VTB Scraps Ruble Sale as Crimea Erodes Demand: Russia Credit

Russia’s second-biggest state-controlled bank postponed a sale of ruble bonds as President Vladimir Putin’s seizure of Crimea eroded demand for the country’s corporate debt at home and abroad.

VTB Group put on hold a sale of 10 billion rubles ($281 million) of five-year bonds, citing “heightened volatility” and “low investor activity,” in an e-mail today. The planned coupon range of 8.5 percent to 8.75 percent compares with 7.6 percent on 20 billion rubles of 10-year bonds sold in October.

With about $3 billion of foreign-currency debt to refinance this year, the turmoil sparked by the Russia-Ukraine conflict means it’s unclear whether VTB will be able to raise funds in international markets, Chief Financial Officer Herbert Moos said on a conference call April 2. Ruble bonds have posted the worst performance in dollar terms among 31 countries in the Bloomberg Emerging Market Local Sovereign Index this year.

“The market is still shut for Russian borrowers, and it’s not just VTB’s fault, it’s the general situation,” Evgeny Kochemazov, head of fixed income at Alfa Capital in Moscow, said by e-mail today. “Opportunities for market placements are very limited at the moment, otherwise there needs to be a significant premium to the market or the placement won’t happen. The liquidity situation is far from good.”

Risk Premium

Putin’s decision to annex Crimea roiled markets, with the nation’s ruble bonds handing investors a loss of 9.2 percent year-to-date in dollar terms, compared with an average 1.5 percent gain for developing nations, according to Bloomberg Emerging Market Local Sovereign Indexes.

“The international capital market requires too much of a risk premium for the time being,” Alexander Losev, chief executive officer in Moscow at Sputnik Asset Management, said by e-mail yesterday. “It’s preferable for VTB to be increasing liabilities in rubles, not in dollars.”

Russian companies sold $6.3 billion of foreign-currency bonds this year, compared with $13.2 billion in the same period of 2013, data compiled by Bloomberg show.

Russia is in a Cold War-like situation with the U.S. and Europe and all of its banks could face the threat of sanctions, Andrey Kostin, VTB’s chief executive officer, said April 2. The bank is returning to the market with the largest ruble bond sale since OAO Rosneft, the nation’s biggest oil producer, sold 35 billion rubles of 10-year bonds in February.

Sberbank Plans

OAO Sberbank, the nation’s biggest lender, has sufficient liquidity and doesn’t plan to sell foreign-currency bonds in the “near future,” its Chief Financial Officer Alexander Morozov said on a conference call last week.

Moody’s Investors Service cut VTB’s financial strength outlook to negative from stable, citing a sharper-than-expected slowdown in the economy and a “worsening” investment climate, according to an e-mailed report April 1.

“The bank’s exposure to international financial markets is higher compared with its Russian peers and could come under pressure given the on-going volatility,” analysts led by Irakli Pipia said in the note.

The ruble advanced 0.3 percent against the dollar today, paring this year’s decline to 7.1 percent, the second-worst performance among 24 emerging market currencies tracked by Bloomberg.

VTB’s international operations accounted for about 25 percent of its assets at the end of last year, according to the Moody’s note. They include a unit in Ukraine with assets of $3 billion, or 1.2 percent of the group’s total assets, it said.

Sovereign Sale

The Finance Ministry, which canceled four auctions in a row before this week, sold 39 percent of the 10 billion rubles of bonds it offered at auctions on April 2. The ministry sold 5.5 billion rubles of May 2019 OFZ notes at a yield of 8.6 percent and 2.3 billion rubles of the August 2023 bonds at 8.9 percent, it said in a website statement on April 2.

The yield on government securities due August 2023 fell seven basis points to 8.85 percent as of 3:30 p.m. in Moscow today, bringing the increase this year to 103 basis points.

Russia, the banking system and the central bank should make it a goal to switch to using rubles in calculations with all trade partners, VTB’s CEO Kostin said April 2.

VTB’s planned ruble-bond issue is “partially political,” according to Alexander Krapivko, investment director at Promsvyaz Asset Management in Moscow, which manages about 17.9 billion rubles.

Raising Rates

VTB’s proposed coupon rate is higher than at the offering in October because “the refinancing rate has risen, the ruble has weakened and investors are demanding a premium because of the geopolitical and currency risks,” Krapivko said by phone yesterday.

Russia raised its main interest rate last month to 7 percent from 5.5 percent as the currency plunged amid concern the Ukraine conflict will escalate.

The coupon range of as much as 8.75 percent is “logical” because of the increase in the refinancing rate, Dmitry Postolenko, who manages about $110 million at Kapital Asset Management in Moscow, said by phone.

“For those who want to buy a large chunk of bonds by a first-tier borrower, this is a good opportunity,” Postolenko said by phone.

NATO leaders warned on April 2 that Russian forces are massed near Ukraine’s border in a high state of readiness and any incursion would be a “historic mistake.”

“Ruble local bonds are the cheapest funding option available to VTB at the moment,” Ivan Guminov, a money manager who oversees 20 billion rubles at Ronin Asset Management in Moscow, said in e-mailed comments yesterday. “In the international markets everybody is afraid of sanctions, so there’s no demand there.”

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