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Bank of Moscow: Fixed Income Daily Report

Local market

Decline amid low activity

The situation to deteriorate next week

Fixed Income Strategy

Money market: excess liquidity doesn''t solve long-term issues

Global markets

Retail sales and G20 meeting in the spotlight

Henry Paulson adjusts the anti-crisis plan

Paulson plan adjusted

Japan supports IMF and UST

The situation with credit risks is contradictory

Corporate news

ТМК, Evraz and Х5 Retail Group to get VTB credits

Government to spend 83 bln. rub. for living estate buyout

Fitch downgrades PIK Group by 5 notches

The Ministry for transportation supports Aeroflot - S7 merger

Sistema to manage Bashkir energy assets

Fixed Income Statistics

Bank of Moscow Bond Indices (BMBI)

http://www.mmbank.ru/content/files/FI_Statistics.pdf http://www.mmbank.ru/content/files/FI_Statistics.pdf

http://www.mmbank.ru/content/files/BMBI.zip

News Flash

Key news

n RZD will issue 30 bln. rub. in bonds before the end-November. The company is going to place bond issue 09 for 15 bln. rub. 19 November and 15 bln. rub. more 25-28 November./ Prime-TASS

Defaults

n Nikoschem-Invest declared a technical default for the second bond issue failing to pay 31.9 mln. rub. coupon for the 1.5 bln. rub. issue. / Reuters

Economy

n VTB, a system-forming bank, will continue to support liquidity at the interbank credit market. / AK&M

n Seventh Continent 12 November entered a credit agreement with Rosbank. The latter will provide a $150 mln. credit line at 15 % per annum. The credit line expires 1 February 2010./ AK&M

n Mirax plans to register a new 3.0 bln. rub. bond issue in December 2008./ Reuters

Credit ratings

n Moody''s has confirmed the rating of RosEurobank (B1) with the stable outlook. / Moody''s

Puts/coupons

n Financial Company NC has passed the put option for the debut issue buying back 498.36 mln. rub. Taking into account earlier buyouts, the issuer has thus redeemed the whole 1.0 bln. rub. issue / Cbonds

Global markets

n One of the founders of Carlyle Group David Rubinstein recommends to invest into own debt, Asian companies and American financial names. / REUTERS

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BM__Toc214438246BM__Toc214438100BM__Toc214436379BM__Toc214436326Decline amid low activity

On Thursday, the activity at the ruble bond market was low with the majority of 10 turnover leaders closing down. Very few names can be characterized liquid. Gazprom-А4 maturing in February 2010 lost 0.04 % yielding 10.21 % (+5 bps) VTB-05 with put in April 2009 fell 0.49 % while the yield rose 133 bps to 15.35 %. The long Lukoil-04 maturing in December 2013 lost 3.69 %, returning 15.82 % (+104 bps). We didn''t see any reaction to the news about the planned new issue of RZD in the outstanding instruments. Very few participants seem to believe that the placement will be marketable, although RZD representatives believe otherwise.

BM__Toc214438247BM__Toc214438101BM__Toc214436381BM__Toc214436328The situation to deteriorate next week

At the beginning of the next week the situation may further deteriorate. On Monday companies will have to pay half of the excise taxes and advance social tax payments as well as insurance premiums. This will be the first tax payment at the background of elevated rates. The rate for overnight direct REPO at the open market has been lifted from 7 % to 8 %. CBR has not yet announced new auctions of unsecured credits. It is possible that the auction limits will be lifted in order to facilitate the situation for banks. We also don''t rule out that the ceiling of currency swaps volume may be lifted as well. In late October, this ceiling saw one-off increase from 10 to 150 bln. rub.

Natalia Kovaleva

BM__Toc214438248BM__Toc214438102BM__Toc214436382BM__Toc214436329Fixed Income Strategy

BM__Toc214438249BM__Toc214438103BM__Toc214436383BM__Toc214436330Money market: excess liquidity doesn''t solve long-term issues

Sources: Bloomberg

The situation at the money market calmed down after Wednesday''s woes - overnight interbank rates fell to 6-8 %. The volume of direct REPO stood at 152.26 bln. rub, unchanged from Wednesday''s level.

We point out higher deficit of longer-term liquidity (3+ months) at the internal market.

