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12 September 2016
Ruble Bonds for Masses Next Stop for Russia After Free Float 

Russian companies are considering a borrowing instrument last seen in the days of currency control and unfettered access to international capital markets - ruble Eurobonds.

VTB Capital said it’s preparing “several” deals that package rubles for foreign investors, which have been almost absent for three years. Citigroup Inc., arranger of five of the eight deals that hit the market in 2013, said conditions are “conducive" for a borrowing tool that was phased out during the record currency volatility following the free float in November 2014.
Now with price swings ebbing and investors pumping money into Russian assets, companies are looking for ways to refinance about $40 billion of foreign debt maturities in the next two years. While international sanctions continue to stifle Eurobond issuance across all currencies, returning appetite puts larger pools of cash within reach for longer than companies could get raising bonds in their own currency at home.
“We are looking at it and have been talking to issuers since the middle of this year” about selling ruble Eurobonds, said Andrey Solovyev, global head of debt capital markets at VTB Capital in London. “Investors think that the ruble has more or less stabilized at the current levels and are eagerly buying.”
Foreign investors are flocking to Russia seeking an escape from negative yields on $9 trillion of developed-country debt. External ownership of local-currency bonds known as OFZs surged to a record 1.35 trillion rubles ($21 billion) in June, accounting for 25 percent of the outstanding amount, according to central bank data released Sept. 9. That’s helped push 10-year government yields to 8.1 percent, a level last seen before penalties from the U.S. and Europe in response to Russia’s role in the Ukraine crisis in March 2014.
“The risk appetite for Russian credit has returned to levels we haven’t seen in a long time,” said Blazej Dankowski, director and head of Russia and Kazakhstan debt capital markets at Citigroup in London. “Yields are back to early 2014 levels.”

For those that generate ruble revenue, it may also be cheaper than dollars when the cost of currency swapping is taken into account. Russian Railways JSC’s dollar bonds due in 2017 imply a rate of 10.8 percent after being converted to rubles, according to Bloomberg data. That compares to a yield of 9.2 percent for the rail network’s ruble Eurobond due in 2019.

Potential sellers of ruble-denominated Eurobonds may be state-backed or privately-held blue chips, according to VTB’s Solovyev. 

Dollar Bias

Eurobonds denominated in the local currency have always been used to supplement foreign issuance overwhelmingly in dollars and euros, accounting for less than 10 percent of the total at its peak in 2012.
Among companies lining up to sell dollar bonds, Russian real estate firm O1 Properties hired banks for a debut issue last week while Bank Otkritie’s chief executive officer said he may seek at least $500 million from the firm’s first Eurobond since 2013. Fertilizer producer EuroChem Group AG last month hired underwriters for a potential Eurobond.

Demand from investors remains limited for what is considered a niche instrument, according to Bryan Carter, head of emerging markets fixed income at BNP Paribas Investment Partners in London.

“Appetite for U.S. dollar bonds remains stronger,” Carter said. Global buyers are “less enthusiastic about local currencies,” he said. “Many funds only do hard currency.”

Still, the ruble’s recovery from a record low on Jan. 21 and an economy poised to exit recession next year may prove irresistible to some foreign funds. The currency’s 15 percent rebound this year trails behind only Brazil’s real in emerging markets, and belies a flat-lining in the price of the nation’s biggest export, oil.

“International investors probably see it as a good time to gain ruble exposure with the view it will appreciate further,” said Stefan Weiler, JPMorgan Chase & Co.’s London-based head of debt capital markets for central and eastern Europe, the Middle East and Africa.
Corporate Communications VTB Capital