(Bloomberg) -- Lukoil PJSC, Russia’s second-biggest oil producer, has launched an offer to buy back $6.3 billion of notes -- all its outstanding bonds -- to avoid any block to its payments to foreign holders, which could trigger a potential default.

Debt payments from Russian companies have been far from certain since March, as many transactions got stuck in payment systems because of the web of sanctions imposed by the US, European Union and UK on Russia, some of its companies and individuals after the country invaded Ukraine in late February.

Due to a change in Russian law to allow domestic investors to get paid, companies have to make direct payments to Russian noteholders instead of through international clearing systems. In order to pay foreign bondholders, Russian companies need to obtain a special license that is subject to Russian holders getting paid.

But even if Lukoil was able to get that license, it would only allow it to transfer funds for the amount owed to the foreign holders instead of the full amount, potentially leading to an event of default, it said in a statement Tuesday. It could also follow the fortunes of other Russian borrowers whose payments have been blocked by some intermediary in the payment system for compliance reasons.

Sufficient Cash

To avoid that, Lukoil said it has enough cash to buy “any and all” of its outstanding notes, according to the statement. The price to buy the notes will be negotiated individually, it said.

The buyback could save Lukoil hundreds of millions of dollars in interest payments as the outstanding notes have maturities ranging from 2023 to 2031. Savings would also come through the principal amount if it buys them at a discount. Its bonds have been trading at about 60% of their face value or less in most instances since March, as several noteholders rushed to sell off their positions and many distressed debt funds haven’t wanted to buy Russia-related debt.

The company asked investors of its foreign-denominated bonds in May to disclose their identity and how much they held, Bloomberg reported at the time. Lukoil didn’t disclose at the time the purpose of the identification process.

Lukoil follows other Russian and Russia-linked companies in buying back its outstanding public debt as sanctions and local restrictions cast uncertainty on their ability to meet debt obligations. The latest is Belarus’ largest grocer Eurotorg LLC. The company has launched a tender offer to purchase the outstanding notes at a steep discount to their face value.

Until now, Lukoil had been successful in navigating the web of international penalties and counter-sanctions to send money through to bondholders. It made several coupons payments due since the start of the war, as well as one for a $500 million maturity in June.

(Updates with Lukoil bond prices and potential savings from buyback in sixth paragraph.)

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Author: Irene García Pérez