Russia awaits orders on $7 billion in Eurobonds

The Ministry of Finance has placed four Eurobond tranches for a total of $7 billion. These include 5-year U.S. dollar denominated bonds for $1.5 billion at 3.7 percent per annum, 10-year bonds for $3 billion at 5.1 percent, 30-year bonds for $1.5 billion at 6.05 percent, and 7-year euro denominated bonds for €725 million ($961.1 million) at 3.7 percent.

Investors had been waiting for this offering since last spring. The Ministry of Finance was dragging its feet, trying to pick the best time, but the market took a turn for the worse when the Fed warned of a forthcoming end to its super accommodative monetary policy.

The Ministry of Finance was right to have waited: Demand for its debt outstripped supply almost three-to-one ($20 billion vs. $7 billion), employees of two underwriting banks said. One said that investors from all over the world had sent in bids.

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A total of 980 bids from more than 500 investors were received, according to his colleague. Investors were more upbeat about Russia than South Africa, which also conducted a sovereign bond placement yesterday: Both countries share the same investment rating, yet Russia was able to borrow 1 percent cheaper.

According to Renaissance Capital president Alexander Merzlenko, the timing for the placement was right — the end of the summer holiday season and the release of strong U.S. economic data on Friday, Sept. 6. Russia picked the right moment to enter the market, a week ahead of the FOMC’s scheduled QE tapering meeting that is likely to cause market volatility again.

This was a highly successful placement, given the market conditions, yet slightly less so than last year’s (when demand outstripped supply by a factor of four), Andrei Lifshits of Spectrum Partners said.

Deputy Finance Minister Sergei Storchak declined to comment, noting that it would be inappropriate to compare placement conditions this year and last.

The external environment is so favorable that the Ministry of Finance has maxed out the annual foreign borrowing cap in one go; the 2013 budget law sets a ceiling of $7 billion, Natalia Orlova of Alfa Bank said.

The other companies will rush to borrow now, before the market window closes, Lifshits noted. “External debt markets have been closed for companies over the past three months,” he said. 

“Everybody was watching the Ministry of Finance’s placement as a benchmark”, UBS IB co-director Sophia Sool said, agreeing with Lifshits. “That's why a new wave of placements might follow; very many transactions have been scheduled, by big and small companies alike.”

That being said, many investment bankers worry that Russia has already scooped up a considerable chunk of existing demand. It makes more sense for the Ministry of Finance to borrow abroad at this time, in Orlova’s opinion.

“Global interest rates will climb because of the anticipated winding down of the Fed’s QE program, while the government is trying to keep domestic rates down,” said Orlova. In general, investors’ attitudes toward Russia are not that bad at the moment: The country has a very low public debt. Even so, weak economic growth spoils the overall picture, according to Sool.

The privatization plan is behind schedule and there is a budget deficit funding gap, Orlova pointed out. The Ministry of Finance is being forced to borrow to bridge the shortfall; however, according to the Ministry, its domestic borrowing plan was fulfilled by barely 40 percent in the first eight months of the year (470 billion rubles [$14.4 billion]  vs. the 1.2 trillion rubles [$36.7 billion] planned), while net borrowing (less repayments) amounted to just 53.3 billion rubles ($1.63 billion), with the deficit projected at 521 billion rubles ($15.8 billion). 

To date, Russian borrowers have issued around $34.2 billion of debt in the past year. Many state-owned companies had been waiting for the Ministry of Finance to tap the market in order not to cross its path, their top executives said.

Gazprombank might launch a road show next week, Interfax-AFI reported, citing banking sources (the bank’s spokesman declined to comment for Vedomosti). By the end of the year, the bank might place Eurobonds worth between $500 million and $1 billion, Ignat Dirks, Gazprombank’s head of capital markets borrowing, said this summer.

Vnesheconombank has also postponed a Eurobond placement until fall, for the same reason as the Ministry of Finance — a bad market situation, according to a top executive of the state-owned corporation.

 “All investor concerns about a possible tapering of the Fed’s QE3 have been priced into current yields: It won’t get worse than that but rates won’t return to the 2012 level either,” he said.

“VTB believes that the Ministry of Finance’s placement won’t affect our borrowing plans,” VTB’s press service said, in response to an inquiry by Vedomosti. VTB CFO Herbert Moos said last spring that his group would borrow $3.2 billion domestically and internationally in 2013.

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Sberbank CFO Alexander Morozov declined to comment. “We are still just front-row spectators — that’s all!” a top executive of the state-owned bank said. He added that major banks’ plans to borrow externally depend not only on the market conditions, but also on demand for foreign currency denominated loans and the liquidity situation. There will most likely be no immediate response to the sovereign placement.

Companies still have some time to think. The market is relatively quiet right now, Raiffeisenbank International analyst Alexander Sklemin said: “It’s worth noting that yields on Russian Eurobonds remain at approximately the same levels as when Russia was placing dollar denominated securities last year.”

First published in Russian in Vedomosti.

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