Bloomberg News

Gazprom Seeking Short-Term Debt Amid Market Rout: Russia Credit

September 29, 2011

Sept. 29 (Bloomberg) -- OAO Gazprom is seeking to raise short-term funds outside Russia for the first time in almost a year after the worst month for emerging-market debt since 2008.

The world’s biggest natural-gas producer will meet investors in Switzerland from Oct. 3 and may sell dollar- denominated euro commercial paper, according to a person with knowledge of the plans. Moscow-based Gazprom’s July 2013 dollar bonds yielded 5.462 percent yesterday, the highest level and the most relative to Petroleo Brasileiro SA debt since June 2010, data compiled by Bloomberg show.

Gazprom is looking at shorter-term paper as concern the world is headed for recession sent average yields on corporate debt in developing nations up 82 basis points this month, the biggest jump since October 2008, according to JPMorgan Chase & Co.’s Corporate EMBI Index. The government canceled an auction of 10 billion rubles of four-year bonds this week, the second debt sale it’s pulled in a row, after yields soared to a record.

“Even though I like the company, I see more risk for deterioration of global growth conditions,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market debt at Union Investment Privatfonds in Frankfurt, said in e-mailed comments yesterday. Bonds like Gazprom’s “will be punished first across the curve, and it does not matter whether these names have strong fundamentals or not.”

New Debt

Dergachev said he cut back his holdings of Gazprom bonds this week, along with debt of OAO Sberbank, Russia’s biggest lender, partly because Finance Minister Alexei Kudrin’s dismissal on Sept. 26 raised concerns about a loosening of the country’s budget and monetary policy.

Gazprom is boosting its borrowing program this year by 67 percent more than planned after the company raised its 2011 investments by 56 percent while building pipelines in Russia’s Far East and to Europe, the biggest consumer of Gazprom gas. The producer aims to keep its debt to earnings before interest, taxes, depreciation and amortization ratio at about 0.8. The ratio for Rio de Janeiro-based Petrobras, Brazil’s state-run oil producer, was 1.1 in 2010, data compiled by Bloomberg show.

“One should borrow now because it may get worse later,” Petr Grishin, a senior credit analyst at VTB Capital, the investment banking arm of Russia’s second-largest lender, said by phone in Moscow. “Euro commercial paper will help them do so fast, easy and cheap.”

Negative Flow

Three-month Euribor -- the rate banks say that they pay for three-month loans in euros -- has remained above 1.5 percent this month, compared with an average 1.36 percent this year. One-week Euribor increased to 1.228 percent on yesterday, the highest level since Aug. 9, before falling to 1.220 percent.

Gazprom registered $4 billion of euro commercial paper two years ago, saying the funds would help the Moscow-based company manage short-term cash flows. A debut $600 million of three- month paper was sold at a 3.4 percent annual yield in September 2009.

While Gazprom had record earnings in the first quarter, the last time that it reported to international standards, its free cash flow swung to negative from 278 billion rubles ($8.8 billion) a year earlier as capital expenditures rose.

The increase in the investment program this year as well as rising mineral extraction taxes mean Gazprom is in need of financing now, said VTB Capital’s Grishin. The producer also faces a six-month delay in higher domestic fees, after the government pushed back an increase in regulated gas and transportation prices to July 1, he said.

Record Earnings

Gazprom’s 2013 bond yields narrowed today to 4.958 percent, trimming the increase since the beginning of August to 246 basis points, or 2.46 percentage points as of 3:00 p.m. in Moscow, data compiled by Bloomberg show. Similar-maturity notes of Petrobras, Brazil’s state-controlled oil company, yielded 2.9 percent today, up 134 basis points in the same period.

Officials at Gazprom’s press service declined to comment on the company’s borrowing plans when contacted by Bloomberg News. In June, Andrey Kruglov, the chief financial officer, said Gazprom has no “great need” to boost debt levels and “won’t borrow just for the sake of it.” The producer expects record earnings in 2011 as demand recovers from the global economic crisis and oil gains push gas prices higher, Chief Executive Officer Alexei Miller said in June.

Urals crude, Russia’s benchmark export blend, has slumped 16 percent from its 2011-high of $122.88 a barrel in northwest Europe in April. Oil is the country’s biggest revenue earner, and Urals traded at $103.16, below the $109 average level the government needs to balance its budget this year.

