dan Ivascyn, along with Alfred Murata and Joshua Anderson.

The fund disclosed that it had subscribed US$ 942 million CDS protection in Russia by the end of 2021. The other funds to hold positions include Pimco’s Total Return Bond Fund, its Emerging Markets Bond Fund, Diversified Income and Short Duration Income Funds.

Russian sovereign debt prices have collapsed since the start of the crisis with Ukraine, as investors bet that crippling western sanctionswhich have made some of the bonuses almost impossible to marketcould push the country into default.

Russia last week conducted a interest payment on one of your local ruble-denominated bondsyes, but he 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 shore up the country’s sovereign reserves following the imposition of sanctions.

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 repay your debt could be hampered by sanctions.

In the past two weeks, traders and investors have raised concerns that sanctions on Russia interfere with the settlement mechanism of CDS contracts.

This could potentially leave investors who used CDS as a hedge against losses on defaulted bonds out of pocket, but would benefit Pimco and other parties that sold the contracts because it could cap their payments in the event of a default.

If Russia defaults on its bonds, it will not automatically trigger a CDS payment linked to its debt. On the other hand the determinations committee, made up of representatives from the big banks and asset managers active in the CDS market, will make a decision. That committee includes Pimco as a member.

While representatives sit behind Chinese walls that are supposed to protect them from company charges, contentious decisions often spark discussions about potential conflicts of interest.

The committee is in the process of ruling on whether Russia’s move to allow some bonds to be paid in rubles instead of other currencies would contravene other rules underpinning credit default swapsrendering them ineligible in any determination.