Ruble Plunge Sends Carlsberg Bonds Back to Square One

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Carlsberg A/S’s hopes of finally getting some good news out of Russia seem not to be panning out.

After a rally in the ruble earlier this year buoyed Carlsberg’s bonds, the currency has plunged back to lows last seen five months ago. The timing is proving particularly unfortunate as Carlsberg has traditionally relied on its Russian beer sales peaking in the summer.

“Carlsberg is to some extent back to square one,” Rickard Hellman, a credit analyst at Nordea Bank AB, said in an interview. “The ruble is today still stronger than it was in the beginning of 2015, but it’s a lot weaker than the historical average of past years.”

On a May 12 conference call, Chief Financial Officer Joern. P. Jensen said a decision on whether to raise Carlsberg’s full-year outlook for Russia hinged on the ruble’s performance over the coming months. “Let’s see how it plays out over the summer,” he said then.

So far, it’s not played out well. The ruble weakened about 10 percent in July, its worst month since December. It has lost about one-fifth of its value against the euro since a 2015 peak on April 15. Russia isn’t Carlsberg’s only weak spot. According to Sydbank A/S, the brewer saw a decline in western European volumes last quarter.

Jim Daniell, a Carlsberg spokesman, said the company wasn’t able to comment, citing its quiet period before publishing second-quarter results on Aug. 19.

Relative Returns

Since the beginning of May, Carlsberg’s 2.5 percent 1 billion-euro ($1.1 billion) 2024 bond has delivered investors an almost 2 percent loss. A 1.875 percent 1 billion-euro SABMiller Plc note due 2020 returned 0.35 percent over the same period. The spread between the Carlsberg bond’s yield and the implied government yield curve has widened to about 123 basis points from a 2015 low of 107 basis points on May 26. At one point in July, it was as wide as 138 basis points.

Moody’s Investors Service has a Baa2 grade with a negative outlook on Carlsberg Breweries A/S, the unit the Copenhagen-based beer maker uses for bond issuance. The rating company said on May 19, when the ruble was about 22 percent stronger than it is today, that the currency’s strength removed some of the pressure on Carlsberg. It also said the brewer was “weakly positioned” in its rating.

“The positive signs that Moody’s saw seem to be evaporating now,” Hellman said. “The event risk of a lower rating is, among other things, tied to a weaker ruble.”

Carlsberg said in January it would close two of 10 breweries in Russia, its biggest market. Before political turmoil and stricter beer regulation hit earnings, Russia had also been a key growth driver for the brewer. Carlsberg now generates about 25 percent of its operating profit from Russia, compared with a peak of about 50 percent in 2008.

“There’s also the other negative element of weaker demand from Russia and Ukraine caused by lower purchasing power,” Nordea’s Hellman said. “That problem would still be there even if the ruble were to strengthen very quickly.”

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