As western sanctions placed on Russia after Crimea's annexation in 2014 hurled the country's banking system into crisis, one lender, Otkritie, saw an opportunity in the years that followed to snap up smaller rivals, a pension fund and insurer.
That was before the company, by then the largest privately-owned lender in the country, itself ran into trouble in 2017 – forcing the Russian central bank to step in with a bailout. The bill would ultimately reach nearly $50 billion (€44.7 billion).
The rescue didn’t extend to investors in $800 million of junior bonds that Otkrite had previously issued through an Irish special purpose funding vehicle (SPV), called OFCB Capital, who were forced to write off what they were owed.
It was not alone in the rush by Russian banks to use Irish SPVs in the first four years of the last decade – enticed by Ireland’s uber tax friendly so-called “Section 110” SPV regime, virtually untouched by regulation but manned by an army of lawyers and accountants willing and able to do the paperwork – that ended in tears.
In early 2016, another Russian lender, Vneshprombank, imploded with a massive hole in its balance sheet amid allegations of fraud, resulting in its Irish funding vehicle defaulting on $225 million of unsecured notes.
Elsewhere, some $60 million of bonds issued by an Irish SPV in November 2016 for a Russian bank called Tatfondbank were deemed worthless months later after the borrower, which had been under investigation for fraud, was declared bankrupt.
A prospectus for the bonds failed to mention that Tatfondbank was already in financial trouble and had been in talks, at that stage for months, with the country's central bank. (The Central Bank of Ireland, which vets prospectuses for public debt and bond sales, underlined the pitiful scope of the process in a response at the time to The Irish Times, saying the accuracy of information in such documents is solely the responsibility of the company.)
The use by Russian companies of Irish SPVs for fundraising may have fallen in the wake of the 2014 sanctions, as a number of state-backed firms were prohibited from raising money in western markets altogether. But a number of bonds remain outstanding, some of which took a hit this week as western countries imposed further rounds of sanctions – both before and after Russia invaded Ukraine in the early hours of Thursday.
Aircraft leasing
However, the segment of the SPV sector that faces the biggest risk this time round are not vehicles linked to Russian banks, but those used by plane lessors in the Republic – which own an estimated 60 per cent of the world’s leased aircraft.
Take GTLK Europe, the Irish funding SPV of Kremlin-controlled JSC GTLK, Russia's largest leasing company, which has $3.7 billion of bonds outstanding. The $500 million of its bonds that are due to be repaid in 2024 were trading at 44 US cents on the dollar on Friday – albeit in a very illiquid part of the bond market – having slumped from 97 cents a week ago.
GTLK's main customer is none other than Aeroflot, the Russian flag carrier that was banned from flying to the UK on Thursday after president Vladimir Putin's forces attacked Ukraine by land, air and sea.
Another major Russian aircraft leasing vehicle in Dublin is SB Leasing. However, it is funded by other parts of its parent, Sberbank, Russia's largest bank, which was barred in 2014 from accessing EU or US capital markets for long-term funding.
The 50 per cent slump in Sberbank’s share price on Thursday told a story of the market’s view of how it will be impacted by mounting sanctions on the Russian economy.
Exposure
However, the main issue in Ireland’s aircraft leasing sector is the industry’s exposure to Russian airlines.
Russian companies have 980 passenger jets in service, of which 777 are leased, according to aviation analytics firm Cirium. Of these, 515, with an estimated market value of about $10 billion, are leased from foreign firms.
Dublin-based AerCap is by far most exposed company in the sector, with 118 of its aircraft managed or operated by Russian-based carriers, according to CH Aviation, another industry intelligence provider. AerCap's scale has been driven by its €25 billion takeover of rival GE Capital Aviation Services last year to create the world's largest aircraft lessor.
"You're talking about roughly $100 million being paid out every month by Russian airlines to Irish-based leasing companies. If the banks that these airlines use are sanctioned, it's going to be very difficult to make payments," said Tim O'Connell, a Grant Thornton Ireland partner specialising in aviation advisory,
A reluctance by the EU and US to cut Russia out of the global Swift banking payments system – even as Russian forces advanced on the outskirts of Kyiv on Friday following a night of missile attacks on Ukraine’s capital – has saved the leasing sector from carnage. For now.
But an even bigger risk, according to O’Connell, is if the EU follows the UK in prohibiting Aeroflot landings, or western countries ultimately go for a wider list of Russian airlines.
“Normally, if an airline runs into financial trouble, the lessor has protection in the form of a letter of credit from their bank to support payments. But lessors are now focusing on who’s providing these letters of credit – in other words, who’s underwriting the payments,” he said.
To be sure, Joe Gill, director of corporate broking at Goodbody Stockbrokers, highlighted that "in the broad sweep of aircraft leasing activity in Ireland, Russian exposure is quite small".
But for a sector that’s barely dusted itself off from the worst of the Covid-19 pandemic – and whose customers now have to deal with $100-a-barrel oil for the first time since 2014 – the conflict couldn’t come at a worse time.
