PIMCO Set To Lose Billions If Russia Defaults On Foreign Debt

March 10, 2022   |   Tags:
PIMCO Set To Lose Billions If Russia Defaults On Foreign Debt

It looks like BlackRock and its ESG preacher CEO Larry Fink aren't the only ones on Wall Street who are set to lose billions on their Russian assets.

While plenty of American firms have recorded massive losses on Russian assets, PIMCO, the bond trading giant founded by Bill Gross decades ago, has somehow managed to lose money on both its holdings of Russian bonds, as well as its CDS.

How is this possible? As we explained earlier this week, many fear that even if Russia defaults on its foreign currency sovereign debt, western sanctions might prevent CDS holders from collecting on their winnings.

PIMCO had $1.5 billion in Russian government bonds on its books. Then early this year, it sold $1.1 billion in CDS, with at least five PIMCO funds selling the CDS to investors, leaving PIMCO holding the bag if the Russians default. So, if Russia defaults, not only will PIMCO be left holding worthless bonds (which have already rapidly depreciated in recent weeks), but it will be on the hook for the CDS payments, the FT reports.

Of course, in the interim, PIMCO receives payments from the CDS holders. The payments are like insurance premiums. In anticipation of a Russian default (something that Wall Street expects with growing certainty), PIMCO has already started with the write-downs.

Russia last week made an interest payment on one of its ruble-denominated bonds, but said the money wouldn't reach foreign investors, in accordance with a Moscow ban on the central bank sending foreign currency abroad.

Two interest payments on Russia’s foreign currency debt, which is covered by CDS, are due on March 16.

Of course, any losses would pale in comparison to PIMCO's $2.2 trillion in assets.

The majority of PIMCO’s swaps sit in its $140 billion Income fund, which is run by Chief Investment Officer Dan Ivascyn, along with Alfred Murata and Joshua Anderson, according to Bloomberg. The fund disclosed that it had sold roughly $942 million of Russian CDS by the end of 2021. The other funds holding positions include PIMCO’s Total Return bond fund, its Emerging Markets bond fund, and Low Duration income funds.

It costs  roughly $5.8 million upfront (and $100K annually) to insure $10 million of Russia’s debt for one year, according to ICE Data Services.

If Russia defaults on its foreign debt, it would mark the first time since the Bolshevik Revolution that Russia refused to pay foreign bondholders. The country defaulted on its domestically owned debt in 1998, which was the default that helped to sink Long Term Capital Management, while the foreign debt was ultimately restructured.

Tyler Durden Thu, 03/10/2022 - 14:20