Weakening Ruble

The ruble weakened 0.8 percent to 32.0125 per dollar, after rebounding on Sept. 27 from its weakest level since August 2009. The currency has tumbled 18 percent from its strongest price in 2011. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest-rate differentials, showed the ruble at 32.5147 per dollar in three months.

Russia’s ruble notes due in August 2016 declined, sending the yield 5 basis points higher to 8.22 percent. The yield hit 8.74 percent on Sept. 26, the highest level since the notes were sold in August 2010. The yield on Russia’s ruble Eurobond due in 2018 was little changed at 8.187 percent. Russia’s dollar bonds due in 2020 climbed, pushing the yield two basis points lower to 5.144 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps added four basis points to 300 basis points, up from as low as 122 on April 6, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Yield Premium

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose two basis points to 396, according to JPMorgan EMBIG indexes. The difference compares with 260 for debt of Mexico -- rated the same level as Russia at Baa1 by Moody’s Investors Service, the third-lowest investment grade -- and 272 for Brazil, rated one step lower at Baa2 by Moody’s.

The yield spread on Russian bonds is 58 basis points below the average for emerging markets, down from a 15-month high of 105 in February 2010, according to JPMorgan Indexes.

Gazprom is raising investments to 1.28 trillion rubles as it builds domestic pipelines and the Nord Stream network, the company’s first direct link to Europe. The pipeline bypasses Ukraine, where pricing disputes have disrupted Gazprom’s winter supplies to Europe at least twice since 2006.

Cash Squeeze

Borrowing options at home declined this month with a surge in bond yields and a decline in funds available to banks. The central bank provided the biggest cash injection to lenders in two years on Sept. 16, and cut the interest rate charged on repurchase loans two days earlier in a bid to bolster money supply.

The three-month MosPrime rate, the average rate banks say they are charging to lend to each other, climbed to 6.66 percent on Sept. 27, the highest level since December 2009, data compiled by Bloomberg show. It has since declined to 16 basis points to 6.5 percent.

Gazprom has 300 billion rubles of bonds registered, and none of them were sold in the first half of the year, according to CFO Kruglov. Since Standard & Poor’s cut the U.S.’ top credit rating on Aug. 5, 15.7 billion rubles of debt has been sold in Russia, down 91 percent from the same period last year, according to data compiled by Bloomberg. That is the lowest amount sold in that period since 2007.

‘State Coffers’

The company may find it easier to borrow for shorter terms than to issue longer-maturity debt in the current market, said Sergei Goncharov, a fixed income analyst at Troika Dialog.

The $10 billion Nord Stream project is designed to carry 27.5 billion cubic meters (971 billion cubic feet) of gas a year under the Baltic Sea to Germany. Gazprom plans to double the amount of gas conveyed by the end of 2012.

“Nord Stream is a very good project, very much needed for our partners, for Gazprom, for the Russian economy,” Prime Minister Vladimir Putin said on Sept. 6, after the first gas was pumped into the link. “It’s a big, significant source of export revenue for the state coffers, for Gazprom’s earnings so it can develop its production.”

Oil and gas account for 17 percent of Russia’s gross domestic product, compared with less than 10 percent of Brazilian GDP, government data show. Energy sales contribute as much as 40 percent of budget revenue.

Arctic Yamal

Putin has pushed Gazprom at home to build gas distribution networks to help develop the economy of the Far East, which is closer to Beijing than Moscow, as well as pipelines to allow the development of the Arctic Yamal Peninsula, one of Russia’s biggest sources of untapped gas.

Including the projects from these regions, Russia may boost natural-gas output to 1 trillion cubic meters a year from about 650 billion cubic meters now, Putin said in October 2010, while discussing the country’s 20-year gas development program.

“Gazprom standalone credit quality is extremely strong and six-month risk could be very well placed,” Union Investment’s Dergachev said. “In Switzerland, commercial papers are very welcome.”

--With assistance from Hannah Benjamin in London, Jack Jordan in Moscow and Boris Korby in New York. Editors: Torrey Clark, Emma O’Brien, Gavin Serkin

To contact the reporters on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net; Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net


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