Muni Sales Surge in Push to Beat Pension Drought: Russia Credit
Cities and regions across Russia’s nine time zones are on track to sell the most bonds in four years, seeking to raise funds before an anticipated slump in pension-fund cash next year drives up borrowing costs.
Municipal debt sales have reached 128.8 billion rubles ($4.1 billion), 4 billion rubles more than for all of 2012 and the most since 2009, data compiled by Bloomberg show. Yield premiums over government bonds have dropped to 165 basis points from 203 basis points at the start of the year, according to UralSib Capital indexes.
Regions from Khakassia, about 4,800 kilometers (2,983 miles) east of Moscow in Siberia, to Stavropol in the South, are spurring yields from a month ago as they lure investors with higher returns before year-end. The municipal bond market may lose out as about 580 billion rubles are directed away from private pension funds and state manager VEB in a stopgap move by the government to pay current retirees, Goldman Sachs Group Inc. and Sberbank CIB said this month.
“Pension money always comprised a considerable part of the demand for sub-federal issues,” Ivan Guminov, who helps manage 14.5 billion rubles at Ronin Trust Management Company, said by e-mail yesterday. “There’ll be none from the beginning of the year.”
The sales by municipalities this year are more than eight times the 1.47 billion zloty ($485 million) of similar placements in Poland as of the end of September, according to Fitch Ratings data. Russian regions’ total outstanding debt was 1.4 trillion rubles as of Oct. 1, with about a third coming from Moscow government loans, according to a Finance Ministry presentation.
After his May 2012 inauguration, President Vladimir Putin ordered local authorities to raise wages for public-sector workers and increase spending on health care and education. That helped boost their deficit almost sixfold to 251 billion rubles in 2012 compared with 2008, Fitch said in July.
While the premium to government securities is lower than at the start of the year, the extra yield offered by regions has risen 20 basis points, or 0.20 percentage point, since Oct. 14, the UralSib indexes show.
“At the end of the year the regions need money,” Guminov said. “They’re ready to pay a premium.”
Investors sought almost double the 3 billion rubles of amortized five-year bonds sold by Mordovia in central Russia at a 9.25 coupon on Oct. 23. Khakassia set a 8.40 percent coupon on 3 billion rubles of seven-year amortized bonds yesterday, toward the top end of its 8.15 percent to 8.55 percent range. Smolensk Region sold 3 billion rubles of bonds with a 9.20 percent yield.
Seven more municipal placements are planned by year-end for a total 27 billion rubles, Alexey Bezrukavnikov, debt and capital markets director at Sberbank CIB, said by e-mail today.
The government has proposed barring non-state pension funds from getting new contributions in 2014 until they re-register as open joint-stock companies and are accepted into a new insurance program, while the earmarked money is channeled to distributions and the state pension fund.
The reduction may be offset by central bank interest-rate cuts and steps to open the local bond market to foreign investors, Dmitriy Turmyshev, deputy director of investment management at OAO Gazprombank in Moscow, said yesterday by e-mail.
Russia is encouraging overseas investors to buy its bonds by allowing non-residents direct settlement of sub-federal and corporate bonds through systems run by Euroclear Bank SA and Clearstream International SA. Clearstream started handling Russia’s municipal bonds on May 31, while Euroclear will probably begin in the first quarter of next year, Finance Minister Anton Siluanov said this month.
“The central bank will cut rates, Euroclear will come and we won’t notice this decline in demand,” Turmyshev said.
Foreign holdings of Russian government bonds advanced to 24.9 percent by Sept. 1 from 3.7 percent at the start of 2012, central bank data show. Foreigners gained direct access to the debt through Euroclear and Clearstream in the first quarter.
The yield on the nation’s dollar bonds maturing in March 2030 was little changed at 3.79 percent as of 11:52 a.m. in Moscow today. The extra yield investors demand to hold Russia’s dollar debt rather than Treasuries was unchanged at 213, according to JPMorgan Chase & Co. indexes. The country is rated Baa1 at Moody’s Investors Service, the third-lowest investment-grade.
Municipal issuers like Khakassia, rated two levels below investment grade at BB by Fitch, are popular with commercial banks who need to put aside less capital under central bank regulations to hold the notes than for companies’ bonds with the same rating, Leonid Ignatiev, the head of fixed income research at BCS Financial Group, said by e-mail.
“Essentially, they are equivalent to tier-1 corporates,” he said.
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