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Interview of Andrey Solovyev, Global Head of DCM at VTB Capital, for Bloomberg

20 August 2013

VTB Sees Record Debt Sales Surviving Fed Tapering: Russia Credit

By Lyubov Pronina

Record Russian bond sales to overseas investors probably won’t be derailed by a reduction in U.S. stimulus as borrowing costs stay low compared with the historical average, according to VTB Capital.

Foreign bond sales totaled $32 billion in the first five months at all-time low yields, compared with $49 billion for all of last year, Andrey Solovyev, head of debt capital markets at the investment arm of Russia’s second-largest bank, said last week. The average yield for Russian companies in JPMorgan Chase & Co.’s CEMBI Broad Index stood at 6.07 percent on Aug. 19, compared with a low for this year of 4.87 percent on Jan. 3 and 8.03 percent in October 2011.

“Issuers are beginning to realize that they won’t get the rates they had in the first half of this year,” Solovyev said in a London interview. “Yet if we look over time, the rates are still very attractive.”

Fueled by interest rates kept close to zero from the world’s biggest central banks, Russian issuers took advantage of demand before Federal Reserve Chairman Ben S. Bernanke said May

22 the U.S. could start reining in bond buying this year. The Fed’s first step may be to taper monthly debt purchases as early as next month by $10 billion to $75 billion, according to a Bloomberg survey concluded last week.

September Meeting

Fed policy makers are scheduled to meet Sept. 17-18. The central bank will end bond purchases in mid-2014, according to the median estimate in a Bloomberg survey of 48 economists conducted Aug. 9-13.

“Everybody is waiting for the Fed’s September meeting but our economists predict that the stimulus program will continue, which will be good for emerging markets,” Solovyev said. The Russian government may come to market, as may corporate issuers including OAO Gazprom, the nation’s largest company, he said.

VTB Capital is one of the organizers for the sovereign issue.

A representative of Gazprom’s press service declined to comment on the natural-gas exporter’s borrowing plans. Finance Minister Anton Siluanov said July 12 that the country would probably look to sell bonds in the fall, according to the Interfax news service. The sale of as much as $7 billion may be scrapped should markets deteriorate, he said in an e-mailed response to Bloomberg News questions in June. The ministry didn’t respond to an e-mailed request for comment yesterday.

No Record

Even if there’s a positive reaction for issuers to the Fed’s September meeting, sales probably won’t happen any earlier than October, according to Alexander Morozov, chief economist for Russia at HSBC Holdings Plc in Moscow. Investors won’t simply rush into emerging-market debt should the U.S. central bank keep quantitative easing unchanged, he said by telephone.

Morozov said. “Market activity will return to a more or less acceptable level, but not to the super-active level of the first five months of this year.”

While Russian companies took advantage of the favorable conditions to sell bonds at the beginning of the year, yields on U.S. Treasuries have been rising since May, Egor Fedorov, an analyst with ING Groep NV in Moscow, said yesterday. There’s no reason to be “that optimistic” for issuance for the remainder of the year, he said by phone.

Russia is rated Baa1 at Moody’s Investors Service, the third-lowest investment-grade status. The yield on its dollar bond maturing in March 2030 was little changed at 4.40 percent at 6:07 p.m. in Moscow. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries rose five basis points to 231, according to JPMorgan indexes.

Corporate Issuers

While Gazprom sold euro-denominated debt to overseas investors this year, OAO Lukoil, Russia’s largest non-state oil company, sold $3 billion of bonds in April, its first such offering in more than two years. OAO Sberbank, the country’s biggest lender, tapped the ruble debt market for the first time in January with a Eurobond in the national currency.

“There may be a hangover effect for some issuers post Bernanke sell-off but those who understand there is a new cycle would want to issue as the situation has stabilized,” VTB’s Solovyev said. 

VTB Capital

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