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VTB Turns Alchemist as Bond Ties Return to Gold: Russia Credit

A logo sits outside the headquarters of VTB Group in Moscow. Photographer: Alexander Zemlianichenko Jr./Bloomberg
A logo sits outside the headquarters of VTB Group in Moscow. Photographer: Alexander Zemlianichenko Jr./Bloomberg

Nov. 20 (Bloomberg) -- VTB Group, the first Russian lender to sell perpetual bonds and debt linked to the country’s benchmark equity index, is selling the nation’s debut notes tied to the price of gold.

VTB is offering 1 billion rubles ($32 million) of securities the company will redeem in December 2013 that pay a rate based on returns from gold up to a limit of 20 percent, according to a Nov. 16 regulatory filing. Gold for immediate delivery rose 11 percent this year to $1,730.44 an ounce. VTB’s dollar bonds due in February 2018 gained the same amount this year, according to data compiled by Bloomberg.

The bonds from Russia’s second-largest bank will offer pension funds a way to invest in gold within the limits placed on commodity holdings by regulators, according to ZAO Raiffeisenbank. VTB, which has sold debt in Turkish liras, Swiss francs and Singapore dollars this year, issued its first $1 billion of perpetual bonds in July, prompting OAO Gazprombank to follow suit last month.

“VTB is a pioneer on the Russian market,” Denis Poryvay, an analyst at Raiffeisen in Moscow, said by phone yesterday. “It’s similar to an exchange-traded fund on gold for Russian investors.”

Banks including JPMorgan Chase & Co. and Barclays Plc sold 11 structured notes tied to gold in November, according to data compiled by Bloomberg. Credit Suisse Group AG sold $2 million of reverse convertibles -- high-yielding bank bonds that suffer losses if a reference asset plummets -- that are linked to the gold price on Nov. 5 with a coupon of 4 percent. VTB Capital’s press service declined to comment on its planned issue.

Gold Rally

Central banks from Europe to China are pledging more steps to boost growth, raising concern about inflation and currency devaluation. Gold rallied 70 percent as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011.

The precious metal will probably rise to more than $2,000 in 2013 as policy makers add stimulus to aid the global recovery, Raymond Key, London-based global head of metals trading at Deutsche Bank AG, said in an interview in Hong Kong earlier this month.

Inflation Target

Russia’s inflation rate is likely to reach 7 percent this year, according to the Economy Ministry. The central bank is aiming to hold inflation at 5 percent to 6 percent next year, half a percentage point more than previously targeted.

There is potential for growth and the securities might beat inflation, though achieving a return of 20 percent is unlikely, according to Alexander Losev, chief executive officer at Moscow-based Sputnik Asset Management.

“I so far view the bond’s prospects at 50:50,” he said by e-mail on Nov. 16.

The ruble strengthened 0.4 percent to 31.3795 per dollar by 1:48 p.m. in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble weakening to 31.8530 per dollar in three months.

A gain in Russia’s dollar bonds due in April 2020 cut the yield two basis points, or 0.02 percentage point, to 2.621 percent. The yield on the government’s domestic ruble bonds due in June 2017 fell six basis points to 6.99 percent today. The yield on Russia’s international ruble bond due in March 2018 dropped seven basis points to 6.179 percent.

Yield Gap

Russia is rated BBB by Fitch, the second-lowest investment-grade ranking. The extra yield investors demand to hold Russian government dollar bonds rather than U.S. Treasuries fell two basis points to 199, according to JPMorgan indexes. The difference compares with 173 basis points for debt of Mexico and 157 basis points for Brazil.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose one basis point to 151, according to data compiled by Bloomberg. The default swaps cost two basis points more than Turkey, which is rated one level lower at BBB- by Fitch. 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.

The VTB bond will pay three fixed coupons of 0.1 percent in addition to the variable rate tied to gold, according to the company’s filing. The bank will stop taking orders for the debt on Nov. 22. VTB sold 5 billion rubles of debt linked to the Micex in June, while it issued $1.25 billion more of its perpetual bonds this month.

While the size of the issue is “hardly material” for VTB, it does allow them to diversify the bank’s funding base, according to Stepan Amosov, director of financial market structured products at ING Groep NV in Moscow. The bond primarily targets investors such a pension funds who want exposure to gold and are heavily regulated, he said.

“They want the chance to buy a local Russian bond and so this is probably the simplest and most obvious opportunity for them,” Amosov said by phone yesterday.

To contact the reporter on this story: Lyubov Pronina in London at

To contact the editor responsible for this story: Gavin Serkin at

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