While the deficit of short-term liquidity is being overcome, it is not true for the longer terms. The 3M. Mosprime rate reached 19.2 % today.

The situation at the internal debt market differs from the overseas market significantly. After massive liquidity injections and aggressive central bank rate cuts 3M and 12M rates went down (for example, USD LIBOR), while in Russia it didn''t happen.

We see three possible explanations for this:

1) Expectations of further CBR rate rise or ruble depreciation;

2) Dramatic deficit of funds at the money market for 3+ months;

3) High implied rates for RUB/USD non-deliverable forwards, pricing in expectations of further ruble depreciation.

In view of the government''s rhetoric on the ruble policy, we can expect sharp rise of short-term rates in the future.

The problems of the money market are reflected in the OFZ curve, where instruments shorter than 2.5 years reached 10 % while risks higher than 2,5 years are returning less than 9.0 %. We think that higher money market rates may lead to growth of yields at the longer end of OFZ curve which can negatively affect the whole debt market.

The rates growth corresponds to the general CBR stance. The chairman of CBR has said that amid the capital outflows nominal rates must cover the inflation level. Since then, CBR has raised deposit rates twice (by 50 bps each time) and one time - the base rates for REPO, currency swaps, etc.

Egor Fedorov, Natalia Kovaleva

Source: MICEX, CBR, BM estimates

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BM__Toc214438251BM__Toc214438105BM__Toc214436386BM__Toc214436333Retail sales and G20 meeting in the spotlight

The yields of US Treasuries rose substantially yesterday: the 10-year notes are yielding 3.82 %, after 3.67 % Thursday morning. The key reasons for this are low demand at yesterdays auction for 30-year UST placement and the growth of American stock market - the spike of yields occurred after US trading opened.

Yesterday''s weekly US unemployment data were very disappointing yesterday. The number of initial jobless claims was the highest since September 2001. The main set of data for today is the retail sales report, which is unlikely to provide any reasons for optimism as well. The 2-day G20 summit starting in Washington today may add some bright colors to the general gloomy picture if the participants manage to come up with any effective anti-crisis proposals.

The moods at the Emerging markets were modestly optimistic yesterday. The spreads of EMBI+ indices continued to grow. EMBI+ widened 17 bps on the day while EMBI+ Russia spread added 19 bps. However, these movements are far from the records set 2 weeks ago, when the daily rise of spreads reached 50-60 bps. After over-optimistic US session we are seeing narrowing of spreads. Russia`30 bonds are yielding around 10.7 % in the morning.

Natalia Kovaleva

BM__Toc214438252BM__Toc214438106BM__Toc214436387BM__Toc214436334Henry Paulson adjusts the anti-crisis plan

Global bank''s credit default swaps decrease

...along with key US corporates

...except auto makers

This week we concerned several key developments on global credit and debt markets

1) The Secretary of Treasury Henry Paulson has adjusted, if not dropped, the initial anti-crisis plan. The budget money will be used to support the financial sector;

2) Japan will help IMF by extending a $100 bln. credit for support to EM countries.

3) The Treasury attracts stable demand for new state debt, but investors are concerned with the possible increase of supply in 2009 which can exert pressure on mid- and long-term bond prices;

4) The situation at the credit market and in the high-yield segment is contradictory. CDS of global banks are on the decline while risks of car-makers are still high.

BM__Toc214438253BM__Toc214438107BM__Toc214436388BM__Toc214436335Paulson plan adjusted

Henry Paulson yesterday provoked a wave of criticism changing the initial Treasury''s anti-crisis plan. The main aim of Troubled Assets Relief Program consisted in buyout of problem assets. Now all $700 bln. will be spent to directly support credit organizations. Paulson said that he is not sorry about the change of the concept due to changed circumstances. It is difficult to fairly evaluate the problem assets while their buyout may take a long time while financial organizations need funds right now - this is the main rationale behind the strategy change. The Treasury will receive final applications from small regional banks for the first trench of the support program ($250 bln.) today. More than a half of the first trench was distributed among 9 large financial names including AIG. The latter has received $40 bln. in addition to $112.5 bln. from the Fed. The volume of state support to AIG is impressive. The Treasury seems to consider direct support a more effective measure that problem assets buyout.

