Bloomberg News

Rosneft Seeks Record Foreign Debt to Buy TNK-BP: Russia Credit

November 26, 2012

OAO Rosneft is raising the most debt ever by a Russian company to complete a $55 billion takeover of BP Plc (BP/)’s Russian oil venture, TNK-BP, and become the world’s largest publicly traded oil producer.

State-run Rosneft has commitments of about $30 billion from international banks, according to a company presentation. China National Petroleum Corp. borrowed a similar amount in 2009, the seventh-biggest outstanding corporate loan, data compiled by Bloomberg show. Rosneft also has registered as much as $10 billion of bonds.

Buying TNK-BP strengthens President Vladimir Putin’s control over output in the world’s biggest energy exporter. Rosneft’s borrowing costs will probably be higher than similar- rated OAO Gazprom because of surging debt and the risk of a credit downgrade, said Sergey Dergachev, a senior portfolio manager at Frankfurt-based Union Investment Privatfonds.

“We expect very high demand for Rosneft’s debt if it offers yields on the same level of Gazprom’s Eurobonds or a bit higher,” Dmitry Turmyshev, a senior fixed income analyst at BCS Investment Bank, said by phone Nov. 26. “Rosneft has solid credit metrics, which are based on close relations with the Russian government, and TNK-BP is one of the best cash- generating oil companies in Russia.”

Gazprom, Sberbank

Rosneft’s bond sale may be similar in amount to state-run Gazprom’s and OAO Sberbank’s debt issues this year, BCS’s Turmyshev said. Gazprom, Russia’s gas export monopoly, sold about $2.8 billion of euro-and dollar-denominated debt in July, while Sberbank, the state-run savings bank, sold $2 billion of 10-year bonds on October.

The oil producer may sell about $5 billion of the bonds this year and the other $5 billion next year, Union Investment Privatfonds’s Dergachev said.

Rosneft’s press service declined to comment on debt plans.

The premium on Rosneft bonds, which will have maturities of no more than 10 years, should be about 35 to 50 basis points over similar maturity Gazprom debt, Dergachev said. The yield on Gazprom’s July 2022 dollar bonds rose five basis points, or 0.05 percentage point, to 4.392 percent yesterday.

Rosneft’s bonds were ranked Baa1 by Moody’s Investors Service, its third-lowest investment grade level, and BBB by Fitch Ratings on Nov. 23, both with a negative outlook. The Russian government and Gazprom have the same ratings from Moody’s and Fitch, with stable outlooks.

Bond Proceeds

Proceeds from bond sales will be used to refinance some of the loans, two people with knowledge of the deal said Nov. 21, who asked not to be identified because the terms are private.

Rosneft said Nov. 22 it signed a binding agreement with BP to pay $17.1 billion in cash and a 12.8 percent stake in treasury stock for half of TNK-BP and is in “advanced negotiations” on a $28 billion cash deal to buy the other half from AAR, which represents BP’s billionaire partners.

“Once the deal closes, Rosneft will have a strategic partner in BP and good growth opportunities in TNK-BP,” Michael T. Workman, head of fixed income at Otkritie Financial Corp. in Moscow, said by e-mail on Nov. 26. “For bond investors, they will have another high-grade benchmark issuer outside Gazprom.”

The ruble closed little changed at 31.0350 per dollar in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 31.4865 per dollar in three months.

Extra Yield

The yield on Russia’s dollar bonds due in April 2020 fell one basis point to 2.582 percent. The yield on OFZ bonds due in June 2017 rose two basis points to 7.08 percent. The yield on Russia’s international ruble bond due in March 2018 dropped four basis points to 6.075 percent.

The extra yield investors demand to hold Russian government dollar bonds rather than U.S. Treasuries rose one basis point to 194, according to JPMorgan Chase & Co. indexes. The difference compares with 169 basis points for debt of similarly rated Mexico and 153 basis points for Brazil.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was unchanged at 147 according to data compiled by Bloomberg. The default swaps cost five basis points more than Turkey, which is rated one level lower at BBB- by Fitch. 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.

Overstretching Rosneft

To fund the acquisition, Rosneft may also use its own cash reserves, which combined with TNK-BP’s stood at $15 billion at the end of the third quarter, borrow from Russian banks, or tap a ruble-bond program, according to the company’s presentation. The oil producer sold about $640 million of 10-year ruble bonds, redeemable by investors in 2017, at par last month, paying interest of 8.6 percent, according to data compiled by Bloomberg.

“Concerns will be to make sure they are not overstretching themselves,” Maxim Tishin, who helps manage $1 billion of assets at UFG Asset Management in Moscow, said by e-mail. “They do not have much public debt outstanding, so the scarcity of high-grade names out of Russia works in their favor.”

To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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