Hedge funds provoke credit crunch in Russia with 16% puts from '98 (Bloomberg) (28-05-2008)

May 28 (Bloomberg) -- A remnant from Russia's debt default ten years ago is threatening the country's economic recovery as it demands an up to 16% increase of interest from 200 companies.

With bond yields rising worldwide as the U.S. subprime turmoil spreads, hedge funds and other investors in Russia are demanding the higher rates or their money back.

Investors who were lured back to Russia with put options giving them the right to redeem debt are forcing leasing firms to raise the yield on 1 billion rubles ($42.4 million) of three-year notes sold last year to 16 percent from 14 percent, according to data compiled by Bloomberg. A Moscow-based supermarket chain had to increased the coupon on 2 billion rubles of bonds from 11 percent to 15.5 percent.

The hedge fund rejected an offer from another Moscow-based retailer last month to increase interest to 14.5 percent from 11.4 percent, choosing instead to redeem bonds due in 2009.

Even with record oil prices pumping the economy, the global credit crunch is penalizing Russian borrowers as the put options leave companies liable for refinancing nearly a third of their 1.5 trillion rubles of bonds at higher rates by yearend, Bloomberg data shows. Soaring interest costs may contribute to a slowdown in economic growth to 6.5 percent from 8.1 percent in 2007.

  Source Bloomberg