Rosneft Picks Ruble Bonds as Dollar Yields Climb: Russia Credit

OAO Rosneft is returning to ruble bonds as Russia’s largest oil company opts for local funding amid rising yields on international markets.

State-run Rosneft is offering 40 billion rubles ($1.3 billion) of bonds redeemable in five years at a yield of 8.00 percent to 8.16 percent next week, according to sale organizer ZAO Raiffeisenbank. The rate on its dollar bonds due March 2022 has increased 60 basis points in May, or more than twice as much as local-currency debt redeemable in the same month of 2018, according to data compiled by Bloomberg.

Rosneft became the world’s largest publicly traded oil producer by output, amassing $56 billion in net debt at the end of the first quarter after buying BP Plc’s Russia venture. While Russian companies had a record month for foreign-currency issuance in April, dollar yields have climbed this month on bets the U.S. will curtail stimulus.

“It’s easier to place rubles in tough times as you have the support from large government-owned banks,” Dmitry Dudkin, head of fixed-income research at UralSib Financial Corp. in Moscow, said yesterday by e-mail. They can use the securities as collateral in repurchase agreements with the central bank, which isn’t the case with Eurobonds, he said.

Lukoil Sale

OAO Lukoil issued $3 billion of bonds in April, its first international offering since 2010. Russia’s biggest non-state oil company led Russian companies to a record $13 billion of foreign-currency sales that month as they swooped on yields forced down by a Bank of Japan decision to pursue unprecedented stimulus.

Yields on 10-year U.S. Treasuries surged to the highest level since April 5, 2012 on May 29. U.S. Federal Reserve Chairman Ben S. Bernanke said last week the central bank could reduce the pace of its asset purchases if officials see signs of sustained improvement in growth.

Ruble debt allows the company to diversify borrowing sources, Moscow-based Rosneft’s press service said by e-mail on May 29.

Borrowing in the Russian currency and using cross-currency swaps to get dollars is 30 to 40 basis points less expensive than selling dollar debt, Anton Nikitin, an analyst at VTB Capital in Moscow, said by e-mail yesterday.

“Ruble bond yields and swap rates are such that borrowing rubles and swapping into dollars is quite cheap,” Maxim Tishin, who helps to manage $1.1 billion at UFG Asset Management in Moscow, said by e-mail on May 28.

Debt Payments

Rosneft has $6.6 billion in debt maturing this year after paying off $1.15 billion in the first quarter, the press service said today. The company is due to repay the equivalent of $15.6 billion next year and $15.9 billion in 2015, according to a presentation on its website. Earnings before interest, taxes, depreciation and amortization were about $4.9 billion in the first quarter, the document shows.

“Rosneft doesn’t have much pressure with cash,” Konstantin Nemnov, a portfolio manager at TKB BNP Paribas Investment Partners in St. Petersburg, said by e-mail yesterday.

The state-run company’s output of 4.17 million barrels a day of crude oil in the first quarter is 30 percent higher than 3.2 million barrels a day total April output from Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries, according to data compiled by Bloomberg.

Sovereign Yields

Rosneft is ranked BBB, the same as the government, at Fitch Ratings, the second-lowest investment-grade category. The yield on the country’s dollar bonds due April 2042 increased 51 basis points, or 0.51 percentage point, this month to 4.96 percent as of 12:33 p.m. in Moscow. The extra yield investors demand to hold Russia’s debt rather than U.S. Treasuries increased four basis points to 208, compared with 205 for Brazil, according to JPMorgan Chase & Co. indexes.

The cost of insuring Russia’s debt using credit default swaps was little changed at 155 basis points. The swaps cost 21 basis points more than Turkey, which is ranked one step lower by Fitch Ratings at BBB-. The contracts, which increase as perceptions of creditworthiness worsen, pay the buyer face value in exchange for underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreement.

Russia may sell as much as $7 billion of bonds in June, Deputy Finance Minister Sergei Storchak said on May 29 in Singapore. Rosneft may be waiting for the sovereign to issue before selling dollar debt itself, according to Kathleen Middlemiss, head of corporate credit research for Europe, the Middle East and Africa at UBS AG in London. With Treasury yields rising, means the company will wait before returning to international investors, she said.

“We’d expected Rosneft to issue in dollars since the start of the year,” Middlemiss said by e-mail. “Now it looks like that’s postponed.”

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