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Emerging Markets

Russia sanctions add to nerves about RBI AT1s

US v Russia

The price for Raiffeisen Bank International (RBI) additional tier one (AT1) bonds has tumbled this week, as investors fret over over incoming US sanctions against Russia.

The bank issued €500m of perpetual non-call 5.5 year AT1 bonds at par in January. But after the US announced a new round of sanctions against Russia on Friday, RBI's bonds have fallen three points to trade at a cash price of 93.

The Austrian banking group receives 35% of its profits from its Russian business and 10% of its balance sheet consists of Russian loans, according a recent investor presentation from RBI. The firm's Russian entity is called Raifeissenbank (Russia).

“No bank wants to be caught on the wrong side of US sanctions. Look how quickly the Latvian bank [ABLV] collapsed recently. The risks are extreme,” said one head of FIG DCM. 

“RBI is not a bad bank, but its business profile is one which is out of favour at the moment,” he said.

The bank's share price has also fallen. It has lost 10% of its value in the first three days of this week.

Russia is unlikely to respond economically to the new sanctions from the US, but asset managers are avoiding Russian exposures including stocks and corporate debt according to a research note from Danske Bank..

The US said that it would penalise financial institutions outside of the US that “knowingly facilitate significant financial transactions” to any person or entity on the sanctions list.  

These developments have have hit RBI's subordinated debt the hardest because of the extent of the bank's exposures to Russian businesses.

But the discounted price of the Austrian bank's recent AT1 also feeds into broader concerns about the asset class. A generic de-risking is taking place in that market, the DCM banker said.

AT1s were designed as perpetual capital, but issuers can call the bonds after a defined period. If a bank does not exercise a call on an AT1, then the instrument switches to paying investors the prevailing mid-swaps rate plus a fixed spread determined at the point of issuance.

“At the moment, in the overall market, we have not seen the AT1 market pricing extension risks," said Tom Kinmonth a fixed income strategist from ABN Amro. "One argument has been that these bonds will always be called, but if spreads are 100bp wider, management might consider not calling them."

The reset spread on the RBI's AT1s is mid-swaps plus 387.7bp, which was said to be very low compared with the bank's implied re-financing costs.

Given RBI's vulnerability to Russian credit risk, the recent US sanctions have compounded concerns that RBI may not be able to replace its AT1s cheaply once they arrive at their first call dates.