In the end not even the eruption of a volcano in Iceland could deter Russia’s return to the international capital markets after more than a decade. On April 21, the sovereign raised $5.5 billion through a dual-tranche offering with five-year and 10-year maturities.
The deal achieved the government’s aims of repricing the sovereign curve and establishing a liquid benchmark that it hopes will pave the way for issuance from quasi-sovereigns and corporates.
The transaction was the government’s first Eurobond since it defaulted on $40 billion of domestic debt in August 1998. Russia’s comeback had been eagerly expected for several years so it was no surprise that it was able to raise a large amount. What did stand out, however, was the pricing. The five-year tranche was issued at an incredibly tight spread of 125 basis points over US treasuries, while the 10-year came out at 135bp over – this for a transaction rated BBB.
Perhaps that’s a mark of just how frothy the bond markets have become. Certainly some investors thought the Russian government and its lead managers – Barclays Capital, Citi, Credit Suisse and VTB Capital – were too aggressive, as the bonds sank in the secondary market, although the deal probably also suffered because of renewed fears over sovereign debt generally and Greece in particular.
Equally, though, it’s a sign of how the natural order of the government bond world is shifting that Russia was able to price inside the Greek, Italian and Spanish curves and just wide of Portugal and Ireland. For a country whose last act in the bond markets was to default, and that only last year was considered by some analysts to be on the brink of another financial crisis, that was a remarkable achievement.
What’s more the transaction attracted good support from high-grade accounts. Both bonds attracted interest from asset managers, banks, insurance companies and pension funds as well as retail accounts. There was a nice split geographically too. Half of the paper was placed in Europe. US funds bought just under one-third and Asia accounted for about one-fifth.
Emerging markets bulls have long argued that the global perception of risk is changing. The strongest developing world sovereigns – Brazil, Turkey, Russia – are now considered to be safe havens compared with peripheral eurozone members. Greek bonds, for example, are trading at double-digit yields. Ironically this is leading to interest from some dedicated emerging markets investors who believe that Greek debt offers better value on a relative basis. It gives the term crossover investor a whole new meaning.
