Bond Yields Lowest on Record to Stocks Revive IPO Market: Russia Credit
The lowest-ever yields on Russian bonds compared with stocks are spurring the biggest wave of initial public offerings since before the credit crisis as investors seek higher returns from equities.
Dollar bonds sold by Russian companies yielded 5.41 percent yesterday, an all-time low, down from an average of 20.4 percent in October 2008, according to JPMorgan Chase & Co.’s EMBI+ index. The 30 stocks in the Micex Index provided an 11.3 percent equity yield, or 2.2 times the level from bonds, the highest ratio in the eight years since Bloomberg began compiling the data. The multiple was 0.7 times in December 2009.
The relative value gap, which is twice the ratio in Brazil and three times that in China, may help make equities more attractive to investors. Companies from steelmaker OAO Severstal to retailer O’Key Group plan as much as $2.5 billion of share sales by yearend, the biggest quarter for Russian stock offerings since 2007.
“There has been too much of a brainless rush into fixed income,” said Eric Kraus, the head of strategy at Otkritie Financial Corp. in Moscow. “The market is at a crossover. At some point you have to think about equities.”
Record-low interest rates globally and rising commodity prices have helped spur demand for fixed-income assets from the world’s biggest energy exporter. Russian corporate bonds in dollars gained 14.6 percent this year, beating the 14.5 percent advance for JPMorgan’s Corporate EMBI Index.
Equities have lagged behind other emerging markets. Russia’s Micex Index, which tumbled 9.7 percent in the second quarter, is down 4 percent from this year’s high on April 15. The index’s 7.2 percent gain this year trails the 11 percent advance for the MSCI Emerging Markets index.
“The problem has been that international investors view Russia as a derivative of global growth,” said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow.
The Micex has the highest earnings yield among the largest emerging markets, or the so-called BRIC nations of Brazil, Russia, India and China. Russian stocks trade at a 44 percent discount to the MSCI China Index and Brazil’s Bovespa Index, 57 percent below India’s Bombay Stock Exchange Sensitive Index and 42 percent less than the MSCI Emerging Markets index, data compiled by Bloomberg show.
Food retailer O’Key expects to raise as much as $500 million from a London IPO by the end of the year, according to a banker involved in the deal for the Moscow-based company, Vedomosti reported Oct. 6. London-based Petropavlovsk Plc, Russia’s third-largest gold producer, plans to raise about $300 million by selling shares in its iron-ore unit in Hong Kong this month, Chairman Peter Hambro said on Oct. 5.
Severstal, Russia’s largest steelmaker, is considering selling shares this year in its gold unit, the company said in a statement. The listing could be worth about $1 billion, according to a banker with knowledge of the transaction.
Severstal has an estimated earnings yield of 9.5 percent, based on the average of 10 analysts’ forecasts for 2011 earnings tracked by Bloomberg. That compares with a yield of 5.3 percent on the Moscow-based company’s dollar debt due July 2013.
OAO Mostotrest, the Moscow-based bridge builder, is selling shares equal to about 25 percent of the company, it said in a statement Oct. 6. The company is valued at $2.1 billion to $2.5 billion, Interfax reported, citing TKB Capital, which is helping organize the offering.
“Investors may be looking at equities more because they no longer see any upside for debt instruments,” said Nikolai Podguzov, head of fixed-income strategies at VTB Capital in Moscow. “The liquidity we are seeing on the market could feed into these new IPOs.”
Mostotrest’s decision to offer shares rather than bonds was a “logical step in the company’s development,” Chief Executive Officer Vladimir Vlasov said in a telephone interview. The company expects to complete the share sale to Russian and European investors in November, he said. “The crisis is to blame for the fact that we haven’t done it earlier,” Vlasov said. “Now the markets have recovered and we think this is a timely proposal.”
Russian companies sold a record 577 billion rubles ($19.4 billion) of domestic debt and $16.6 billion of international securities this year, compared with $4.7 billion in new share issuance, UralSib’s Weafer said. Weafer, who had predicted Russian companies may raise $20 billion from share sales this year before scaling back his forecast to $10 billion in June, now estimates the total at $7.5 billion.
While companies “need to raise equity to repair their stretched balance sheets,” investors will be more cautious after losses from IPOs so far this year, Weafer said.
OAO Protek, the Moscow-based drug wholesaler, has dropped 45 percent since its April IPO. OAO Russian Sea Group raised $90 million in its IPO in April, less than the $174 million initially intended, after setting its price at the bottom of the $6 to $8 per share range. The Moscow-based company’s shares have tumbled 58 percent since the offering.
“Theoretically most of the market should be switching out of fixed income based on the implied yields, which is many times higher than the bond market,” said Michael Kart, who helps manage about $1 billion in stocks at Marshall Spectrum Ltd. in Moscow, including about $100 million of Russian equities in Russia and the former Soviet Union. “The appetite for Russian equities is still relatively low. You have to be highly selective about investing in Russia IPOs and do a lot of due diligence. Some people lost a packet of money in IPOs earlier this year.”
The yield on Russia’s dollar bonds due in 2020 fell seven basis points, or 0.07 percentage point, to 4.299 percent yesterday, the lowest level since they were sold in April. Gains in the country’s ruble notes due August 2016 reduced the yield 14 basis points to 7.16 percent.
Investors cut the extra yield demanded on Russian debt over U.S. Treasuries by two basis points to 221, according to JPMorgan EMBI+ indexes. The difference compares with 159 for debt of similarly rated Mexico and 200 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps declined 0.7 basis point to 145.5 yesterday, 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.
Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating, cost 0.8 basis point more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.
The ruble gained 0.7 percent to 29.6850 per dollar yesterday, its strongest level since May 4. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, show the ruble at 30.0026 per dollar in three months.
“There are a large number of companies waiting in the wings and all the drivers for IPOs which were there last year continue to hold true, said Moscow-based Hasnen Varawalla, the head of corporate finance at Renaissance Capital, in an interview.
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