Bloomberg News

Linkers Luring State Companies as Inflation Slows: Russia Credit

April 17, 2012

A Russian state company is selling bonds with returns linked to inflation for the first time ever, as the rate falls to the lowest level since the collapse of communism two decades ago.

OAO Rusnano, which invests in technology-related ventures, sold 20 billion rubles ($674 million) of seven-year bonds with an 8.6 percent coupon, 250 basis points above the inflation rate last year, the company said in a regulatory filing yesterday. It compares with a 6.56 percent yield on inflation-linked six-year debt in reais of PDG Realty SA, Brazil’s biggest homebuilder by revenue, sold last month.

“We believe the regulator can contain inflation,” Oleg Kiselev, Rusnano’s deputy chief executive officer, said in an e- mailed response to questions on April 16. “The central bank has an inflation targeting policy, which gives it a free hand in meeting the inflation goal.”

The annual inflation rate fell to 3.7 percent in February and March after the government froze utility prices before the presidential election and the central bank limited supply of rubles to curb a rally. The rate dropped to 6.1 percent at the end of last year from 9.6 percent in January 2011.

OAO Russian Railways, the state-owned rail monopoly, may sell inflation-linked debt in May or June, Deputy Head of Corporate Finance Pavel Ilyichev said yesterday. Russia has 42 billion rubles of inflation-linked bonds outstanding, compared to about $135 billion in Brazil, according to Bloomberg data.

Inflation Policy

North-West Concession Co., a venture between France’s Vinci SA and Russian transportation billionaires, was the only Russian company selling linkers last year. The sale was priced to yield 11.15 percent in October, or 300 basis points above the annual inflation rate at that time.

Chairman Sergey Ignatiev has pledged to shift the central bank’s policy to target consumer price growth while allowing the ruble to trade more freely. The regulator expects to keep inflation between about 5 percent and 6 percent in 2012, and bring it as low as 4 percent by 2014, according to a three-year policy plan published in November.

The next coupon on the Rusnano bond, to be set in October, will be 250 basis points above the August annual inflation rate.

The company also chose to sell linkers because it provides longer-term funds for its project pipeline as well as attracting investors seeking protection from inflation risk, said Kiselev. Rusnano spent 36 billion rubles last year on 61 hi-tech projects and approved 38 new ventures, including Russia’s first production of flash memory cards.

Project Finance

“For our projects, we need long-term funds,” said Kiselev. “Investors are reluctant to lend money long-term for a fixed rate because of uncertainty about the interest rates in the future. Instead of paying a premium for this uncertainty, we are offering a comfortable instrument which is guaranteed to outpace inflation.”

Rusnano, formed last year from the restructuring of the state-run Russian Corporation of Nanotechnologies, is charged with developing Russia’s nanotechnology industry to help diversify the economy away from its dependency on oil and gas.

President Dmitry Medvedev named Anatoly Chubais, first deputy prime minister under Boris Yeltsin, as CEO in September 2008. Last year, the company borrowed on the capital markets for the first time in a bid to reduce its reliance on state funds.

“Inflation has decreased in Russia, and inflation-linked bonds became attractive for companies borrowing long-term,” said Yuri Golban, an analyst at Uralsib Capital in Moscow. “Still, there is a risk that inflation will increase in the future, boosting the rate the company should pay.”

Ruble Advances

The ruble gained 0.4 percent to 29.49 per dollar in Moscow yesterday. Non-deliverable forwards, which provide a guide to expectations of currency movements, show the ruble at 29.9516 per dollar in three months.

Russia’s dollar bonds due in 2020 rose, pushing the yield eight basis points lower to 3.916 percent. The price of ruble notes due August 2016 rose, reducing the yield three basis points to 7.43 percent. The yield on the ruble Eurobond due in 2018 fell two basis points to 7.079 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell three basis points to 199 basis points, down from last year’s peak of 338 on Oct. 4, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit Ratings

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.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell eight basis points to 288, according to JPMorgan EMBIG indexes. The difference compares with 194 for debt of similarly rated Mexico and 187 for Brazil, which is rated one step lower at Baa2 by Moody’s.

The yield spread on Russian bonds is 75 basis points below the average for emerging markets, up from a 10-month low of 32 on Oct. 4, according to JPMorgan Indexes.

Investor demand for Rusnano’s seven-year linkers exceeded supply by 45 percent, a spokesman said by e-mail yesterday.

“For many pension funds and managing companies the goal is to save their money from being burnt by inflation, and the instrument with a certain premium over inflation best suits their needs,” said Alexander Polyutov, an analyst at Nomos Bank in Moscow. “Rusnano needs long money for its projects, while in the current market it would’ve been difficult for the company to borrow for such a long maturity as seven years without linking its debt to inflation.”

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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