- VTB Capital was sole arranger of the deal to sell 10-year debt
- First Eurobonds since 2013 placed at yield of 4.75 percent
Russia sold $1.75 billion of Eurobonds, marking its return to international debt markets even as U.S. and European Union sanctions remain.
The government placed the 10-year notes at a yield of 4.75 percent on Tuesday, according to Finance Minister Anton Siluanov. That compares with initial guidance of 4.65 percent to 4.90 percent, said a person with knowledge of the offering who wasn’t authorized to speak. VTB Capital, the investment-banking arm of penalized state lender VTB Group, was the sole arranger. The main buyers of the Eurobonds were investors from Great Britain, the head of the Finance Ministry’s debt department said.
“Despite unofficial pressure exerted on certain elements of the global financial-market infrastructure, demand from foreign investors of various regions showed a high level of trust in Russia as an issuer,” Siluanov said in an e-mailed statement.
The first Eurobond sale since 2013 helps the government plug a budget deficit that’s forecast to be the biggest in six years and marks a symbolic victory for President Vladimir Putin, who has sought to play down the impact of restrictions imposed for Russia’s role in stoking the Ukraine crisis. While the funds raised in the sale won’t be channeled to blacklisted companies, there’s “no assurance” the bonds will be eligible for major international clearing systems on which many foreign funds rely, according to the prospectus.
“It is encouraging to see the first Eurobond issuance,” Paul Christopher, head of international strategy at Wells Fargo Investment Institute, said by phone from St. Louis, Missouri. “The sale may be an indication that foreign sanctions are less important for investors than a few years ago. But uncertainties persist longer term -- what is going to happen with the sanctions regime, how welcome will foreign investors be in Russia in the future?”
Investors bid about $7 billion for the bond and more than 70 percent was placed with foreign investors, Siluanov said in e-mailed comments. This year’s budget authorizes a sale of as much as $3 billion. The nation may potentially sell the remaining $1.25 billion of Eurobonds by the end of 2016, Konstantin Vyshkovsky, the head of the Finance Ministry’s debt department, said in an interview in Moscow.
“There wasn’t any real financial need to issue bonds,” Vyshkovsky said. “We sold them to confirm our presence in the market, as a long hiatus is bad for an issuer, to feel out investor sentiment and to understand our possibilities overall.”
Russia’s $3 billion of Eurobonds due 2023 gained, sending the yield three basis points lower to 4 percent. Existing Eurobonds have handed investors 6.6 percent this year amid a rebound in oil.
“Less than $2 billion is not a lot on a grand scheme of things,” Steve Hooker, managing director and portfolio manager at Newfleet Asset Management LLC said by phone. “The idea was that Russia wanted to say that it is making business as usual, but there are a lot of investors who are still skeptical.”
A main concern for Viktor Szabo at Aberdeen Asset Management Plc was that the bonds wouldn’t be eligible for major international clearing systems such as Euroclear Bank SA on which many foreign funds rely.
“We just aren’t sure whether this will be Euroclearable and if it’s not, then who will trade it?” said Szabo, who helps oversee $11 billion of emerging-market debt as a fund manager at Aberdeen Asset Management. “Will there be secondary-market liquidity? There are serious doubts.”
The sale comes after warnings from Washington to U.S. underwriters including Goldman Sachs Group Inc. stifled a first attempt in February at issuing the debt. The European Union later urged banks in its region to be “mindful” of breaching sanctions.
“We’ve had those statements discouraging the participation of U.S. banks,” Aberdeen’s Szabo said before the sale was priced. “You’re in this gray area where it’s not really clear whether you should stick to it or you should really be more cautious and anticipate the desires of the regulators.”