ING to Ashmore See More Buybacks After Severstal: Russia CreditKsenia Galouchko
Russian companies will probably follow steelmaker OAO Severstal in buying back bonds to turn a slump in asset prices to their advantage by reducing debt, according to Ashmore Group Plc and ING Groep NV.
The nation’s second-largest steelmaker bought back $288 million, or 19 percent, of two short-dated Eurobonds, the company said in a May 14 statement. The price of the dollar note due October 2017, one of the securities repurchased, had fallen to 101.28 on April 28, from this year’s high of 107.88 in January, according to data compiled by Bloomberg.
President Vladimir Putin’s intervention in Ukraine at the start of March sparked a rout in company bonds as the prospect of sanctions curbed investor appetite for Russian assets. Cash-rich companies, including oil producer OAO Lukoil, OAO Sberbank, Russia’s biggest lender, and mobile operator OAO Mobile TeleSystems may follow Severstal’s lead, Egor Fedorov, senior credit analyst at ING in Moscow, wrote in an e-mailed report last week.
“It is quite reasonable to expect further buybacks,” Jan Dehn, the London-based head of research at Ashmore, which has about $70 billion in emerging-market assets under management, said by e-mail on May 16. “It is a great buying opportunity.”
Russian corporate bonds have handed investors a loss of 1.9 percent since Feb. 28, compared with a return of 2.9 percent for developing nations, according to data compiled by Bloomberg. Sberbank’s spokeswoman, who asked not to be identified because of company policy, said the lender isn’t planning a buyback.
Severstal offered premiums of 1 percent and 1.7 percent on the July 2016 and 2017 notes compared with their prices on May 14, according to ING’s Fedorov. The bonds have dropped more than 3 percent since the start of the year.
“Controlling the momentum of a move to lower prices is important as a signal to investors,” Jeremy Brewin, who helps oversee about $7.5 billion of bonds as the head of emerging-market debt at ING Investment Management in The Hague, said by e-mail on May 16. “They may also believe in a more positive outcome to current uncertainty in the Russia space than the market does.”
The buyback will cut Severstal’s cost of servicing its dollar debt, Irina Bobrysheva, the company’s head of treasury, said by e-mail, without providing details. Mobile TeleSystems’ press office declined to comment when contacted by e-mail, while Lukoil didn’t immediately reply to an e-mailed request.
OAO Mechel, Russia’s biggest producer of coal for steelmaking, has no funds available to buy bonds back from the market, Chief Financial Officer Stanislav Ploschenko said on a conference call May 15. The company, which won a one-year covenant holiday from its main lenders in December, has enough funds to cover 2014 interest payments, he said.
“Investments are extremely low, so companies accumulate funds,” Dmitry Dudkin, head of fixed-income research at UralSib Capital in Moscow, said in e-mailed comments on May 16. Buybacks are driven by “growing economic risks,” he said.
Russia’s first-quarter economic growth slowed to the weakest in a year as the standoff with the U.S. and its allies over Ukraine cut investments. Capital outflows in the first three months were the largest since the fourth quarter of 2008. The ruble strengthened 0.7 percent to 34.5245 per dollar by 6 p.m. in Moscow.
“It’s a tradeoff,” Ashmore’s Dehn said. “If the bonds do not cheapen enough and if the premium you have to pay to get investors to relinquish the bonds gets too high, then obviously there is no point. But that would also suggest that investors are not very bearish.”