Davide Barbuscia and Tommy Wilkes

LONDON/NEW YORK – Some Russian assets, including beaten-down Russian assets, are attractive. JPMorgan strategists (NYSE:) cite bonds issued by Russian companies that have significant international operations, as the best way for them to benefit from distressed pricing. However, two sources in banking said loans offered to Russian corporates were at a large discount.

Russian bonds prices fell to new lows after Moscow invaded Ukraine. Investors are worried about their ability to repay due to Western sanctions. While the United States led sanctions that restricted the flow of Western money to Russia and damaged its economy, Ukraine demanded the cancellation of Russian energy exports.

Russia’s hard currency sovereign bonds traded above par up until February mid-February. Investors ignored Moscow’s military buildup at Ukraine’s borders and U.S. warnings about an imminent invasion. Although trading is almost halted, the decline in value has been swift. Longer-dated bonds are now listed at 20 cents per dollar.

Russia is facing its first serious default in foreign-owned sovereign debt since 1917 Bolshevik Revolution. Russia stated on Sunday that the West would sanction payments.

In a note sent to clients on March 4, a JPMorgan team led by Zafar nazim stated that Lukoil bonds was their favorite pick. This is because Lukoil has substantial international standalone operations and generated $3.5B in earnings for 2021. It also had relatively low foreign loans.

In the note, titled “If Ifs-And-Buts-Were-Candy-And-Nuts Recovery Analysis”, the JP Morgan strategists said investors could make huge returns should the company repay its debts.

According to two banking sources, there were some transactions in the secondary markets for distressed Russian corporate loans last Wednesday. Some market participants tried to sell the paper at discounts.

Although sanctions render it impossible to trade with any sanctioned Russian entity or in assets rouble denominated in rubles, investors from Western countries can trade bonds issued by Russian companies that are not on the sanctioned list.

On Friday Lukoil bonds traded at 32 cents per dollar with bid/ask spreads around 10 cents. This suggests a highly liquid market. JPMorgan’s strategist suggested that they might recover up to 100 cents per dollar.

The bonds of Novolipetsk Steel were also upgraded, as they believed that the current market prices didn’t reflect the potential recovery.

The strategists stated that their analysis was based on the recovery of international operations and a potential claim on international receivables.

Russian companies can make payments to foreign debt owners. Many earn substantial foreign currency from export sales.

However, this could be changed if Russia’s government places restrictions or if companies have financial problems that worsen, or are unwilling to pay. This could potentially lead to “events of default” (EoD).

Russian issuers could face an EoD, but some foreign issuers have substantial operations overseas (e.g. The strategists suggested that Lukoil could keep servicing its debt.

JPMorgan strategists stated that the repayment of current bonds, such as one from Gazprom (MCX):, would not automatically mean that other borrowers will repay.

A person from the investment company said that it received all due payments in U.S. Dollars to an investment firm which had some Gazprom bonds worth $1.3 billion.