Fidelity Investments has been left holding 7.4 percent of a bond issued by one of Russia’s largest coal miners, SUEK, as it failed to make its first coupon payment on 1 April amid sanctions uncertainty.
SUEK said in a statement on its website that it was able to make the coupon payment –initially due on 15 March – which would amount to $8.43 million dollars, but that payment had been delayed as Citibank conducted internal compliance checks. The Russian coal miner said it had been in contact with regulators in the UK and Ireland, and that a Swiss regulator had confirmed it was not subject to sanctions.
SUEK did not respond to a request for comment. Citi declined to comment.
The $500 million bond was issued by SUEK in September last year. At the time, the paper was rated BB by Fitch, which noted in commentary that “ESG issues are credit-neutral or have only a minimal credit impact on the entity”.
All but one of the Russian banks involved in the transaction have now been placed on sanctions lists over the invasion of Ukraine.
Fidelity, which took down 7.4 percent of the bond, would have had a $35 million stake before the invasion. On Friday the bonds were trading at 15 cents on the dollar, representing a significant loss.
A spokesperson for Fidelity said that the bond was not held in its sustainable funds, which exclude investment in coal, and that in the funds which did hold the bond – “not sustainable focused funds” – it made up on average less than 0.4 percent of holdings.
“As a general practice, we do not discuss our specific investment decisions, but we will address divestment of currently held Russian securities where it is possible and evaluate opportunities as appropriate and in a thoughtful way as to help protect the interests of our clients,” the spokesperson continued.
The miner saw orders of $1.8 billion for the bond, including $280 million interest from the leads, allowing it to cut the coupon from initial price thoughts of 3.75 percent through 3.875 percent to 3.375 percent. Most of the allocation went to domestic investors, but European and American investors were also well represented.
Ulf Erlandsson, a former credit portfolio manager at AP4 who now heads up climate-focused think tank the Anthropocene Fixed Income Institute, told Responsible Investor that aside from the environmental concerns relating to thermal coal, investors should have factored governance risks into decision-making. “If you still decided to invest in this bond at a fairly low coupon then that might reflect on how important you believe ESG factors are in your investment decisions.”
“Irrespective of why investors aren’t getting paid this was a poor bond investment to start with and now it’s gotten into trouble, not directly due to environmental reasons but surely due to parts of the governance factor. If you applied an ESG perspective on this bond you would have avoided it.”
A spokesperson for Fidelity said: “market volatility is an inevitable and inherent part of investing, and we have well established processes in place to deal with it. One of the primary benefits of mutual funds is diversification and the ability to spread investments around so that customers’ exposure to any one type of asset or individual security is limited. That is the case with this particular security”.
It is not clear what the sanctions holdup may be in relation to, but Russian billionaire Andrey Melnichenko, who served as a non-executive director at SUEK and held a significant stake in the firm, was placed on UK and EU sanctions lists on 9 March. He subsequently resigned from his position and said in a statement that 0 percent of shares were controlled beneficially by him. A spokesperson has previously said Melnichenko planned to dispute his inclusion on sanctions lists, had “no relation to the tragic events in Ukraine and has no political affiliations”.