Oligarch M&A Power Shown by Lowest TNK-BP Yields: Russia Credit

Russia’s third-richest man Mikhail Fridman
Russia’s third-richest man Mikhail Fridman, seen here, was behind both deals. Photographer: Alexander Zemlianichenko Jr/Bloomberg

The rally in TNK-BP and VimpelCom Ltd. bonds is underscoring confidence in Russia’s billionaire businessmen to revive acquisitions from a five-year low.

TNK-BP’s dollar bonds due in 2012 surged for a second day, sending yields down 20 basis points to a record-low 3.08 percent, after BP Plc’s venture said yesterday it will spend $1.8 billion for BP assets in Venezuela and Vietnam, prices on Bloomberg show. VimpelCom’s Oct. 4 accord to purchase phone assets from Egyptian billionaire Naguib Sawiris in a $6.5 billion deal also drove yields on the Moscow-based company’s debt to a low. Mikhail Fridman, Russia’s third-richest man, was behind both deals.

Takeovers are climbing after an 86 percent slump in foreign purchases by Russian companies this year to $17.1 billion of deals, trailing the $33.9 billion by Indian companies and $29.3 billion out of Brazil, data compiled by Bloomberg show. The advances in TNK-BP and VimpelCom securities compare with losses on bonds in Europe and the U.S. after some of the year’s biggest acquisitions on concern the purchases may damage credit.

“TNK-BP’s financial metrics are quite comfortable,” Elena Anankina, an analyst at Standard & Poor’s in Moscow, said yesterday in an e-mail. Free operating cash flow covers 53 percent of outstanding debt, she said. The company had net debt of $5.8 billion at the end of June, according to TNK-BP’s website.


Oil prices above $80 a barrel through this month are helping to lift Russia’s economy after its worst recession since the Soviet era. Economic growth in the world’s largest energy exporter is forecast by the government at 4 percent this year. Deputy Economy Ministry Andrei Klepach said Oct. 6 that the country will have to “fight” to achieve growth of 3.9 percent to 4.5 percent in the next three years.

Billionaires Viktor Vekselberg, Len Blavatnik, German Khan and Mikhail Fridman, whose Alfa Group owns 39 percent of VimpelCom, control half of TNK-BP through a company called AAR. BP, based in London, owns the other 50 percent, according to TNK’s web site.

Fridman said last month the Russian shareholders’ relationship with BP has improved since a dispute in 2008 over management and expansion. The billionaires said at the time that BP treated the venture as a branch and stymied attempts to expand overseas. Then TNK-BP Chief Executive Officer Robert Dudley, who denied the accusations, fled Russia two years ago after heading the venture for five years, citing “sustained harassment” and amid difficulty renewing his visa. Dudley took over as head of BP on Oct. 1.


“One of TNK-BP’s bigger problems is its dependence on Russia, so anything that can change that is a positive for investors,” said Neil Murray, the head of corporate bonds at Scottish Widows Investment Partnership in Edinburgh who manages the equivalent of $3.8 billion including TNK-BP bonds. “It diversifies their business.”

TNK-BP accounts for about a quarter of BP’s output, a fifth of reserves and an eighth of group profits, according to Vladimir Buyanov, a Moscow-based spokesman for BP.

Russia and Venezuela, which signed an accord to support TNK-BP’s acquisition of the assets in the South American country, are “strategic partners,” President Dmitry Medvedev said last week during a visit by his counterpart Hugo Chavez to Moscow.

‘Ample Debt Capacity’

“TNK-BP has sufficient cash flow and ample debt capacity to pay for these assets,” Stan Polovets, chief executive officer of AAR, the Moscow-based consortium made of holding companies Alfa Group, Access Industries and Renova Group, said in an interview this month. “Finding the cash for these assets is not going to be a problem.”

The venture is also looking at buying BP assets in Algeria, which may cost about $3 billion, TNK-BP Deputy CEO Maxim Barsky said Oct. 6 in Algiers. TNK-BP may have to increase its debt burden to buy those assets, Trust Investment Bank said yesterday in a note.

TNK-BP may have $7.5 billion in cash flow from operations this year and expects to pay dividends of about $3 billion after the acquisition, Polovets said. Standard & Poor’s raised TNK-BP’s rating one level to BBB-, its lowest investment-grade ranking, in December. Yields on TNK-BP bonds due in 2012 have dropped from as high as 32.997 percent on Oct. 27, 2008.

VimpelCom Bonds Rally

VimpelCom’s bonds rallied on prospects the Sawiris merger will transform the Russian company into the world’s fifth-largest mobile phone operator. The enlarged company would have a subscriber base of more than 174 million, and give the Russian company access to markets in Africa and the Middle East, according to its statement on Oct. 4.

Yields on VimpelCom securities due in 2013 fell to a low of 4.66 percent the following day and are at 4.75 percent today, down from 5.91 percent on Aug. 26. Shares of VimpelCom, rated BB+ by S&P, one level below investment grade, have risen 3.8 percent in New York since the announcement.

Russia’s dollar bonds due in 2020 were little changed today, with the yield at 4.24 percent. The yield on the country’s ruble notes due August 2016 climbed 1 basis point, or 0.01 percent, to 7.13 percent.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 8 basis points to 198, according to JPMorgan Chase & Co. EMBI+ indexes. The difference compares with 149 for debt of similarly rated Mexico and 180 for Brazil, which is rated two steps lower at Baa3 by Moody’s Investor Services.

Cost of Protection

The yield spread on Russian bonds is 52 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps increased 2 basis points to 136 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, cost the same for the similar contracts for Turkey.

The ruble depreciated 0.4 percent to 30.5850 per dollar, the weakest closing price since Sept. 24. 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 30.8438 in three months.

Happy Holders

Yields on Novartis AG’s $3 billion of 5.125 percent notes due 2019 rose 32 basis points relative to government bonds to as high as 105 basis points about a month after the Basel, Switzerland-based drugmaker said on Jan. 4 that it would triple its stake in eye-care company Alcon Inc., according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Novartis completed the $28.3 billion purchase from Nestle SA in August. The debt currently trades at a spread of 88 basis points.

Relative yields on CenturyLink Inc.’s $500 million of 6 percent notes due 2017 rose 65 basis points to as high as 282 basis points a month after the Monroe, Louisiana-based company, formerly known as CenturyTel, agreed to buy Qwest Communications, Inc. for $22 billion, according to generic Bloomberg prices. CenturyLink agreed to buy Qwest in April and the securities now trade at a spread of 324 basis points.

The extra yield investors demand to hold TNK-BP’s dollar bonds due 2020 rather than Russian sovereign dollar bonds with similar maturity narrowed 10 basis points to 147 since July 28 when state-run Petroleos de Venezuela SA said BP was discussing selling assets in the South American country to TNK-BP.

“We think that the bonds are still relatively cheap,” said Murray at Scottish Widows. “We bought ours when they were issued, and we’re still happy holders.”

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