Russia’s bond market revival ready to roll on into 2017
1 January 2017
In late 2016 a clutch of Russian borrowers shrugged off Western sanctions and domestic stagnation to return to the global bond markets. But will investors’ returning appetite for Russian risk survive a global repricing?
Eurobond activity from Russia was on course to total just under $15bn for 2016. While a far cry from the heady days of 2013, when issuance topped $50bn, that was nearly four times the $3.8bn seen in 2015.
The list of issuers spoke to a return of confidence in Russian assets. Along with market stalwarts such as Russian Railways and Lukoil, it included debut and second tier names from across the corporate and financial spectrum — and even, despite the best efforts of US policymakers, the sovereign.
“Many international investors were expecting to see defaults from Russia after the start of Western sanctions,” says Andrey Solovyev, head of debt capital markets at VTB Capital in Moscow. “There were no defaults, however, and they are now becoming more and more comfortable with Russian risk.”
The question is whether enthusiasm for Russia can survive a global emerging markets repricing. Solovyev is convinced it can. “Even when we move into a cycle of higher rates Russia will remain a favourite with international investors,” he says.
Early indications are encouraging as Russia easily outperformed its emerging markets peers after the US election.
At the same time, high levels of domestic participation in deals from the likes of Eurochem and Polyus Gold suggested that there are still limits to global buyers’ appetite for Russian assets. “International investors have shown an interest in buying Russian debt but sometimes at higher yields than domestics were prepared to offer,” says Dmitry Gladkov, head of DCM at Renaissance Capital in Moscow.
However, this trend is unlikely to continue. “Some of these deals have not been trading so well, which may discourage domestic investors, and liquidity is not as plentiful,” he says.
Solovyev also expects external participation in Russian deals to increase this year, although for different reasons. “As international buyers get more comfortable with Russian names, they will hopefully be more aggressive and more in line with local investors,” he says.
On the supply side, bankers say liability management should remain a theme as Russian borrowers look to refinance debt from 2012 and 2013. Citi estimates that $60bn of Russian bonds with maturities in 2017 and 2018 remain outstanding.
“Some borrowers may not come back to the market to refinance, but even if only 50% did so we would see a significant pickup in activity,” says Blazej Dankowski, Citi’s head of Russia DCM in Moscow.
For some of the most prolific issuers from the precrisis years, Eurobond refinancing will remain off limits thanks to sanctions. VTB, Gazprombank and Russian Agricultural Bank are barred from global markets. As a result, bankers say issuance by financial institutions will be subdued. “As long as the major banks are on the sanctions list, volumes from the sector will be limited as there are only a handful of other banks that can tap the market,” says Dankowski.
Capital trades could prove more popular following AlfaBank’s successful Basel IIIcompliant additional tier one deal in October. “Some banks have upcoming sub debt maturities, so we will likely see more activity in that space,” he says.
Nevertheless, Solovyev says investors from outside Russia will likely continue to focus on corporate names, particularly from the natural resources, infrastructure and transport sectors.
“Financial names were not much favoured last year by international investors and I don’t expect that to change drastically in 2017,” he says.
This year could also see more new names emerging from Russia, following inaugural deals in 2016 from Global Ports, State Transport Leasing Company (GTLK) and O1 Properties. Further sovereign issuance is also expected, following Russia’s $.175bn deal in May and a $1.25bn tap in September. VTB Capital led both deals after Western banks were warned that participation would not be in line with US foreign policy.
Whether global banks will be allowed to pitch for the $7bn worth of sovereign deals planned for this year remains to be seen. Some bankers speculate that US officials could take a more lenient line on the issue under a Trump administration.
One senior Moscow banker, however, says the refusal of Western players to participate in last year’s transactions would not be quickly forgiven by Russian policymakers. “Even if US banks wanted to get involved this time, I don’t think the government would let them,” he says.