Resurgent Russian Eurobonds Beg Question When Will Sanctions End

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  • Norilsk Nickel sees excess demand of four times led by U.S.
  • Political risks may be diminishing following Ukraine talks

Stigmatized for more than a year by political sanctions, Russian Eurobond issuers broke through the ice this week, prompting investors to ask whether the penalties might be the next to go.

GMK Norilsk Nickel PJSC and Gazprom PJSC, Russia’s largest miner and energy company, had no problem raising $2.1 billion of Eurobonds. While neither company is sanctioned over the country’s involvement in the military conflict in eastern Ukraine, political risks that pushed up average borrowing costs by 200 basis points kept every big Russian company out of the market since November. Those risks may be diminishing, said Sascha Otto, head of asset management at Sparkasse Bremen.

“There are some signs in the market the European Union will ease sanctions,” said Otto, who oversees $800 million in multi-asset funds and holds the bonds of both Gazprom and Norilsk Nickel. “Maybe not in the short-term but medium-term I am quite sure. There will be some pressure from Germany to lift sanctions.”

The deals came to market a week after Russian President Vladimir Putin and his Western counterparts met in Paris and agreed to back a withdrawal of weapons in Ukraine, where a fragile cease-fire between pro-Russian rebels and government troops has held since February. Appetite also benefited from a rally in emerging-market assets as traders dialed back the timing of the first Federal Reserve rate increase in nine years.

“Investors are feeling sort of encouraged from an apparent easing of tensions in Ukraine,” said Giuliano Palumbo, a Milan-based money manager who helps oversee $3 billion in emerging-market debt for Arca SGR “This in turn could cause sanctions on Russia to be reduced or perhaps canceled.”

Bids for Norilsk Nickel’s $1 billion bond outstripped by four times the amount sold, with U.S. investors taking the largest share of 34 percent, according to a person familiar with the transaction who wasn’t authorized to speak publicly. The miner cut the proposed yield on the bond to 6.625 percent from initial guidance of about 7 percent.

The Eurobond market’s re-opening should be seen as investors chasing higher-yielding assets to offset Fed rate repression more than any detente with the West, according to Clemens Hansmann, a money manager in Vienna at Gutmann Kapitalanlage AG.

“It’s the overall sentiment on emerging markets that plays the key role,” Hansmann said. “It’s definitely a good window of opportunity” for Norilsk Nickel and Gazprom, he said.

The yield on Russia’s 10-year dollar debt dropped 78 basis points in the past month to 4.50 percent, the most among 10 emerging-markets tracked by Bloomberg . The nation’s corporate-bond yields fell to an average 7.78 percent from 7.85 percent at the start of the month, according to JPMorgan Chase & Co. index data.

Apart from market speculation, there are no official indications that the European Union will let sanctions lapse at the end of January. The U.S. and Europe slapped penalties on Russian companies including Rosneft OAO and Gazprombank OJSC after Putin annexed the Crimea peninsula in March 2014.

The sanctions have sent borrowing costs for Russian companies across the board to an average 8.7 percent over the past year, compared with 6.6 percent in the previous 12 months, according to JPMorgan indexes. Before this week, the last benchmark Eurobond sale from a Russian company was in November 2014, as sales shriveled from $42 billion in 2013, before the penalties were imposed, Bloomberg data show.

When Norilsk Nickel last tapped the market two years ago, raising $1 billion of notes due October 2020, it was at a lower yield of 5.55 percent, according to data compiled by Bloomberg. The yield on Gazprom’s new notes was at 4.58 percent on Friday.

“I am quite confident that Gazprom and Norilsk are quite nice investments,” Sparkasse Bremen’s Otto said. “When you look at the credit spreads, they are traded as if they were sanctioned. If sanctions are lifted, the premia will decrease.”