Ruble Snubbed as Eurobonds to Surpass Domestic Borrowing: Russia Credit

Russian companies are turning to the dollar for financing as slower-than-forecast economic growth spurs the most bearish outlook for the ruble in eight months and drives up local borrowing costs.

Sales of foreign-currency bonds probably will exceed ruble debt this year for the first time since 2007 at $33 billion, according to Moscow-based Troika Dialog, Russia’s oldest brokerage. Ruble yields touched the highest in seven months relative to dollars last week, based on trading in bonds from OAO Lukoil, the nation’s largest non-state oil producer.

Russia is lagging behind Brazil and China for economic growth while inflation is accelerating faster. Options traders are betting against the ruble, with its one-month risk reversal rate -- the premium of put options over calls -- at 2 percent on Dec. 1, the highest level since Sept. 28. Energy and metals producers, which account for the majority of Russian exports, get most of their income in dollars and are borrowing in the greenback to shield against market movements.

“Funding in dollars is a natural match to dollar revenue flows,” Daria Kim, the head of treasury at OAO Severstal, Russia’s largest steel producer, said in an e-mail on Nov. 26. “U.S. and European investors are in general more receptive to longer maturities than investors in the ruble bond market.”

Severstal refinanced part of its dollar bonds due in 2013 with a $1 billion sale in October of securities due in 2017. The yield spread between the steelmaker’s ruble bonds due in February 2013 and dollar notes maturing in July 2013 more than doubled since July, reaching 199 basis points today.

Falling Yields

Gains in Russian corporate dollar bonds reduced yields by 110 basis points, or 1.1 percentage points, in the past six months, to 6 percent yesterday, based on a JPMorgan Chase & Co. index. The advance beats the 60 basis-point decline for comparable Brazilian debt in the same period to 6.07 percent.

The yield spread between Lukoil’s ruble bonds due in December 2013 and its dollar debt maturing in November 2014 widened to a seven-month high of 311 basis points on Nov. 22 from 166 basis points on May 25.

Companies led by state-run lenders VEB and OAO Sberbank have raised $24.1 billion so far in 2010, the most in three years, compared with about 800 billion rubles ($25.5 billion) locally, data compiled by Bloomberg show. Last year, ruble bond sales were about $3.5 billion more than foreign-currency deals.

Novatek, UralChem

OAO Novatek, Russia’s second-biggest gas producer, plans to sell as much as $1.5 billion of bonds with a maturity of 10 years. UralChem Holding Plc plans to borrow about $525 million, Chief Executive Officer Dmitry Osipov said in an interview in Moscow on Oct. 19. Novatek Chief Financial Officer Mark Gyetvay declined to comment when contacted by Bloomberg News on Nov. 25.

UralChem, Russia’s second-largest producer of nitrogen- based fertilizers, “isn’t excluding” a sale of Eurobonds to “securitize foreign-currency income,” Chief Financial Officer Maxim Bakov in Moscow, said by e-mail on Nov. 26. The company had $1.34 billion of debt as of June 30, according to its website.

“The preference for foreign-currency bonds is primarily due to favorable market conditions and appealing rates,” Bakov said. “It’s another matter how lasting this trend will be. The situation may turn around early next year.”

While longer-dated foreign-currency debt enables companies to raise capital for long-term projects, issuance in ruble bonds is limited to shorter duration of five years, with “real liquidity” available in the three-year market, said Giacomo Baizini, chief financial officer at Evraz Group SA, Russia’s second-largest steelmaker, said by e-mail on Nov. 26.

Ruble Slides

The ruble slid 2.2 percent against the dollar in November, the most since a 5.8 percent slump in May. The so-called implied yield, or carry, paid to investors who bet on the ruble using one-year non-deliverable forwards was at 4.69 percent today and 4.92 percent on Nov. 29, the highest reading in six months.

The ruble strengthened 0.2 percent to 31.375 per dollar by 12:41 p.m. in Moscow, rebounding from its weakest closing price against the greenback since June 11 on Nov. 30.

The yield on Russia’s dollar bonds due in 2020 dropped 12 basis points to 4.927 percent. The price of the country’s ruble notes due August 2016 rose, pushing the yield down 5 basis points to 7.34 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell two basis points to 162 points today, 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.

Default Swaps

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade, cost 20 basis points more than similar 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 extra yield investors demand to hold Russian debt rather than U.S. Treasuries dropped 1 basis point to 230 points, JPMorgan Chase & Co. EMBI+ indexes show. The difference compares with 147 for debt of similarly rated Mexico and 184 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The yield spread on Russian bonds is 25 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.

Trailing Brazil

International bond sales by Russian companies trail the amount from Brazil, according to data compiled by Bloomberg. Brazilian companies have raised $38.7 billion from foreign- currency debt and 30 billion reais ($17.6 billion) in domestic bonds this year, the figures show.

Russia’s inflation rate may reach 8.4 percent this year, exceeding the official forecast of 8 percent, while gross domestic product will probably gain 3.8 percent, less than the 4 percent initially predicted by the government, Economy Minister Elvira Nabiullina said in Moscow yesterday. GDP grew an annual 2.7 percent in the third quarter, the slowest pace this year.

China’s economy expanded three times faster, at 9.6 percent last quarter, and India’s grew an annual 8.9 percent in the three months through September. The Indian economy is likely to expand 8.5 percent in the fiscal year through March, the most in three years, Prime Minister Manmohan Singh said Nov. 20.

The weaker ruble, faster inflation and expectations that the central bank will raise interest rates for the first time since 2008 have damped the appeal of local-currency debt.

“The ruble debt market is starting to see a rise in borrowing costs, bringing to an end an era of super-liquidity that helped take yields to the lowest level on record,” said Leonid Ignatiev, head of fixed-income research at Trust National Bank in Moscow. “There’s a build-up of inflationary risks, which means we might see an increase in key interest rates as early as the first quarter of next year.”

Russian banks charged 4.78 percent on Nov. 30 to lend to each other overnight, an increase of 228 basis points since June and the highest level in almost 10 months.

“With nominal yields so attractive, borrowing abroad will always be tempting for Russia’s biggest corporates and banks,” said Pavel Pikulev, a fixed-income strategist at OAO Gazprombank, the lending arm of Russia’s gas export monopoly.

To contact the reporters on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net; Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.