The largest fund in the Pacific Investment Management Co.’s portfolio increased its exposure to Russian defaults after the Ukraine invasion by selling protection to banks, including JPMorgan & Chase Co and Barclays Plc.
What is this regarding?
Pimco Income fund has about $1 billion in bets on Russia through the swap of credit defaults maturing. Another $106 million was added in the 2022 first quarter as per filings by the fund with the Securities and Exchange Commission. According to a person with knowledge of this matter, the new swaps were mainly sold in January, and more were added in February before the Russia Ukraine war began.
Pimco is one of the biggest players in exposure to Russia’s credit default swap, and it will be interesting to see how the drama pans out this week as most debt investors have this question in mind. A panel of investors and dealers of which Pimco is a part will meet on Tuesday to decide whether the swaps will be triggered because Russia failed to include $1.9 million extra interest on payments made this month.
The credit default swaps are like insurance contracts that Pimco will have to pay to counterparties. This will not be a major loss for Pimco as they have underwritten its Russian exposure. These markdowns have contributed to the 6% decline in funds position this year.
Pimco reduced its Russian holdings by two-thirds in the first quarter and accounted for lower than 1% of the $128 billion assets, according to Michael Reid, a spokesperson for Pimco.
The sovereign debt of Russia plunged after the country invaded Ukraine in February, and the trading on Credit default swaps indicates that there is a 90% chance of Russia defaulting next year on its foreign debts. The total credit default swaps covered $1.3 billion in net Russian debt to Depository Trust & Clearing Corp. data for the last month.
Pimco possibly made money on other trades linked to Russia. The ruble increased 20% against the US dollar, and energy prices have risen. Pimco will receive bonds to settle the credit default swap will rise in value. A top lawyer who deals in Sovereign debt said that it is unlikely that Russian government bondholders will be left penniless if Russia defaults.
As part of the Russian swap’s exposure of Pimco, Money Managers sold notional $31 million to JPMorgan, $77 million to Barclays, and more than $7 million to Goldman Sachs. At the start of the year, Pimco owned $1 billion of Russian sovereign and corporate debt.
