World Cup Boost for Steelmakers Spurs Bond Rally: Russia Credit

World Cup Boost for Steelmakers Spurs Bond Rally
A general view of a blast furnace at an OAO Severstal steel mill in Cherepovets, Russia. Photographer: Alexei Boitsov/ Bloomberg

Russia’s winning bid to host soccer’s 2018 World Cup is driving the biggest bond rally in five months for its largest steelmakers as the government prepares to spend at least $9.6 billion on stadiums and expand airports and roads.

The yield on dollar bonds due in 2013 from OAO Severstal, Russia’s largest steelmaker, fell 7 basis points to 5.217 percent, adding to yesterday’s 26 basis point decline, the biggest drop since July, according to data compiled by Bloomberg. Advances for Evraz Group SA, the country’s second-biggest steelmaker, pushed the yield on its 2015 dollar bonds to the largest three-day drop since May.

Russian borrowing costs relative to U.S. Treasuries fell and the benchmark Micex stock index climbed to the highest level since July 2008 after soccer’s governing body FIFA awarded the world’s most-watched sporting tournament to the country. The World Cup may be responsible for half of a percentage point of gross domestic product growth for South Africa, this year’s hosts, Finance Minister Gordhan Pravin said in July.

“The World Cup will be very supportive of the bonds of steel names, construction and transportation companies, which will play out over the next three months,” said Vladimir Gersamia, who helps manage more than $2 billion at Threadneedle Asset Management in London. “The victory will lead to a huge number of orders that has been lacking domestically.”

13 Stadiums

Russia beat a challenge from England and joint bids from Belgium and the Netherlands, and Portugal and Spain. Its winning bid commits Russia to build 13 stadiums and renovate three more. The government will make “major upgrades and capacity increases” at most airports serving the 13 proposed host cities, including Sochi, home of the 2014 Winter Olympics, according FIFA’s website. Russia’s victory marks the third consecutive hosting in an emerging market after South Africa this year and Brazil in 2014.

The country will spend 300 billion rubles ($9.6 billion) to build the stadiums for the tournament, Prime Minister Vladimir Putin said late yesterday after flying to Zurich to meet with Sepp Blatter, president of FIFA, or the Federation Internationale de Football Association, soccer’s world governing body,

The total cost may be as much as $500 billion and cause government borrowing to surge to 15 percent of gross domestic product from 11 percent over the next three to four years, according to Chris Weafer, chief strategist at UralSib Financial Corp.

“It’s a boost for Russian equities, bonds and the Russian investment case,” Weafer said in a phone interview from London. “The news is very good for steel names, transport and construction companies as it sets down a specific six-year timeline for Russia to complete its infrastructure program.”

The program will push Russia to increase joint initiatives with companies through so-called Public Private Partnerships and attract more foreign direct investment, Weafer said.

‘Look at Greeks’

The expenditure risks causing “high indebtedness” should the government add to its existing program for infrastructure projects in the next five years, said Luis Costa, an emerging-market debt strategist at Citigroup Inc. in London.

“Look at the Greeks, the fact they hosted the Olympics boosted their indebtedness, there was a huge chunk of debt from the Olympics,” Costa said in a phone interview yesterday.

The ruble strengthened 0.6 percent to 31.2900 per dollar in Moscow trading, posting it biggest daily gain since Nov. 18. 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 31.4558 per dollar in three months.

The price of the country’s ruble notes due in August 2016 rose, leaving the yield 1 basis points lower at 7.32 percent.

Default Swaps

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was little changed at 156 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 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 18 basis points 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 extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 7 basis points to 215 today, according to JPMorgan Chase & Co.’s EMBI+ Indexes. The difference compares with 140 for debt of similarly rated Mexico and 175 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The so-called yield spread on Russian bonds is 28 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.

‘Drop in Ocean’

“The benefits of hosting the World Cup is a perception issue rather than reality,” Kingsmill Bond, chief strategist at Troika Dialog, said by phone from London. The spending is a “drop in the ocean” by comparison to Russia’s $1.2 trillion economy, he said.

The win may help Russia’s stock indexes outperform other emerging markets by as much as 10 percent in the next three months, analysts at VTB Capital, the investment banking arm of Russia’s second-biggest lender, wrote in an e-mailed report today. The Micex has climbed 20 percent this year compared with a 13 percent advance for the MSCI Emerging Markets Index.

Shares of Cherepovets-based Severstal and OAO Novolipetsk Steel, Russia’s largest steelmaker by market value, jumped more than 3 percent today, adding to yesterday’s gains of 4.6 percent and 4.9 percent.

The yield on Lipetsk-based Novolipetsk’s 2013 ruble bonds fel1 21 basis points yesterday, the most since Nov. 11, according to data compiled by Bloomberg.

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