A touch too bullish on the bear?

A touch too bullish on the bear? Bankers are selling hard the story of Russia’s return to the Eurobond market with City of Moscow’s latest foray. Yet investors need to be cautious given the republic’s recent debt history. The queue of credible issuers is far from endless and likely to be trimmed by the Russian government as it prepares for its own refinancing in 2002.

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Russia is booming. And Russian issuers, we are told, are once again queuing up to tap the Eurobond market. The news has prompted enthusiasm from overnight experts on Russia. As one such banker puts it: "It's been a place of 900 years of serfdom, 70 years of communism, and then was subjugated by 10 years of corruption when nobody knew what the hell was going on. But I'm bullish now, very bullish about the country."
More such incautious optimism is to be expected, but it's to be hoped that investors will be wary and not forget that it's just three years since the sovereign defaulted on its domestic debt, the currency collapsed, foreign investors lost their shirts, a global financial crisis blew up and Russia's credibility with fixed-income investors was destroyed.
From pariah to performer
Two years ago, enthusiasm for Russian credit was non-existent. But times have changed, and three years after becoming pariahs in the international capital markets, the Russians are back. Debt capital markets teams are delighted. And as one banker eloquently puts it, dripping coffee down his shirt: "There's a shitload in the pipeline."

Russia, say bankers, is the story to buy. And, most notably, since the September 11 attacks on the US, Russia has been seen as a safe haven for emerging-market investors. But isn't it stretching the bounds of credibility to expect international investors to lay out cash for new issues from such a tainted country?
"It's a single B credit, so you can never say that it's a safe bet," says Marcin Wiszniewski, Russia strategist at Morgan Stanley. "After all there is a reason for its rating. But what we are saying is that it's an improving credit story. And for people who understand these stories there is confidence that the issuance plans are manageable."
Strong oil revenues, tighter budgetary discipline and an increase in foreign reserves have all boosted Russia's credibility and investors' perceptions of its credit.
In the second week of October, the team from the City of Moscow - which has always serviced its debt - arrived in London on the first leg of a European roadshow. Sergy Pakhomov, chairman of the municipality's debt committee, extolled the virtues of the first Eurobond offer out of Russia for three years. The reception was definitely positive.
Moscow issued an exploratory e300 million ($272 million) retail-driven three-year bond. And there's a chance it may come twice more before the year-end. But already there's sniping between the banks lined up behind the various potential Russian issuers. One banker quickly pours cold water on the Russian municipality's deal. "City of Moscow is an extraordinary issuer to be reopening the market. Six lead managers were picked and you have to ask yourself why the major players were not involved in that deal."
UBS Warburg and ING Barings, the two leads, will definitely not appreciate that comment. The banker continues: "It's a very strange issuer. And it's very interesting that the rating agencies should take the view that they have taken. According to them it's a much weaker credit than the sovereign." The banker, perhaps because of his ire, is getting his ratings confused. City of Moscow and the sovereign are both rated by Standard&Poor's as single Bs with a positive outlook. And if he is referring to Moscow's bond rating, a single B, then he should note that S&P don't give positive outlooks to any issuers' bonds.
Other bankers agree that it might seem strange that Moscow came before the sovereign, but remain unfazed. They believe criticisms are sour grapes. City of Moscow is, after all, stealing some issuers' thunder by reopening the market. Morgan Stanley's Wiszniewski says: "I think it's interesting that, post the Russian crisis, a municipality came to the market first and not the government. But the City of Moscow shouldn't have to wait for a benchmark from the sovereign, because a benchmark is already out there."
Moscow didn't wait for the sovereign and came to the market when it did because it only has a relatively narrow window of opportunity in which to issue. It's a reason ignored by the banker trying to sell an issue from one of Russia's major oil companies.
In the wake of the 1998 crisis, the federal government introduced steps to limit the borrowing of municipalities. Now municipals can only issue to refinance maturing obligations. And since Moscow's window of opportunity to finance the $700 million plus that will have matured by December closes at the end of the year, it can't wait for the sovereign.
But it shouldn't be viewed as a desperate grab for financing. Moscow is running a primary budget surplus. And Moscow has other points in its favour. Investors like its pseudo-sovereign risk. Its GDP is 14% of the Russian total and it contributes 30% of the federation's tax revenues. Its debt history is not tarnished by default, and it has strong cashflow and a good credit rating.
The finance ministry is, however, keeping a close eye on proceedings. Richard Luddington managing director of debt capital markets at JPMorgan explains: "With the sovereign not attempting to access the market this year, it is the closest to the sovereign we are going to get. There will be a lot of focus on the relative coupon and spread. The sovereign knows that it will be priced as a reference to the Russian curve. The good news is, Moscow is the right sort of name and the right sort of maturity."
Russia's leading oil and gas companies are lining up behind Moscow. How many will eventually enter the market before the year-end remains unclear. Gazprom has been looking to get something away for the past 10 months. However, because of recent debilitating management shakeouts and being held hostage to broader political issues in Moscow, two previous attempts to come to the market in January and March were delayed. It now looks like being pushed back into 2002.
Sibneft, LUKoil and Tyumen Oil are other names being bandied around. And Rosneft, Russia's seventh-biggest oil producer, is expected to become the first Russian borrower since 1998 to tap the US bond market, with a $300 million issue.
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Abigail Hofman:

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

A touch too bullish on the bear?

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