Putin’s Fannie Mae Shows Market How to Sell Bonds: Russia Credit

Police Watch Pro-Russian Separatists In Kharkiv
Police watch pro-Russian separatists holding a rally outside from a window in the regional administration building on April 24, 2014 in Kharkiv, Ukraine. Russian companies including banks have raised 71 percent less on local debt markets than the same period in 2013, as President Vladimir Putin’s escalating crisis with Ukraine sours investor sentiment. Photographer: Brendan Hoffman/Getty Images

Russia’s state housing agency is showing markets there’s appetite for ruble bonds, offering a premium that spurred demand for six times the debt being sold.

The Agency for Housing Mortgage Lending, akin to Fannie Mae in the U.S., sold 6 billion rubles ($168 million) of bonds at a coupon of 9.6 percent two days ago. Demand, including from foreign buyers, allowed the company to lower the coupon from as high as 10.4 percent, according to organizers Sberbank CIB and ZAO Raiffeisenbank.

Russian companies including banks have raised 153 billion rubles on local-debt markets this year, 71 percent less than the same period in 2013, as President Vladimir Putin’s escalating crisis with Ukraine sours investor sentiment. The agency succeeded because of its credit rating and by letting buyers redeem the securities after 18 months, said Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow.

“The window has indeed opened, but it’s only a window and only for issuers with the highest ratings,” Losev said in e-mailed comments yesterday. “And only for maturities as long as a year and a half.”

Russian companies sold the least debt since 2009 this year, data compiled by Bloomberg show. Escalating tensions in eastern Ukraine have raised the prospect of tougher sanctions from the U.S. and Europe, prompting the government to scrap 20 billion rubles of bond auctions this week as investors sought higher yields than the Finance Ministry was prepared to pay.

Deal Pipeline

The coupon on the mortgage agency’s bonds compares with a 7.75 percent rate on 6 billion rubles of bonds it sold with a four-year put in April last year. The yield on the notes has risen 70 basis points this year to 8.5 percent yesterday compared with a 170 basis-point increase on government debt due June 2017. The sovereign notes yielded 8.57 percent yesterday, compared with 6.96 percent on equivalent debt from similarly rated South Africa.

Eurasian Development Bank in Kazakhstan started taking orders for a 5 billion-ruble bond offering yesterday with a two-year put, or an option for early redemption. International Investment Bank, a Moscow-based supranational lender, set a coupon of 9.9 percent on 2 billion rubles of bonds with an 18-month put, lowering the rate from as high as 10.25 percent.

Eurasian Development Bank is rated BBB at Standard & Poor’s, the second-lowest investment grade and the same as Russia’s housing agency, known as AHML. That’s one level above the Russian Federation, which was cut to BBB- today, one step above the junk.

Nixing Auctions

“A number of companies really need to refinance their debt, while investors have amassed some money, which they are ready to invest” in short-term notes, Sputnik’s Losev said.

Foreigners, mostly from western Europe, made up about 10 percent of the bids, AHML’s press office said in an e-mailed response to questions yesterday.

The Finance Ministry said in a statement that investor bids for five- and nine-year OFZ notes on offer two days ago didn’t “adequately represent” Russia’s “credit quality.” OFZ sales are 86 percent lower than last year amid Putin’s incursion into Crimea from March 1, data compiled by Bloomberg show.

“Unlike the Finance Ministry, which is not ready to give any premiums, AHML was more generous,” Olga Sterina, an analyst at ZAO UralSib Capital in Moscow, said in an e-mail yesterday. The agencies bonds with 13 months left until a put option yielded around 8 percent, she said.

“A 9.6 percent coupon for an investment-grade issuer for 18 months looks very, very good,” she said.

Buyer’s Market

Russian companies, facing $115 billion of debt due over the next 12 months, have about $100 billion in cash and earnings at their disposal during the next 18 months, Moody’s Investors Service said in an analysis of 47 businesses on April 11. Almost all 55 companies examined by Fitch Ratings are “well placed” to withstand a closed refinancing market for the rest of 2014, it said in a note on April 16. Banks have more than $20 billion in foreign currency to lend as the tension prompted customers to convert their ruble savings, ZAO Raiffeisenbank said.

Dmitry Kosmodemiyanskiy, a money manager at Otkritie Capital in Moscow, said he doesn’t expect a “barrage” of new deals until both debt issuers and would-be bond buyers become accustomed to increased risk stemming from the Ukraine crisis.

“There is some new money inflows as bonds get redeemed,” he said by e-mail yesterday. “People will get used to the new reality and forget their fears.”

Russian government dollar bonds due April 2042 declined for a fifth day, lifting the yield 18 basis points to 6.40 percent by 2:25 p.m. in Moscow today. The premium investors demand to hold Russian debt over U.S. Treasuries rose 11 basis points to 338, JPMorgan Chase & Co. indexes show. That compares with 225 basis points for Brazil and 183 for Mexico.

Last year saw a “seller’s market” as strong demand for new issues allowed companies to place bonds with long maturities at low coupons, Losev said.

“Now it’s a buyer’s market,” he said. “Investors pick whom they give money to, under what rate and for how long.”

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