Yields Diverge on Downgrade for Bank of Moscow: Russia Credit

Russian plans to sell government- owned companies are causing tremors in the bond market, with Bank of Moscow debt falling by the most in three months on concern the lender is better off under the city’s control.

Bank of Moscow dollar bonds due in 2013 fell the most since Oct. 19 after Moody’s Investors Service cut its rating because of the reduced prospects the lender would be rescued in the event of financial problems after a sale by the Moscow city government. The yield rose to the highest level since Dec. 7 compared with notes of state-run VTB Group due the same year after the Jan. 19 downgrade, according to prices on Bloomberg. VTB bonds rose the most since Jan. 12 as Fitch Ratings said it may lift Russia’s ranking this year if the economy expands.

“There could be some negative changes in things like permits and real estate, or something that might affect the value of some of the assets used as collateral for loans made by the Bank of Moscow,” Tim McCarthy, who helps manage $1 billion at Valartis Asset Management, said in a phone interview from Geneva. Government ownership is a “positive factor” for bondholders.

Russia’s capital plans to sell stakes in 200 of its 433 companies, including Bank of Moscow, this year, the city’s Mayor Sergei Sobyanin said on Dec. 31. Prime Minister Vladimir Putin’s federal government is seeking to raise about 1 trillion rubles ($33 billion) from privatizations over the next three years. Poland aims to raise 55 billion zloty ($19 billion) in 2010-2013 from state asset sales, while India expects to generate 400 billion rupees ($8.8 billion) in the year to March 31.

Stakes in 900 companies including OAO Rosneft, the country’s biggest oil producer, and Moscow-based lenders OAO Sberbank and VTB, will be sold, First Deputy Prime Minister Igor Shuvalov said on Oct. 20.

Moody’s Downgrade

Moody’s said it cut Bank of Moscow’s long-term local and foreign-currency debt and deposit ratings by one level to Baa2, the second-lowest investment-grade ranking. The bank had been rated Baa1, equal with the government.

The new rating reflects the higher yields on Bank of Moscow bonds compared with those of state-owned banks with a Baa1 rating, including VTB and Sberbank, Moscow-based investment bank Troika Dialog said in a research note.

Bank of Moscow’s 2013 bonds yielded 4.439 percent today, compared with 2.865 percent for VTB’s 2012 securities. The 157 basis-point spread between the two bonds has widened by 15 basis points since Jan. 5. The gain in VTB’s bonds today sent the yield 8 basis points lower to 2.858 percent. Sberbank’s 2013 dollar bond yielded 3.354 percent today.

Fitch Upgrade?

Fitch, which put Russia on “watch positive,” indicating optimism, last September, will probably issue a new rating this September, Vladimir Redkin, who oversees Russia’s rating at the agency, said in an interview in Moscow.

Fitch last changed its score for Russia in February 2009, cutting it one step to BBB, the second-lowest investment grade.

Russia’s dollar bonds due in 2020 rose the most in two weeks, pushing the yield 11 basis points lower to 5.005 percent, according to prices on Bloomberg at 5:41 p.m. in London. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries declined 6 basis points to 184 today, according to JPMorgan Chase & Co.’s EMBI+ indexes. The difference compares with 126 for debt of similarly rated Mexico and 169 for Brazil, which is rated two steps lower at Baa3 by Moody’s Investors Service.

The yield spread on Russian bonds is 49 basis points below the average for emerging markets, according to JPMorgan.

‘Stability’

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 8 basis points to 140 basis points, down from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Credit-default swaps for Russia cost 8 basis points less than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 points less on April 20.

The ruble, which is managed by the central bank against a dollar-euro basket to limit swings, rose 0.2 percent to 29.9351 per dollar in Moscow today. Non-deliverable forwards, which provide a guide to expectations of currency movements and interest-rate differentials, show the ruble weakening to 30.1618 per dollar in three months.

“Bank of Moscow’s rating only differs from Russia’s sovereign rating by one level, which points to a high level of stability of the credit organization,” Oleg Fedorchenko, Bank of Moscow’s spokesman, said in an e-mail yesterday.

Strategic Importance

VTB, Russia’s second-largest lender, may buy the city’s entire 46 percent stake in Bank of Moscow, Finance Minister Alexei Kudrin told reporters in Moscow on Nov. 24. The Russian government plans to sell a 10 percent stake in VTB this year.

Companies on the government’s for-sale list, including VTB, Sberbank and Rosneft, will continue to have some government ownership, which should continue to bolster their bonds, Olga Budovnits, an emerging-market credit analyst at Union Bancaire Privee in Zurich, said in a phone interview yesterday.

“I don’t think that the issue of state support will be questioned even during the privatization process, because they are strategically important,” Budovnits said.

Fitch would probably lift Bank of Moscow from its current “negative” outlook to “stable” should the deal with VTB go through, Alexander Danilov, Fitch’s Russian banking analyst, said in an interview in Moscow yesterday.

“If the VTB deal goes through that could lead to positive rating action on the Bank of Moscow because that would mean there is a potential of support ultimately from the Russian government,” Danilov said.

To contact the reporters on this story: Jason Webb in London at jwebb25@bloomberg.net; Maria Levitov in London at mlevitov@bloomberg.net.

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

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