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

16 August 2016
Global Capital
Russian rush expected in primary before November

By Virginia Furness

Borrowing conditions for Russian issuers are the best they have been since 2013 and as changes to onshore funding conditions push more borrowers offshore, several corporates as well as the sovereign are expected to raise international money ahead of the US elections in November, according to DCM heads at VTB and Sberbank.

Russian corporates are now trading at tighter levels than they were in 2013 and demand for the asset class has rarely been stronger. Russia’s CDS spread has nearly halved over the course of a year at 224bp on Monday from around 400bp last August. Russian debt offers the coveted combination of strong fundamentals and high yields in a world where some $13tr assets are offering negative returns.

“Markets were short of Russian issuers in the last two years, even those planning to come will face high demand, if we compare the same credit quality Russian issuers offer huge yield pickup,” said Olga Gorokhovskaya, managing director, capital markets, Sberbank CIB. "It’s the year of the US elections, so the bulk of issuers that are planning to come to the market, will try and do so before November.”

Russian borrowers have only printed just $5.9bn year-to-date including a $1.75bn offering from the Russian sovereign. Limited supply contributes to good technical support and with some $20bn of bonds coming up for redemption this year, there is plenty of cash to be reinvested in Russia. Fitch estimated in a note in June that the 61 Russian corporates it rates have $20.8bn due in 2016 and $19.8bn in 2017.

Andrey Solovyev, global head of DCM at VTB Capital, is expecting over 10 transactions in the second half of the year, and says that the majority of these will come from corporate issuers, some of them debut names.

Investors have already shown their willingness to buy debut names. Global Ports and State Transport Leasing Company printed well supported transactions earlier this year.

"We placed Global Ports earlier this year,” he said. "It is a completely new name with just one rating. In 2013, this would have been a no-no but now, investors are so hungry for yield they will buy.”

With a US election, and a possible US Federal Reserve rate rise on the horizon, as well as pricing technicals, Solovyev is advocating an early mover advantage.

"We’re advising corporates to come as early as possible,” he said. "In terms of spreads, things are already at historical lows and some corporate bonds are trading between 110 and 115 so there could be limited further tightening from a technical point of view as they’re moving towards their trading limit, so we’re recommending issuers to come now.”

Sovereign return

The Russian sovereign is also expected to return to market, and a tap of its existing $1.75bn 2026 is expected to be the trade. Solovyev’s bank VTB was sole-lead on Russia’s first postsanctions sovereign bond in May. After an initial delay, Euroclear finally agreed to clear the bond, prompting a 30bp yield rally.

"The Russian sovereign is certainly in a position to raise more funds,” said Solovyev. "Their bond is trading north of 106. The Euroclear news was a strong driver but even before that it was trading 103 or 104.”

Stanislav Bozhenko, head of fixed income research, at Otkritie Capital International expects that Russia will reopen its 2026s to raise the additional $1.25bn it budgeted and to improve the liquidity of the bond. He quoted the bond to yield 3.96% and said that the original premium of around 40bp paid had now almost disappeared.

Russian Eurobond issuance fell dramatically post sanctions, from some $35.5bn in 2013 according to Dealogic data, to $3.1m in 2014. But Russia’s banks had plenty of FX liquidity, meaning that corporates could easily find both rouble and dollar funding onshore.

While Stanislav Bozhenko, head of fixed income research, at Otkritie Capital International said that many corporates are still able to find better rates in dollars from the local banks, changes to the onshore funding conditions are pushing corporates to look offshore once again, even if the headline coupon is slightly higher.

"Many companies are saying that the interest rates they can now get on Eurobond market is close to rates being offered by local banks what gives them more choice,” he said. "Banks still have a lot of FX-liquidity. It about managing where you can get better interest rates.”

But VTB’s Solovyev and Sberbank’s Gorokhovskaya argued that for the larger corporates, both the size of the deal, and the longer maturities available offshore are much more attractive.

"Before it was convenient to go to both markets, the local market was almost as deep in terms of the money you could raise,” said Gorokhovskaya. "Now the climate of issuing locally has changed. The size of a normal issue on local market hasn’t changed, it is Rb10-Rb15bn rouble for good companies, which used to be the equivalent of half a billion dollars. Now it is much much less. You can’t put all your plans on local market despite the yields”.

Solovyev also suggests there is benefit in proving to the international market that you can issue abroad.

"International capital markets can provide longer money so corporates want to issue Eurobonds despite the fact local financing can be sometimes tighter,” he said. "It’s also a sort of 'big boy' syndrome. They want to show they can come to the international markets. Eurobond issuance also gives you a certain pedigree, so on the back of those [deals], issuers can borrow cheap money as credit lines are open.”

Bozhenko said that EuroChem, LukOil, Russian Railways, TMK and Evraz are all possible candidates for issuance this year.

"LukOil would be looking for financing up to $4bn if the company participates in Bashneft’s privatization. Not all of that will come from the Eurobond market but this is a likely to be the main funding source according to LukOil’s management,” he said. "Evraz might also do a new deal in September. After their buyback in August, their longest bonds [2022s] already yields below 6% at 5.9% from 6.25% in mid-July, so borrowing cost is becoming cheaper.”

Earlier this year, Sovkomflot was able to replace debt maturiting in 2017 at the same rate for seven years.

Sberbank’s Gorokhovskaya said that combined liability management with new issues would be a main feature of bond issuance.

"The tendency we saw earlier this year for substituting existing issues and smoothing maturity profile will continue,” she said. "People will tender existing bonds in any manner they can including printing new bonds in order to finance the tender or the buyback”.

The process is attractive to both issuers and investors alike. Issuers are able to extend their maturity profiles at a much lower costs, and investors are able to reduce their reinvestment risk. In addition, many Russian corporate bonds are held by local banks who have the bonds in hold- to-maturity portfolios. Central bank legislation makes it difficult for them to sell the bonds without violating the rules.

"It is really attractive from an issuer perspective,” said Solovyev. There’s also pressure from ratings agencies to refinance short-dated debt [debt of less than one year]. Looking at the secondary levels, any corporate could do this.”

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