Alfa Bank Rally Shows Fridman to Avoid Irking Bondholders: Russia Credit
Alfa Bank's Mikhail Fridman
Alexander Zemlianichenko Jr/Bloomberg News
Alfa Bank, controlled by billionaire Mikhail Fridman, pictured, pays a coupon of 8.625 percent on its $225 million of 2015 bonds until the call option date on Dec. 9, after which the coupon would be fixed at 628 basis points over the five-year U.S. Treasury yield.
Alfa Bank, controlled by billionaire Mikhail Fridman, pictured, pays a coupon of 8.625 percent on its $225 million of 2015 bonds until the call option date on Dec. 9, after which the coupon would be fixed at 628 basis points over the five-year U.S. Treasury yield. Photographer: Alexander Zemlianichenko Jr/Bloomberg News
Investors are betting Alfa Bank and Bank of Moscow will make an early repayment of bonds due in 2015, foregoing the chance to save money by keeping them in circulation.
The bonds have recovered most of their losses since VTB Bank became Russia’s first lender to pass up an option to pay a debt before it was due. The announcement on Aug. 20 sparked a 7 percent plunge in VTB’s $400 million of 2015 notes as holders faced a drop in the coupon to about 5.2 percent from 6.2 percent. Alfa’s 2015 bonds, which hit 96.25 cents last week, traded at 99.375 yesterday and Bank of Moscow’s 2015 securities were at 99.083, according to data compiled by Bloomberg.
While VTB’s decision will save the state-owned lender about $4 million in annual interest, Alfa and Bank of Moscow may follow the market convention of exercising the options to avoid disappointing bondholders, said Anton Hauser, who helps manage about $1.7 billion of emerging market debt at Erste Sparinvest KAG in Vienna.
“If it’s private institutions it makes more sense for them to call the bonds because it might be more difficult for them to issue in the future,” said Hauser, whose holdings including callable bonds issued by Russian Standard Bank. “If it’s a state-owned entity it’s easier for them not to call the bonds.”
Russian bondholders are being forced to reassess the risk of maturities running beyond call option dates as the rally in Treasuries, the benchmark for dollar-denominated bonds, makes it cheaper for banks to stick with existing securities.
Step-Up
Callable subordinated bonds typically include a step-up coupon that’s higher than the original interest rate to penalize borrowers that don’t redeem their debt. Step-up coupons are often tied to benchmark interest rates such as Treasury yields or the euro interbank offered rate, data compiled by Bloomberg show. Treasury yields tumbled this year, cutting the rates for bond issuers even after the step-up in coupons.
Alfa, Russia’s largest private lender, controlled by billionaire Mikhail Fridman, pays a coupon of 8.625 percent on its $225 million of 2015 bonds until the call option date on Dec. 9, after which the coupon would be fixed at 628 basis points over the five-year U.S. Treasury yield. The 3 percentage-points plunge in U.S. five-year yields since 2005 to 1.4 percent means the coupon would fall to 7.7 percent.
The lower coupon would save Alfa about $2.1 million a year, based on the current five-year Treasury yield.
Eurobond Plans
Alfa’s reported plans for a sale of Eurobonds means the bank may be more eager to keep creditors happy, said Jeffrey Sacks, who helps oversee $3 billion in emerging-market assets as a money manager at Principal Global Investors Europe in London. Alfa may hire Deutsche Bank AG and UBS AG to arrange a Eurobond sale, Interfax reported on Aug. 25, citing bankers it didn’t identify.
A spokeswoman for Alfa in Moscow, who declined to be named, wouldn’t comment. A spokesman for Bank of Moscow also declined to comment.
Bank of Moscow pays 7.5 percent interest on its $300 million of bonds due in 2015 until Nov. 25, and then switches to 456.7 basis points over five-year Treasuries, or 5.97 percent at current U.S. yields. The reduced coupon would save the bank $4.5 million a year.
Moscow’s city government owns a majority stake in Bank of Moscow, Goldman Sachs Group Inc. owns 9.6 percent and Credit Suisse Group AG has 2.77 percent.
Little Sacrifice
Foregoing a reduced coupon would be little sacrifice for Alfa or Bank of Moscow as they probably could issue new subordinated five-year debt at a similar interest rate, according to an Aug. 24 report by Maxim Raskosnov, a Moscow- based banking analyst at Renaissance Capital.
Alfa’s 2015 subordinated debt is rated Ba2 by Moody’s Investor Services, two levels below investment grade. Bank of Moscow’s bonds are rated Baa2 by Moody’s, the second-lowest investment grade.
The ruble strengthened 0.1 percent to 30.7025 per dollar yesterday. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at 30.9162 per dollar in three months.
Default Swaps
The yield on the Russian government’s dollar bonds due in 2020 fell 2 basis points, or 0.02 percentage point, to 4.58 percent yesterday, from 5.31 percent when they started trading on April 26.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 0.5 basis point to 169 yesterday, according to data provider CMA. Credit-default swaps 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 price as contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s. Contracts on Turkey were 40 basis points more expensive than Russia’s on April 20.
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.’s EMBI+ indexes. The difference compares with 158 for debt of similarly rated Mexico and 219 for Brazil, which is rated two steps lower at Baa3.
The yield spread on Russian bonds is 64 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
Russian Standard
While bonds of Alfa and Bank of Moscow have recovered, Russian Standard Bank’s 2015 bonds with a call date on Dec. 16 are down 4.4 cents since VTB’s announcement, trading at 95.62 on Sept. 1.
The bank controlled by billionaire Roustam Tariko is the most likely candidate to follow VTB’s lead and not call its bonds, Renaissance Capital wrote. The bank is mainly funded by retail deposits in rubles, it said.
Russian Standard had a capital adequacy ratio of 30.7 percent at the end of 2009, more than the minimum 8 percent recommended under the Basel rules and ratios of 18.9 percent at Bank of Moscow and 20 percent at Alfa, according to VTB Capital.
Interest payments on Russian Standard’s $200 million of bonds would fall by 1.5 percentage points from the current 8.875 percent coupon if it doesn’t redeem, saving $3 million a year.
Russian Standard is rated Ba3 by Moody’s, three steps below investment grade, and B1 by S&P, four below. Russian Standard officials declined to comment.
“Keeping those long term funds at the banks is a reasonable thing to do,” said Eugene Tarzimanov, a Moscow-based credit analyst at Moody’s. “If those banks decide to call and need additional new funding of the same tenor it is likely that the rates will be somewhat higher than those recorded pre crisis.”
Editor: Gavin Serkin
To contact the reporters on this story: Jason Webb in London at jwebb25@bloomberg.net; Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net.
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