Euroclear’s Corporate Bond Debut Seen Struggling: Russia Credit

Russia will struggle to lure foreign investors to ruble corporate debt as the market prepares to open about a year after government bonds were offered to outside funds, according to ZAO Raiffeisenbank and OAO Gazprombank.

Investor preference for less risky sovereign securities and reduced flows from the Russian pension industry this year will result in a less liquid company bond market, said Denis Poryvay, an analyst at Raiffeisenbank in Moscow. Euroclear Bank SA plans to start settling foreign purchases of corporate and municipal debt on Jan. 30, it said today.

While domestically traded sovereign ruble bonds rallied in the run-up to last year’s market opening, company bonds are missing out on similar gains as U.S. stimulus cuts curb risk appetite and pension savings are channeled away from the market to pay current retirees. The yield on Russia’s February 2027 government securities climbed 102 basis points as of yesterday since Euroclear started on Feb. 7. That compares with an increase of 133 basis points for similarly rated Mexican debt.

“Foreign investor involvement has to reach some level, but the early flows will probably be gradual,” Richard Segal, chief of credit strategy at Jefferies International Ltd. in London, said by e-mail on Jan. 21. “I don’t expect tremendous demand” given existing risk aversion, he said. “I would expect foreign investors to focus on the largest corporate bonds.”

Sale Slump

Debt sales by companies may slump 15 percent this year, from a record 1.8 trillion rubles ($53 billion) in 2013, according to Sberbank CIB. The local market faces a reduction in cash for investment as about 580 billion rubles is directed away from private pension funds and state manager Vnesheconombank into the pay-as-you-go system this year.

The ruble has lost 5.7 percent against the dollar since May as the prospect of Federal Reserve stimulus cuts reduced demand for emerging-market assets. The currency gained 0.2 percent to 33.8825 as of 5:03 p.m. in Moscow today.

“Corporate bonds, even those with a sovereign rating, present credit risks,” Denis Poryvay, an analyst at Raiffeisenbank in Moscow, said by phone Jan. 20. “Plus this year asset managers won’t be getting a new injection of cash. It’ll be frozen, this is a problem for the corporate market.”

No Motivation

Overseas investors will no longer need to use local brokers for transactions with municipal and corporate bonds issued in 2012 and later, according to today’s joint statement by Euroclear and Russia’s National Settlement Depository.

The yield on the locally traded ruble bonds of mobile phone operator VimpelCom Ltd. was at 8.13 percent yesterday, 87 basis points below that of its February 2018 ruble Eurobond, data compiled by Bloomberg show.

“Local bonds trade at a lower yield than ruble eurobonds,” Poryvay said. “When foreigners receive access to this market, they won’t have motivation to buy them.”

Overseas investors increased their share of the government ruble-bond market as Russia prepared to make the debt available for settlement through Euroclear and Clearstream International SA. Foreign ownership was at 24.9 percent at the start of December, compared with 3.7 percent at the start of 2012, central bank data show.

Extra Yield

Russia is rated Baa1 at Moody’s Investors Service, the third-lowest investment grade. The yield on Russia’s April 2042 dollar bonds dropped two basis points, or 0.02 percentage point, to 5.54 percent today. The extra yield investors demand to hold Russia’s dollar debt over Treasuries dropped two basis points to 209, according to JPMorgan Chase & Co. indexes.

Barclays Plc elevated government ruble debt to its Global Aggregate Index after Euroclear and Clearstream began settlement of foreign purchases.

“There’ll definitely be increased interest although we’re not talking about such extensive growth of interest as we saw with OFZs,” Alexey Demkin, head of fixed-income research at Gazprombank in Moscow, said by e-mail on Jan. 20. “There are many other factors which might have a bigger impact on the corporate bond market and spreads than Euroclear.”

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