Sanctions-Free No Shield for Alfa in Wary Market: Russia Credit

OAO Alfa Bank risks paying the highest borrowing costs in at least seven years as the Russian lender unblemished by the toughest sanctions since the Cold War seeks to lure Eurobond investors wary of the nation’s debt.

No Russian issuer has braved the dollar or euro debt market for a major sale since the U.S. and European Union in July blocked lenders including OAO Sberbank and VTB Bank from accessing funds. Investors will demand that Alfa Bank pay a premium of 30 to 35 basis points above its existing curve, the most since at least 2007, to compensate for the risk that the Ukraine crisis will worsen, Jefferies International Ltd. said.

“The market’s not that open for Russian debt,” Richard Segal, the head of international credit strategy at Jefferies in London, said by phone yesterday. “Even though Alfa is not covered by sanctions, it still has banking relationships with banks that are, it probably has some exposure to Ukraine, and the Russian economy is weakening.”

The private bank whose main shareholder is billionaire Mikhail Fridman said this week it hired Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Merrill Lynch to raise at least $500 million next month. Its euro-denominated bond yield fell 60 basis points from an Aug. 8 high as investors pared bets that President Vladimir Putin will invade Ukraine, spurring the best rally in emerging markets for Russian company bonds.

Tougher Penalties

Alfa Bank ended a three-month freeze in Russian corporate Eurobond issuance during a downturn in Ukraine tension in June, raising 350 million euros ($464 million) of three-year notes at 5.5 percent. Sberbank and OAO Gazprombank followed with their own offerings in the first sales window after Putin’s March annexation of Crimea triggered a standoff with the U.S. and the initial rounds of sanctions for allegedly aiding pro-Russian separatists in Ukraine’s east.

Capital markets seized up again after new U.S. penalties on July 16 prevented Gazprombank and Vnesheconombank from accessing dollar financing beyond 90 days. EU governments agreed two weeks later to bar the largest state-owned lenders from selling shares and bonds in Europe.

Corporate offerings of euro- and dollar bonds since the Crimea incursion slid 70 percent from the same period last year, according to data compiled by Bloomberg.

U.S. Investors

Hiring U.S. banks to organize its sale was a “prudent approach” by Alfa Bank, Olga Budovnits, a credit analyst at Union Bancaire Privee in Zurich, which manages about $3.5 billion in emerging-market debt, said by e-mail Aug. 20. “Alfa isn’t under any sanction restrictions so it’s not a bad move for them to signal to investors that it’s business as usual.”

Sophie Ramsay, spokeswoman for Goldman in London, declined to comment on the mandate, as did JPMorgan’s London-based spokeswoman Elizabeth Seymour. A spokesperson for Bank of America-Merrill Lynch declined to comment.

Alfa Bank, which is seeking funding to finance organic growth, will assess its capital needs next month, its Chief Executive Officer Alexey Marey told reporters in Moscow on Aug. 19. The bank hopes to maintain the quality of its loan portfolio at current levels as Russia’s bad-loan situation worsens, he said.

“We think it’s realistic to be able to place subordinated Eurobonds now,” Marey said. “We will not necessarily look for this money only in the U.S., but we will no doubt target the U.S. to some extent.”

‘Good Interest’

The yield on the bank’s euro notes sold in June fell nine basis points to 5.59 percent yesterday amid a bond rally that gained momentum after Putin vowed Aug. 14 to “do all we can” to end the bloodshed in Ukraine. The rate was 5.55 percent at 1:06 p.m. in New York.

Russian members in the Bloomberg USD Emerging Market Corporate Bond Index have rallied 4.4 percent since Putin’s retaliatory food-import ban drove the average corporate yield to a three-month high on Aug. 8.

Alfa Bank will probably need to pay a premium of 50 to 60 basis points over its existing debt to attract buyers, according to Sergey Dergachev, who helps oversee $10 billion in emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt.

“I can imagine that Alfa Bank will find good interest in Asia, Switzerland, Europe and even the U.S.,” Dergachev said by e-mail on Aug. 20. “U.S. banks, if they see chances to generate attractive fees, will go for it as long as it is not a real sanctioned name they are prohibited doing business with.”

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