Billionaire Galitskiy Bonds Fuel Magnit Expansion: Russia Credit

OAO Magnit is selling its first bonds in five months to help billionaire Sergey Galitskiy’s food retailer add to the record 1,575 stores opened in Russia last year.

Magnit is offering 5 billion rubles ($166 million) of three-year securities at a yield of 8.78 percent to 8.99 percent, sale organizer Sberbank CIB said on Feb. 15. The yield on Magnit ruble notes due in September 2015 has fallen 19 basis points this year to 8.64 percent, compared with a 13 basis-point increase for higher-rated French retailer Carrefour SA on 600 million euros ($775 million) of notes in September that year.

Russia’s largest retailer by market value is spending as much as $1.8 billion this year to compete against X5 Retail Group NV and OAO Dixy Group. While retail sales in the euro area contracted in December, they jumped 5 percent in Russia, exceeding analysts’ expectations.

“Magnit is seen as a high-quality issuer by the Russian investors despite its non-investment grade,” Ilya Mozgovoy, who helps oversee about $1 billion of debt at Allianz Investments in Moscow, said by phone yesterday. “We’ll consider participating in the issuance. We’re very pleased with Magnit’s management and rapid growth.”

The company, based in the southern Russian city of Krasnodar, is rated BB-, three steps below investment-grade status and the highest in Russia’s retail industry, by Standard & Poor’s. X5 Retail Group NV, billionaire Mikhail Fridman’s grocery chain and Russia’s biggest by revenue, is ranked one step lower at B+.

Expansion Plans

Magnit said last month that it plans to open at least 1,410 stores, as well as four distribution centers. Revenue increased 34 percent last year compared with an 8.3 percent advance for X5.

Magnit may overtake X5 by revenue this year to become Russia’s biggest retailer, according to Nadezhda Bozhenko, an analyst at UralSib Capital in Moscow. Proceeds from the bond sale will probably go toward capital spending, she said.

“This is the only Russian retailer that is growing at a fast pace without endangering its healthy debt load,” she said yesterday by phone. A “large circle of investors” would want to buy the bonds, she said.

Timothy Post, head of investor relations at Magnit, declined to comment by phone.

Ruble Rate

The ruble was steady at 30.11 versus the dollar by 7:08 p.m. in Moscow.

The country’s dollar bonds due in April 2042 were unchanged, with the yield at 4.605 percent today. The rate on domestically traded government ruble bonds due in June 2017 fell three basis points to 6.17 percent. The yield on Russia’s ruble Eurobond due in 2018 rose four basis points to 5.907 percent.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries lost one basis points to 179, according to JPMorgan Chase & Co. indexes. The difference compares with 166 for debt of similarly-rated Mexico and 156 for Brazil.

Cost Protection

The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose two basis points to 144 basis points, according to data compiled by Bloomberg. The swaps, whose prices increase when investor sentiment worsens, cost nine basis points more than Turkey, which is rated one step lower by Fitch at BBB-. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

O’Key Group SA, whose stock is traded in London and is ranked B+ at Fitch, was the last Russian retailer to sell ruble bonds, issuing 3 billion rubles of securities in December. Lenta LLC, a hypermarket operator that is now part-owned by TPG Capital and VTB Capital after a shareholder feud, plans to offer 4 billion rubles of debut notes between Feb. 25 and March 1.

With its store openings last year and increased revenue, Magnit produced “impressive” financial results, according to OAO Nomos Bank in Moscow. The new bond issue will be interesting at the lower end of guidance, the bank said in a research note yesterday.

“Investors are likely to show heightened demand for Magnit’s bonds,” Nomos said.

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