Putin Premium Returns Eurobond Sales to Pre-Sanctions LevelBy and
VTB sees pipeline building for fourth quarter and 2017
Near-zero Fed rates can help tackle $50 billion maturity wall
When Dmitry Mints, the chairman of Russian developer O1 Properties, visited New York to market Eurobonds last month, not one investor asked him about sanctions.
The company was among four borrowers including the government that made September the busiest month for global bond offerings out of Russia since June 2014, setting the stage for what UBS Group AG predicts will be a revival in sales that dried up when penalties were imposed over Vladimir Putin’s role in the Ukraine crisis the following month. For Mints, the timing couldn’t be better for a debut from a junk-rated issuer as investors looking to escape near-zero rates cast aside lingering political risks and a recession.
“Right now some investors see sanctions as an upside potential because if the sanctions are lifted, Russian assets will rally,” Mints said by phone from Moscow after his bond deal drew orders for double the amount tendered. "Although it’s impossible to catch the perfect moment, one should take advantage of positive market sentiment."
Appetite for the O1 Properties bond, which paid a yield of two percentage points more than the average for similarly rated notes in the developing world, shows that the stigma attached to Russian debt is quickly dissipating, allowing a little-known company to sell bonds for the first time. Sanctions continue to lock out borrowers like Rosneft PJSC, Russia’s biggest corporate debtor.
Along with O1 Properties, Russian Railways, Global Ports Investments Plc and the government collectively raised $2.5 billion in September as the Federal Reserve signaled a slower path to interest-rate increases, enhancing the appeal of higher-yielding emerging-market debt. That compares with zero sales in the same month last year, but an average of $4 billion per month in 2013. Russian Railways’ $500 million bond drew bids for eight times the amount on sale.
“We cracked the door slightly but it is not fully open yet," said Andrey Solovyev, the global head of debt capital markets VTB Capital in London, which was the sole manager of the sovereign’s $1.25 billion offering on Sept. 22, the day after the Fed kept rates on hold. “No one thought the market would be so active in the second half of the year. It will be even more so the next year."
While the crash diet of sanctions sent the average debt burden of Russian companies to the least in six years, winning back foreign investors before a wall of $50 billion of hard-currency maturities hits over the next two years is becoming more urgent. The penalties could last another three years, according to Bank of Russia Governor Elvira Nabiullina.
Tensions between Putin and his U.S. and European counterparts don’t diminish the ability of Russian companies to honor their debts, and might even be a bonus when it comes to yield negotiations between Russian borrowers and investors, according to Jan Dehn, head of research at London-based Ashmore Group Plc.
“The low popularity of Putin in the West creates a premium, which makes Russian debt broadly attractive,” Dehn said.
O1 Properties increased the size of its debut sale on Sept. 20 to $350 million from $300 million of five-year notes yielding 8.5 percent, compared with an average 6.4 percent for peers in a Bloomberg index of emerging-market company bonds. The bonds received ratings of B+ from S&P Global Ratings and B1 from Moody’s Investors Service, three steps lower than Russia’s government, which carries the highest non-investment grade.
“Investors didn’t ask about politics during any of the roadshow meetings,” said Mints. He attributes above-average yields to the fact that the sale was the first international foray for any Russian real-estate developer and the state of the nation’s economy, where growth isn’t forecast to return until 2017.
“It’s not an issue of sanctions or politics, but of the risk of doing business in Russia, the state of the real-estate sector in Russia during the crisis,” he said. “Investors were interested in our bonds but at a certain price. ”