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

12 June 2020

VEON explores rouble angle

Telecoms company VEON sold a Rbs20bn (US$287m) five-year Eurorouble on Thursday at 6.30%, using roubles as a way to hedge against exposures in the currency.

The offering came 20bp inside initial guidance of the 6.50% area.

Andrey Solovyev, global head of debt capital markets at VTB Capital, which was one of the bookrunners, said that given part of the company's revenues are in roubles, raising money in the currency offered a natural hedge for the issuer.

The other bookrunners were Alfa-Bank, Citigroup and Sberbank CIB.

The settlement currency for the new bond is roubles, but there is an optional FX election on any coupon payments and principal at maturity in US dollars, on request.

Books for VEON's issue at one point reached over Rbs30bn, but fell away to Rbs25bn when the yield was set.

"International investors actively participated in the deal, most of the international demand came from UK and Continental European investors," said Solovyev.

Earlier in June, VEON announced it had entered into a Rbs100bn term loan agreement with Sberbank.

"We expect VEON's leverage to remain moderate, at around 2x in the medium term," said Fitch in assigning a BBB– rating to the new issue.

It defines VEON's net debt to Ebitda with the Algerian operations deconsolidated, but reflecting dividends from this subsidiary.

"Deleveraging flexibility is driven by modest positive free cashflow generation, but also low single-digit revenue growth and slightly improving profitability from 2021," said Fitch.

S&P assigned an expected BB+ rating to the deal.

Sofya Donets, Russia & CIS economist at Renaissance Capital, says that unprecedented fiscal stimulus at 5% of GDP is likely to weigh on the rouble in the next 12 months, with additional pressure expected in the coming months from recovered demand for imports, including imported services.

Donets estimates the downside at 5%–7% from the current level of near to 69 versus the US dollar.

"At the same time, significant FX sales by the Ministry of Finance (via the Central Bank of Russia) in recent weeks have been supporting the rouble, and the Ministry of Finance has stated that it will continue to do so, not only to offset lower oil prices, but also production cuts due to the OPEC+ agreement," said Donets.

"This is likely to translate into a more stable rouble performance even amid low oil prices as compared with 1Q20. We estimate that the FY20 exchange rate will average 73.5 versus the US dollar."

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