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

14 May 2013

Party Awaits $7 Billion Bond Before Spreads Widen: Russia Credit

By Lyubov Pronina and Ksenia Galouchko

May 14 (Bloomberg) -- Russia is preparing to return to the international capital markets for the first time in more than a year with costs near the lowest in three months.

The country may choose arrangers for the sale of as much as $7 billion of securities at “any moment,” Deputy Finance Minister Sergei Storchak told reporters in Istanbul May 11. The extra yield investors demand to hold Russia’s debt rather than U.S. Treasuries stood at 173 basis points, within three basis points of the lowest since Feb. 1, according to JPMorgan Chase & Co. indexes at 7:01 p.m. yesterday in Moscow. That compares with the past year’s peak of 355 basis points in June.

While developing economies fr om Hungary to Colombia tapped foreign debt markets this year to take advantage of borrowing costs pushed down by the biggest central banks, Russia refrained, giving companies including OAO Lukoil and OAO Nomos- Bank a chance to borrow first. The government should sell now after an increase in U.S. Treasury yields sparked concern about the durability of a bond-market rally, according to Citigroup Inc.

“It’s definitely a good time,” Luis Costa, a London-based emerging-market strategist at Citigroup, said by phone yesterday. “They should come to the market as soon as possible given the scope for the rise in EM core yields.”

Treasuries Fall

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest fixed-income fund, said May 10 that a 30- year bull market for bonds has probably ended. The yield on the U.S. 10-year Treasury note climbed two basis points, or 0.02 percentage point, to a seven-week high of 1.92 percent as the markets in Moscow closed yesterday.

Russia isn’t in a rush to sell debt and will decide on the maturity based on demand, Deputy Finance Minister Storchak said.

He declined to say when a sale may happen or which banks would organize it.

Russia sold $7 billion of bonds last year in the biggest issue from an emerging-market government since 2009, according to data compiled by Bloomberg. The world’s biggest energy exporter lured $24 billion of bids for securities due in 2017,

2022 and 2042 by offering yields closer to those of Turkey, rated lower by Moody’s Investors Service, than investment-grade peers like Brazil and Mexico. Russia is ranked Baa1 by Moody’s and BBB by Standard & Poor’s and Fitch Ratings.

Investor Base

That sale allowed the government to diversify its investor base and lower the overall average borrowing cost for the state, according to the Finance Ministry’s debt strategy for the next three years published in December. The country also looks to borrow in foreign markets to establish a yield curve that may be used by its corporate issuers as a benchmark, lowering their borrowing costs as well, the ministry said.

Russian companies sold a record $13 billion of foreign- currency debt last month as the Bank of Japan announced it would double monthly bond purchases, data compiled by Bloomberg show.

The European Central Bank cut rates to a record 0.5 percent on May 2 and Israeli policy makers lowered their benchmark yesterday.

Corporate issuance is probably heading for a record- breaking year as companies have sold almost twice the amount of bonds so far in comparison with the same period of 2012, according to Andrey Solovyev, Moscow-based head of debt capital markets at VTB Capital.

Attractive Yields

While ministers may wait until the second half of the year to sell bonds, it might not be in their interests to do so, according to Viktor Szabo, who helps oversee $11.8 billion as portfolio manager at Aberdeen Asset Management Ltd. in London.

“Yields are still attractive despite the selloff last week,” he said by e-mail yesterday.

The yield on Russia’s dollar bond due in April 2042 increased 13 basis points last week to 4.49 percent, compared with a record low of 4.17 percent on Dec. 3. The rate was at 4.506 percent today.

“Russia has missed the best moment to sell Eurobonds at the lowest yields,” Ilya Mozgovoy, who helps oversee about $1 billion as the head of asset management at Allianz Investments in Moscow, said by telephone yesterday.

Russia may sell bonds as it runs a budget shortfall that reached 0.9 percent of gross domestic product in the first quarter. Finance Minister Anton Siluanov said in October that the price of oil would need to be $105.10 a barrel for the country to balance the budget.

Aggressive Plans

While Urals crude for delivery in northwestern Europe has averaged $107.24 a barrel this year, Russia’s chief export earner rose for the first day in four today to $101.74.

A decision on selling bonds depends on how aggressive the budget plans are and the government’s oil price forecast, Mozgovoy said.

“If the Finance Ministry sees the oil price falling below

$100 a barrel, they should borrow, if above $100 a barrel, they could wait for a better time,” he said. “Overall, they could place Eurobonds now not too badly.”

The yield on the government’s only ruble-denominated Eurobonds, due in March 2018, lost five basis points to 6.06 percent today. The ruble strengthened 0.3 percent against the dollar to 31.2510.

The cost of insuring Russian debt using credit-default swaps rose one basis point to 131, according to data compiled by Bloomberg. The swaps cost 12 basis points more than Turkey’s, ranked one step lower at Fitch. The contracts, which rise as perceptions of creditworthiness worsen, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Ministry Flexibility

The Finance Ministry has “a lot of flexibility” about coming to market given the oil price and the size of the country’s reserves, VTB Capital’s Solovyev said by phone yesterday. The nation’s international reserves rose to stand at $533.5 billion, the central bank said last week.

“International investors are voting with their wallets buying Russian risk,” he said. “Given wh ere the market is for Russia, it probably makes sense to come earlier than later to enjoy extremely favorable market conditions.”

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