Demand for Russian Eurobonds Continues
Byline: Simon Pirani
The Russian corporate Eurobond boom has life in it yet. With spreads over sovereign yield expected to tighten further, healthy demand supported by Russian investors, and investment grade not far over the horizon for the sovereign, bankers say there is room for further issuance this year. If there is a bubble anywhere, it is in the rouble bond market.Russian Eurobond issuers brought $1.9bn ([euro]1.7bn) worth of paper to the market in Q4 2002 and $2.8bn in Q1 2003. The wave crested in February with Gazprom's 10-year 9.6% Eurobond, the biggest ever from an emerging market corporate, which grew from $1bn to $1.75bn from a $6.5bn order book.
Sistema, the Moscow-based investment group, on April 3 launched a $350m, five-year Reg-S bond with a 10.4% coupon, the proceeds of which will be used to raise the group's stake in MTS, the telecoms company, by buying 10% owned by Deutsche Telekom. Last-minute fears that the bond might breach the US Securities and Exchange Commission rules meant it was available to European investors only. But it attracted a $600m order book, confirming that investors' appetite extends beyond the top-tier commodities exporters.
The next issuer into the market is expected to be Alrosa, the east Siberian diamond producer, which has mandated ING to bring a five-year bond of $300m to $500m to the market. The oil companies Slavneft and Tatneft, the US-listed food manufacturer Wimm Bill Dann and the steelmaker MMK may follow.
Peter Botoucharov, head of emerging markets strategy at Commerzbank Securities, says spreads of Russian corporates relative to the sovereign can tighten further and that there is still some value at the long end of the sovereign curve.
He says: "After a consistent flow of emerging market funds out of Latin America into Russia in the last quarter of last year, there was a turnaround early this year. The main reasons for this were technical, in that investors were underweight Latin America. Russia is still improving as a credit and the best corporate bonds are seen as a proxy for the Russian sovereign."
Dmitry Dmitriev, fixed-income analyst at Moscow-based United Financial Group, agrees that the spread of Russian corporate Eurobonds over the sovereign should narrow. The corporates are "better protected from the risks emanating from the US economy than the sovereigns" due to shorter durations, higher yields and the possibility of spreads over the sovereign tightening.
Demand from Russian investors who, according to a senior executive at a Russian private bank, "are buying about one third of each new issue" has supported the Eurobond boom. Dmitri Shemilo, emerging market strategist at Commerzbank Securities, believes "local investors prepared to take risks that they know for extra yield" could help to tighten spreads.
Stephen Evans, head of East European corporate research at ING Bank in London, says: "During the rally in February, when yields came in by around 2.5%, there was nothing available at yields comparable to Russian corporates, and they became a big favourite. I saw three categories of new buyers: the hedge funds; retail investors, especially in Asia; and Russian investors." Evans estimates Russian investors bought at least half of Sibneft's second Eurobond, $500m of seven-year paper issued in November with 11% yield.
The Eurobond boom, and indeed the whole Russian economic recovery of the past two years, has been principally an oil and gas story: that sector accounted for more than three quarters of the $6bn-plus Eurobond issuance of the last 15 months. And it is not only high oil prices at work. The $6.8bn deal announced in February between BP and the Russian producer TNK, Russia's largest-ever slice of foreign direct investment, gave the market a powerful push.
Colm McDonagh, emerging market debt fund manager at Aberdeen Asset Management, says: "As yield on the sovereign became tight and people looked down the curve for other yields, Russian oils looked very attractive. …