Aberdeen’s Late-Night Call to Russia Leaves It Cold on Bond

  • Conversation with VTB failed to allay liquidity concerns
  • Bond is in ‘gray area’ because of lingering sanctions: Szabo

Europe’s third-largest publicly traded money manager balked at buying Russia’s first Eurobond under sanctions after it failed to get reassurance last night from the state-owned bank acting alone to sell the debt.

Viktor Szabo, who helps oversee $11 billion of emerging-market debt as a fund manager at Aberdeen Asset Management Plc, said a conversation with VTB Capital, the investment-banking arm of penalized state lender VTB Group, left him with “serious doubts” about how easy it will be to trade the bond.

Even if Russia succeeds in selling the debt domestically, rejection from big investors such as Aberdeen is a blow as the country tries to rebuild its reputation as a player on international markets after two years of isolation under U.S. and European sanctions. Szabo said his main concern is that the bonds won’t be eligible for major international clearing systems such as Euroclear Bank SA on which many foreign funds rely.

“We just aren’t sure whether this will be Euroclearable and if it’s not, then who will trade it?” Szabo said in an interview from London. “Will there be secondary-market liquidity? There are serious doubts.”

VTB Capital’s press department declined to comment about what it is doing to address investor concerns regarding the bond’s Euroclear eligibility.

The deal had attracted about $6.3 billion of bids as of mid-morning in London and will be priced later on Tuesday, according to a person familiar with the plans who wasn’t authorized to speak about it publicly. The Finance Ministry didn’t indicate how large the issue would be, but this year’s budget authorizes as much as $3 billion.

Most of the demand is probably coming from local Russian buyers, said Szabo, adding that he’s been cutting holdings in Russian sovereign dollar bonds and doesn’t see “value” in this issue. A spokesperson for Russian brokerage Aton Capital Group said their clients are participating, while money managers at Moscow-based UralSib Asset Management and Aricapital Asset Management and Sovcombank PJSC said they submitted bids.

Russia needs cash to finance its widest budget shortfall since 2010 after the collapse in oil, its biggest export earner, led it to drain reserves. Warnings from Washington to U.S. underwriters including Goldman Sachs Group Inc. stifled a first attempt in February at issuing the debt. The European Union later urged banks in its region to be “mindful” of breaching sanctions.

“We’ve had those statements discouraging the participation of U.S. banks,” Aberdeen’s Szabo said. “You’re in this gray area where it’s not really clear whether you should stick to it or you should really be more cautious and anticipate the desires of the regulators.” 

‘Cold Feet’

The bond prospectus said that there could be “no assurance” that the securities would be eligible for clearing systems such as Euroclear and Clearstream Banking SA. Instead, they will be settled on Russia’s own National Settlement Depository.

The local clearing “gives me cold feet,” said Ogeday Topcular, managing partner at Ram Capital in Geneva, who helps oversee $300 million in fixed-income assets. “I don’t want to deal with any regulatory issues in case we want to sell them later.”

Investors at Allianz Global Investors Europe GmbH in London and Frankfurt-based Union Investment Privatfonds GmbH echoed the concerns about settlement, saying they will not take part in the sale. Marco Ruijer, who oversees about $7 billion of emerging-market debt at NN Investment Partners, also said he won’t participate.

Hedge funds North Asset Management and Promeritum Investment Management LLP in London said they were interested in buying.

“The logistics imposed by the local clearing and the sole dealership of an officially sanctioned entity makes the proposition too challenging for us,” said Greg Saichin, who manages emerging-market bonds at Allianz in London.

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