Bloomberg News

Putin Lures $24 Billion With Bond Yields Above Brazil

March 29, 2012

Russia lured $24 billion of bids for the biggest emerging-market sovereign bond sale since 2009 by offering yields closer to those of Turkey, rated four levels lower, than investment grade peers like Brazil and Mexico.

The government sold $7 billion of bonds coming due in five, 10 and 30 years on March 28. The yield on the longest-maturity bond, due in 2042 was priced to yield 5.798 percent, 96 basis points more than debt of similar maturity sold by Mexico and 117 basis points higher than Brazil’s. The yield was 28 basis points lower than Turkey’s 2041 bond.

Russia, the world’s largest energy exporter, obtains 50 percent of its government revenue and 17 percent of its gross domestic product from oil and gas. This makes it more exposed to swings in international commodity prices than Brazil, which has a more diversified economy with better long-term growth prospects, according to Viktor Szabo, who helps manage $7 billion in emerging-market debt at Aberdeen Asset Management.

“The whole Russian economy is skewed towards exporting commodities and in terms of fiscal balance it’s really a one-way bet on commodity prices,” Szabo said by phone yesterday in London. “Growth prospects are much better for Brazil and the ability to generate cash flow going ahead in 10, 20 years to pay down the debt is probably much better in Brazil.”

Aberdeen only bought the five-year bonds in the sale, Szabo said.

Bonds Climb

All three Eurobonds rose in their first day of trading yesterday, according to data compiled by Bloomberg. The yield on the $3 billion of bonds maturing in 2042 bonds fell 12 basis points to 5.68 percent, according to bid prices from HSBC Holdings Plc on Bloomberg. Yields on securities due in 2017 fell to 3.24 percent and 2022 bond yields slipped to 4.53 percent, HSBC data compiled by Bloomberg showed. The government sold $3 billion each of the five- and 10-year notes, priced to yield 3.325 percent and 4.591 percent, respectively.

Russia’s offering was the biggest among emerging markets since Qatar issued $7 billion of bonds in November 2009, with investors bidding for more than three times the amount sold.

“It was one of the largest order books that we’ve seen for a very long time,” Nick Darrant, head of debt syndicate for central and eastern Europe, the Middle East and Africa at BNP Paribas SA in London, which helped manage the deal. There was significant demand from central banks and sovereign wealth funds, “which I think is a sign of confidence in the stability of the Russian Federation going forward, which ties in with the strong demand on the 30 year,” he said.

Yield Spread

Investors bid for $11.5 billion of the 30-year paper, $6 billion of the 10-year and $6.5 billion of the government’s five-year notes, Andrey Solovyev, VTB Capital’s global head of debt capital markets, said by phone yesterday.

Russia last sold new dollar-denominated notes in April 2010 due in 2015 and 2020 at 125 basis points and 135 basis points over Treasuries, respectively. The yield spread on yesterday’s sale was 230 basis points for five-year notes and 240 basis points for 10-year debt, according to a banker with knowledge of the deal.

“A lot of U.S. investors didn’t participate last time because of the high pricing, but it’s better this time,” Solovyev said. “Definitely Russia was trying to restore its reputation as an investor-friendly issuer.”

The amount of demand for the 30-year debt opens the market for other borrowers to place similar-maturity bonds, Finance Minister Anton Siluanov said in an interview in New Delhi today. The last time Russia issued 30-year securities was in August 2000, two years after its $40 billion domestic debt default.

Meeting Target

The government has no plans to revise its $7 billion foreign borrowing target for this year after selling the maximum amount allowed, Siluanov said.

The yield on the 2042 bond compared with 4.842 percent for 2044 debt sold in March by Mexico, which, like Russia, is rated Baa1 by Moody’s Investors Service, the third-lowest investment grade. The yield on the dollar bond due in 2041 sold in 2009 by Brazil, which is rated one step lower at Baa2 by Moody’s, was 4.624 percent yesterday. The 2041 bond issued in January 2011 by Turkey, which is rated four levels lower at Ba2, yielded 6.073 percent.

Russia has a ratio of debt to gross domestic product of 12 percent, the lowest of any big emerging-market country, according to the International Monetary Fund. Brazil has a ratio of 65 percent while Mexico is at 43 percent and Turkey at 40 percent.

Economic Growth

Russia’s economy will expand by 3.3 percent this year, compared with 3 percent growth in Brazil and 3.5 percent in Mexico, according to the International Monetary Fund on Jan. 24. Turkey’s government expects its economy will expand by 4 percent this year.

The price of Russia’s benchmark Urals crude has climbed 13 percent this year. Russia is ranked as the world’s most corrupt major economy on Berlin-based Transparency International’s 2010 Corruption Perceptions Index released Oct. 26, behind Nigeria at 134th place and Brazil at 69th.

“Institutional structure in Russia is quite weak, the rule of law is quite weak, we know about corruption, so all that demands a much higher premium at this stage,” Yerlan Syzdykov, who helps manage about $2.7 billion in emerging-market and high- yield debt at Pioneer Investments in London, said in a phone interview yesterday. “Obviously it helps when oil is high, and Russia has a very low debt to GDP ratio, and I think if all things were equal, Russia should have had a much, much better rating and much tighter levels.”

Pioneer funds bought all three bonds, but mostly the 10- year debt, he said.

Ruble Weakens

The ruble lost 0.3 percent to 29.4900 per dollar by the close in Moscow yesterday. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest-rate differentials and allow companies to hedge against currency changes, showed the Russian currency at 29.8880 per dollar in three months at 8:20 p.m. in Moscow.

Russia’s dollar bonds due 2020 rose, lowering the yield three basis points to 4.009 percent. The yield on Russia’s ruble Eurobond maturing in 2018 was less than five basis points higher at 6.962 percent. The price of the country’s ruble notes due August 2016 declined, increasing the yield three basis points to 7.40 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps jumped six basis points to 186, down from last year’s peak of 338 on Oct. 4, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The swaps cost 45 basis points less than those for Turkey. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Default Risk

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose seven basis points to 279, according to JPMorgan EMBIG indexes. The difference compares with 187 for debt of Mexico and 182 for Brazil.

The yield spread on Russian bonds is 64 basis points below the average for emerging markets, up from a 10-month low of 32 on Oct. 4, according to JPMorgan Chase & Co. indexes.

OAO Russian Railways, the state-owned oil monopoly started selling a benchmark-sized 10-year dollar bond yesterday. Other Russian companies may soon follow in the wake of the government and issue debt, including a longer-dated security from state gas monopoly OAO Gazprom to fund capital expenditures, according to Aviva Investors in London, which bought the sovereign 2042 bond.

“We now expect a lot of Russian corporates to come to the market before the end of the year,” Jeremy Brewin, who oversees about $4 billion of emerging-market debt at Aviva, said by telephone yesterday. “The Russian space is going to get a lot bigger.”

To contact the reporters on this story: Jason Webb in London at jwebb25@bloomberg.net; Jack Jordan in Moscow at jjordan22@bloomberg.net.

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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