Lawsuit Is a Buzz Kill to Yield Chasers Who Thought Russia Was Safe

  • Sistema bonds traded near record low before $1.9 billion case
  • Shock could push up Russian borrowing costs: Union Investment

Investors in Russia just a got a $1.9 billion reality check.

Dollar bonds of Russian billionaire Vladimir Evtushenkov’s Sistema PJSC traded with a record-low yield the day state-run oil producer Rosneft PJSC filed a legal claim for that amount against it. The news triggered a correction of 150 basis points, sending yields to the highest level in 11 months.

Investors seeking refuge from near-zero rates in developed markets have been willing to accept lower and lower yields from Russian companies, whose bonds are considered some of the safest in emerging markets. The lawsuit against Sistema is a reminder of the risks, according to to analysts at Citigroup Inc., and the company could become the focus of an ownership struggle if Russia’s recent corporate history is any guide.

The shock from the court claim against Sistema, which is equivalent to 75 percent of the company’s market capitalization, could push up borrowing costs for Russian issuers by 15 to 20 basis points, according to Sergey Dergachev, who helps oversee about $14 billion in assets as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt. Yields on Russian corporate dollar bonds dropped to a record 3.56 percent on April 28, Bank of America Merrill Lynch indexes show.

“This news should hopefully lead to some incremental increase and offering in new issue premia compensating for Russia risk,” Dergachev said by email. “The latest issues have been priced relatively tight.”

Investors in a debut dollar bond sale by United Co. Rusal in January submitted bids for double the amount of debt on offer, allowing the aluminum producer to price the debt at 5.125 percent, below an initial target of about 5.375 percent. Non-state lenders came to the market in March and April, with Alfa Bank and Credit Bank of Moscow both selling bonds at levels lower than their price targets.

The high demand from foreign buyers coupled with a dearth of supply from many government-run borrowers still barred from international markets by sanctions has meant that Russian companies have been able to “get away with a lot of issuance at more expensive levels,” Yerlan Syzdykov, head of emerging-market debt at Pioneer Investment Management said in an interview last week.

Rosneft, which is headed by President Vladimir Putin’s ally Igor Sechin, now controls Bashneft after buying the state’s more than 50 percent shareholding in October. The new claim covers alleged damage to Bashneft incurred when Sistema owned it, according to the Kommersant daily.

Sistema ceded its Bashneft PJSC oil unit to the state in 2014 in a case targeting its previous privatization, and Evtushenkov was subsequently cleared of money laundering charges.

“This development is significant not only due to the amount, but also due to the historical context,” analysts at Citigroup including Dalibor Vavruska said in an e-mailed note to clients. “Similar claims against large companies have often been linked to broader agendas including change of control in assets.”

— With assistance by Olga Voitova, and Lyubov Pronina

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