Central bank softens merger terms
Selling the index takes on new meaning
A corporate bond market is slowly developing in Russia, but for the time being it appeals only to Russian banks and foreign investors with defaulted Russian treasury bill money trapped in special restricted accounts at the Central Bank of Russia.
Since June three Russian blue-chip companies have issued so-called rouble bonds to raise the finance needed for their investment programmes. Denominated in roubles, but index-linked to the rouble/dollar exchange rate, between them Gazprom, LUKoil and Tyumen Oil (TNK) have issued a total of Rb8.5 billion ($350 million) in bonds with maturities of between four and five years and yields of between 6% and 12.3%.
Since the government defaulted on its T-bills (known as GKOs) last summer, foreign investors have been avoiding Russia, making it all but impossible for the country’s biggest companies to raise any form of financing. “[Rouble bonds ] are one of a few ways that Russian companies can raise relatively cheap finance at the moment,” says Oleg Larichev, a fixed income fund manager at Troika Dialog, Russia’s largest brokerage. “Before all the companies were part of the financial-industrial groups which gave them loans or they could borrow abroad. [The corporate bonds are] a more civilized way for companies to raise money.”
With industrial production booming – up 20% year-on-year in September – companies are casting around for ways to finance their investment programmes as they expand.
The rouble bonds are aimed partly at cash sitting idle in Russian bank vaults. Domestic producers have been doing surprisingly well over the first three-quarters of this year. The lack of imported competition and the trade advantages that a cheap rouble brings have fuelled a mini-boom for domestic industry. Russian banks have found roubles are beginning to pile up in their vaults, but without GKOs there is nothing to do with their excess liquidity other than deposit it with the central bank. Between February and mid-September roubles in correspondent accounts with the central bank ballooned from about Rb24 billion to more than Rb60 billion.
Rouble bonds have also proved attractive to domestic investors as a hedge against inflation, currently running at 45% a year, but the corporate bonds are mostly aimed at foreigners’ GKO money. When the government defaulted on GKOs last summer, the bonds were converted into roubles (at a greatly reduced exchange rate) and placed in special S accounts with the central bank.
At the time of devaluation foreigners were thought to hold some $20 billion in GKOs and the restrictions on the S accounts make it virtually impossible to repatriate what is left of this money. Money in S accounts can only be used to buy equities or rouble bonds and a limited amount can be converted at special auctions. At the latest auction in September the $50 million up for grabs was 13 times oversubscribed, suggesting there is some $700 to $800 million of GKO money still stuck in the central bank.
“Foreigners can’t do anything else with this money so they are bound to consider investing in these bonds,” says Larichev. Although the yields are meagre compared with the risk, the bonds remain attractive to foreigners as the index link to the dollar make them an effective hedge against the possibility of another devaluation.
But foreigners are still wary. United Financial Group/Paribas estimates that Gazprom’s own underwriters bought 60% of its Rb3 billion ($121million) four-year bonds issued earlier this year and most of the rest, sold on the open market, were bought by Russia investors. However, interest is growing as the terms of the new bonds becomes more attractive.
LUKoil’s four-year bond had a 6% yield, which analysts believe was sold mostly to related companies. But in the most recent issue, TNK managed to sell its entire Rb2.5 billion ($103 million) five-year, 12.3% yielding bond within two days of offering the second tranche. According to the company about half of the issue was sold to foreign investors with money in restricted accounts and it is planning to issue a second bond before the end of the year.
Following the success of TNK’s issue, diamond mine Almazy Rossy-Sakha (Alrosa) will be next with even more attractive terms. The company’s management recently announced that it would begin issuing the first tranche of a Rb1.5 billion discount bond on Micex (Moscow Interbank Currency Exchange) on October 29. The yield will be a high 39.5% with a six-month maturity, raising money to finance investment into production and replenishing its capital base. Alrosa produces about 95% of Russia’s diamonds and extracts about $1 billion of diamonds a year. Other blue chip companies have also announced plans to issue rouble bonds before the end of the year: Power grid operator United Energy Systems, Avtobank, Alfa Bank and oil majors Sibneft and Tatneft are all also considering bond issues.
The main disincentive for investors remains the long maturities. Four years is a long time to tie up money in Russia. Even TNK’s five-year bond with put options at two, three and four years is still hard to dump should things become more unstable than now.
A secondary market exists, but it is still in an embryonic state. Gazprom was the first to launch its rouble bonds on the Micex secondary market in the middle of October, but volumes are low with only $100,000 being traded a day.
“The market is still not transparent and I can’t see how big the real demand is for these [rouble] bonds,” says Dmitri Avdeev, an analyst with UFG/Paribas. “Why should a foreign investor look at the 6% domestic rouble bonds that are regulated by Russian law, when he can buy something like the LUKoil Eurobond, that is paying about 26% and is regulated by third country legislation?” Ben Aris
