First St. Petersburg Bond in Five Years Spurs Muni Market: Russia Credit
Russia’s $13 billion municipal bond market, dominated by issues from Moscow, is poised to expand as the first debt sale in five years by St. Petersburg encourages local government borrowers.
Russia’s second-biggest city will issue 5 billion rubles ($163 million) of bonds in October or November and a further 5 billion rubles before the end of the year, Eduard Batanov, head of St. Petersburg’s finance committee, said in an interview last week. The city water utility Vodokanal may sell 2 billion rubles of debt this year and 3 billion rubles in 2011, he said. More regions will follow, Standard & Poor’s and Fitch Ratings say.
“Regional needs are huge and they will have to raise capital to finance capital expenditures,” said Boris Kopeykin, an analyst at S&P in Moscow. “It’s necessary to develop infrastructure to stimulate economic growth.”
Fitch estimates Russian local governments will borrow 90 billion rubles of bonds this year, boosting the 400 billion- ruble municipal debt market in Russia, to help refinance existing debt and develop a national road network.
Local governments sold 65.4 billion rubles of bonds in the first six months of this year, a 37 percent increase from the same period last year, data collated by Troika Dialog in Moscow show. Moscow accounted for about 80 percent of bonds issued by regional governments this year, according to data compiled by Bloomberg.
St. Petersburg, the hometown of President Dmitry Medvedev and Prime Minister Vladimir Putin, delayed $13 billion of infrastructure projects last year, including a 33 billion-ruble tram network and the 26.4 billion-ruble Orlov tunnel for automobiles, after credit markets seized up and investors fled emerging markets.
Blackout
The city founded by Tsar Peter the Great in the 18th century is trying to revamp its electricity grid after a blackout on Aug. 20 left 40 percent of St. Petersburg without power and halted subways and commuter trains. The outage may force the government to accelerate its development plans, according VTB Capital, the Moscow-based investment banking arm of VTB Group, Russia’s second-largest bank.
The city, a production hub for carmakers including Toyota Motor Corp. and Hyundai Motor Co., had a 10 percent jump in local manufacturing output and improved retail sales in the first half, according to the St. Petersburg government website.
“We’ve been absent from the ruble debt market for a long time, and our aim is to return to this market,” Batanov said. “There’s sufficient liquidity in the banking sector and plenty of appetite for quality debt.”
St. Petersburg, which has “practically” no outstanding bonds after buying back its debt between 2005 and 2008, is selling securities on expectations its revenue growth may stagnate in the years ahead, Batanov said.
Premium to Moscow
The city may need to offer yields 20 to 50 basis points, or 0.20 percentage point to 0.50 percentage point, higher than Moscow, “basically to reflect the primary market premium,” said Stanislav Ponomarenko, an analyst at Troika Dialog in Moscow.
St. Petersburg last sold bonds in 2005. The local government offered 559.7 million rubles of six-year bonds in February 2004 that yielded 9.19 percent, or 96 basis points more than the yield on Moscow’s 4.9 billion rubles of six-year bonds sold a month earlier.
St. Petersburg is rated Baa2 by Moody’s Investors Service, one level below the Russian government, and BBB by Fitch and S&P, the same level as the sovereign rating. The city of Moscow is ranked at the same level as Russia by all three ratings companies.
‘Only Alternatives’
St. Petersburg will join Moscow as the “only alternatives to sovereign Russian ruble debt,” said Leonid Ignatiev, the head of fixed-income research at Bank of Moscow. “St. Petersburg’s bond sale this year is only testing the waters of the debt market, and it may need to offer only a minimal or symbolic premium to Moscow. As far as credit quality is concerned, the two cities are almost identical.”
Advances in Russia’s dollar bonds due in 2020 lowered the yield 2 basis points to 4.57 percent today.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 9 basis points to 218, according to JPMorgan Chase & Co. EMBI+ indexes. The yield difference compares with 157 for debt of similarly rated Mexico and 219 for Brazil, which is rated two steps lower at Baa3 by Moody’s. The spread on Russian bonds is 61 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
Default Swaps
The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 0.5 basis point to 169, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Russia credit-default swaps are the same as contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. The difference has narrowed from 40 on April 20.
The ruble was little changed at 30.7025 per dollar today and has dropped 1.3 percent this year. Non-deliverable forwards show the ruble at 30.9431 per dollar in three months.
Russia’s “funding gap” for road network maintenance amounts to about 1.2 percent of gross domestic product, the World Bank said in a June 16 report. Russia’s GDP was equivalent to 38.5 trillion rubles in 2009, according to the Finance Ministry.
Siberian Bonds
St. Petersburg’s capital spending will total 122.5 billion rubles this year as the government seeks to upgrade infrastructure, Fitch said in a June 18 report.
Vodokanal, which supplies water to 4.6 million people, plans to sell a total of 5 billion rubles of bonds to help finance an 11.6 billion-ruble extension to St. Petersburg’s sewage network, the company said on Aug. 16.
Municipal borrowers this year have included Siberia’s Khakassia region and Karelia in northwest Russia.
“It will be a healthy development for the market when a second major player will emerge,” said Konstantin Anglichanov, associate director at Fitch Ratings in Moscow. “That may help the size of the market grow in the years ahead, encouraging other Russian regions to sell debt.”
Bonds currently account for less than half of direct borrowing by local governments, which may exceed a total of 1 trillion rubles by the end of 2010, S&P’s Kopeykin said. The share of bonds is set to rise in the next few years as governments seek to lengthen the maturity of their debt, he said.
“For most of the local and regional governments bank loans are available for no longer than three-year periods,” he said. “Sales of bonds allow the regions to improve the structure of their debt obligations, attracting capital with longer maturities.”
To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.
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