After a half-year absence from the Eurobond market, some Russian companies are preparing their return.
Pig iron producer OAO Koks is considering its first foreign bonds in at least four years, while iron-ore miner Metalloinvest says the market shows signs of opening. Moscow-based Bank FC Otkritie meets investors in Europe next week. Russian corporate Eurobond yields fell to an average 6.92 percent on May 22, the lowest since September and 1.72 percentage points higher than the average for emerging markets, JPMorgan indexes show.
With $117 billion of external debt due in the year from July, companies and banks not affected by foreign sanctions see a chance to refinance as the cease-fire in Ukraine and oil $20 above this year’s low help Russia’s outlook. Sberbank CIB, the investment arm of the country’s biggest bank, said foreign bondholders hungry for higher yields will snap up Russian securities. Others are more cautious.
“The market will buy high-quality names with state support if they offer a big enough concession to the existing bonds,” said Max Wolman, who helps manage $13.5 billion in emerging-market debt at Aberdeen Asset Management Plc. Beyond these companies, “there is limited appetite,” he said by e-mail Tuesday.
Sberbank expects borrowers to return next quarter when the European Union decides whether or not to extend sanctions that blocked a handful of companies from capital markets as punishment for Russia’s role in the Ukraine crisis. Corporates returning to the market will offer a yield premium of 20 to 40 basis points, Sberbank CIB analysts Alexander Kudrin and Alexander Golinsky predicted in an e-mailed note.
Metalloinvest plans to refinance some of its $1.3 billion of debt maturing in 2016, Chief Financial Officer Pavel Mitrofanov said in May. Koks’s board of directors approved a $500 million Eurobond program in May to be prepared should borrowing costs fall further, Chief Financial Officer Sergey Cherkaev said last month.
Not all Russian companies are optimistic. Power utility Inter RAO UES doesn’t expect the market to open within the next 12 months because investors are still wary of sanctions, CFO Dmitry Palunin said on May 27.
With the Eurobond market shut, Russian companies have responded to the sanctions and drop in oil prices last year by cutting costs, refinancing debt on the local market and increasing their cash cushions, Bank of America Corp. analysts Kay Hope and Ali Dhaloomal said in a note last month.
Eurobond issuance tumbled to $7.6 billion last year, equivalent to 17 percent of the 2013 total. Since OAO Alfa-Bank’s $250 million debt sale in November, companies have stayed away altogether.
Metalloinvest’s April 2020 dollar bonds rose, lowering the yield 2 basis points to 7.62 percent by 12:50 p.m. in Moscow, a 364 basis point drop so far this year. It hit a record 14.60 percent on Dec. 16 as the ruble nosedived and Russia’s market turmoil peaked.
“There are too few Russian Eurobonds outstanding, and the market is squeezed,” Jean-David Haddad, a strategist at Otcexgroup in Paris, said by e-mail. “There will be demand for unsanctioned names as investors are hungry for yield, and there’s no yield elsewhere.”