Yield Frenzy Blinds Investors to Risk of Sanctioned Russia Bonds

Updated on
  • Rosneft yields converge with Gazprom in Eurobond market
  • Penalized issuers face bigger hurdle as $82 billion comes due

Investors are so thirsty for yields, they’re paying little heed to sanctions in Russia.

The clamor for emerging-market risk has almost erased the premium investors demand on the Eurobonds of blacklisted companies relative to those not targeted by the U.S. and European Union over the conflict in Ukraine. The difference in yields on bonds Rosneft PJSC, which is sanctioned, and those of Gazprom PJSC, which isn’t, has shrunk to close to the levels that preceded the crisis that erupted in 2014.

"Investors have been so bullish on emerging-market credit, they don’t seem to differentiate the risk among Russian issuers,” said Yannick Naud, the head of fixed income at Bank Audi SAL’s Geneva-based unit, who recommends investors focus on bonds unaffected by penalties. “There is almost no spread differential anymore between sanctioned and non-sanctioned Russian companies."

The dwindling differentials show how easy-money policies of central banks are driving investors to take ever-greater risks as yields on almost $10 trillion of developed-market sovereign debt turn negative. Though markets may have priced out sanctions risk for now, the disadvantages of Russian companies barred from foreign capital compared with peers whose access is unfettered will become more obvious in 2017 and 2018, when $82 billion of foreign-currency denominated corporate debt comes due.

Refinancing Risks

That has made Naud wary of recommending the securities to clients. He prefers Eurobonds of GMK Norilsk Nickel PJSC and Severstal PJSC, issuers that are free of penalties. Egor Fedorov, a senior credit analyst in Moscow at ING Groep NV, said he looks at each company on a case-by-case basis and that Eurobonds of some sanctioned companies are attractive even if risks are greater.

Rosneft faces the nation’s biggest refinancing burden in Russia in 2017 and 2018 with $8.4 billion of maturities on foreign-currency bonds and loans, according to data compiled by Bloomberg. Russian corporate external debt has handed investors a return of 11 percent this year.

Bonds of the nation’s largest oil company due March 2022 yielded 4.31 percent Wednesday, close to a three-year low, after tumbling 224 basis points this year. That puts it within six basis points of the yield on Gazprom’s $1.3 billion note due the same month. Russian issuers benefited from the biggest monthly fund inflows into emerging markets ever recorded by EPFR Global in July, with the nation’s bonds attracting $681 million from foreign funds that month.

“While there’s still a sanctions premium, it’s come down due to market trends and not due to a change in the attitude toward these companies,” Fedorov said. “Everyone is buying emerging-market debt.”