By Matt Day
J.P. Morgan Chase & Co. won't include any new bonds issued
by Russian companies subject to U.S. sanctions in its debt
indexes.
The Obama administration on Wednesday escalated its sanctions
against Russia over alleged interference in Ukraine's crisis,
essentially prohibiting U.S. companies--and fund managers--from
providing equity financing or long-term debt funding to a slate of
Russian energy and defense firms.
The firms placed on the Treasury Department's sanctions list
include state-controlled oil giant OAO Rosneft; OAO Novatek,
Russia's No. 2 gas company; Gazprombank, the bank tied to
gas-export monopoly OAO Gazprom; and Vnesheconombank, a state-owned
development lender.
In a notice sent to clients late Thursday, J.P. Morgan said new
bonds issued by those companies wouldn't be included in its indexes
"due to investors' inability to replicate the benchmark."
Existing debt of the companies isn't affected, the bank said,
and will remain in J.P. Morgan's indexes.
J.P. Morgan's bond indexes serve as the benchmark for many money
managers who invest in emerging-market debt. The indexes affected
by Thursday's announcement are the benchmark for investors who
oversee a combined $379 billion, the bank said.
Oil firm TNK-BP, which is controlled by Rosneft, wasn't
mentioned on the sanctions list, but is included on J.P. Morgan's
roster of companies whose new debt wouldn't be eligible for its
indexes.
Vnesheconombank bonds, such as those maturing in 2025 with a
6.8% coupon, constitute 0.55% of J.P. Morgan's EMBI Global
Diversified Index, the bank said. Gazprombank, Novatek, Rosneft and
TNK-BP together account for 0.76% of the bank's CEMBI Broad
Diversified index.
EMBI comprises dollar-denominated bonds issued by governments
and wholly state-owned entities, while CEMBI tracks
dollar-denominated corporate bonds. Investment funds managing about
$313 billion use EMBI as a benchmark, the bank said, and funds
overseeing $66.3 billion track CEMBI.
The yield on Rosneft's dollar-denominated bonds maturing in 2017
soared to a two-month high of 4.16% on Friday from 2.86% the
previous day. Prices and yields move in the opposite direction.
Trading activity in the existing bonds of sanctioned firms fell
after the announcement on Wednesday, said Jim Craige, a portfolio
manager with Stone Harbor Investment Partners LP in New York, which
manages about $62.5 billion. "Everyone is under the assumption that
you can trade the debt at the moment, but there may be a time when
you can't."
Russian companies have largely avoided issuing
dollar-denominated debt since the tensions between Russia and
Ukraine ramped up in early March. Dollar bonds accounted for 30% of
the debt Russian firms issued between January and the end of
February, according to data provider Dealogic. Since then, dollar
bonds have made up 10% of Russian firms' new borrowing.
The pace of borrowing slowed, too, from $8.5 billion in all
currencies during the first two months of the year to $10.7 billion
in the more than four months since, according to Dealogic.
"It's a much tougher sell right now to buy a new (bond) issue
from Russia than in any point in quite a while," Mr. Craige
said.
Write to Matt Day at matt.day@wsj.com
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