BM__Toc214438254BM__Toc214438108BM__Toc214436389BM__Toc214436336BM__Toc21434 5649BM__Toc214345342BM__Toc214345312BM__Toc214345169BM__Toc214344421BM__Toc2 14344406Japan supports IMF and UST

Japan will support IMF by extending a $ 100 bln. credit if additional support to EM countries is needed. Tokyo calls on other countries to follow suit. The news is important for the debt markets as in order to credit IMF Japan will have to sell UST, which will affect their prices. In order to eliminate the negative effect, Japan will lend not cash but UST, which would be used by the fund to finance its programs. This confirms the fact that main holders of UST are interested in stability of the market.

Foreign central banks support demand for UST

Yesterday US Treasury placed a new issue of 10-year notes totaling $ 20 bln. The demand was 2.2 times higher than the supply, which is less than the average kevel. However, Reuters reports a rather high share of indirect bids, which include applications from foreign central banks and global funds.

UST yields are still volatile. The range of yield oscillations of 10-year notes yesterday was 10 bps. At present, the yield of UST-10 is 3.7 %. The prices of long-term UST will be under pressure as the Treasury will increase the borrowing program to finance the second trench of TARP and the budget deficit.

BM__Toc214438255BM__Toc214438109BM__Toc214436390BM__Toc214436337The situation with credit risks is contradictory

We note a positive trend of lower credit risk premium for financial companies and several large real-sector companies (in terms of CDS of Boeing and Home Depot), while the largest car-makers still bear high risk of bankruptcy. The Big Three is unlikely to be covered by the financial companies support program. The hints of Paulson about car-makers mean that GM or Ford are more likely to become banking structures than to get Treasury funds for restructuring. Car-making companies bear the biggest threat to the economy as their bankruptcy may lead to a chain reaction.

Egor Fedorov

BM__Toc214438256BM__Toc214438110BM__Toc214436391BM__Toc214436338BM__Toc21288 8308BM__Toc212888249BM__Toc212883782BM__Toc212883671BM__Toc212883593BM__Toc2 12883580BM__Toc212883569BM__Toc212626648BM__Toc212626468BM__Toc212625828BM__ Toc212625772BM__Toc212624818BM__Toc212624777Corporate news

BM__Toc214438257BM__Toc214438111BM__Toc214436392ТМК, Evraz and Х5 Retail Group to get VTB credits

Media reported yesterday about VTB credits to 3 companies:

* VTB approved allocation of a 7 bln. rub. credit line to Х5 Retail Group; * VTB will provide 7 bln. rub. in credits to TMK. The TMK''s production units will get 5,5 bln. rub. for 1 year while 1,5 bln. rub. will be allocated to the parent holding; * Evraz Group will get 10 bln. rub. Nizny Tagil and West-Siberia metal plants will get 5 bln. rub. each for 1 year.

We think that the new credits will influence the credibility of the companies to a modest extent. According to borrowers'' comments, the funds will be used to replenish the working capital, which has been under pressure both for metal plants (delays in payments), and the retailers (not all suppliers agree to extend the terms of trade credits). Thus the VTB credits will have only limited influence on refinancing opportunities. For example, Evraz is going to use the funds to pay 4Q taxes.

As for the refinancing risks of X5, they seem to us lower than average. The latest trade in the company''s bonds was executed at 70 % of the par which translates into the yield of 35 %. The high duration (1.5 years) prevents us from issuing a buy recommendation.

Short ruble issue ТМК-2 (22 %) are unattractive compared to TMK 2009 eurobond, whose yield is a 3-digit (!) figure. The reasons for the negative bond dynamics lie in weak IFRS results (see our Daily report of 7 November 2008).

The short Evraz 2009 eurobond (27%) is not attractive to us.

Leonid Ignatyev

BM__Toc214438258BM__Toc214438112BM__Toc214436393BM__Toc214436339Government to spend 83 bln. rub. for living estate buyout

Ministry for regional development decided to allocate 32.6 bln. rub. to purchase homes for military servicemen in 2008-2009. The funds will be allotted by MRD and the Defense ministry. The Housing and Utility Reform Fund will allocate another 50 bln. rub. to buy newly built living space with 15 bln. rub. to be allotted within 2008, Vedomosti and Kommersant reported yesterday.

At present, direct buyouts of living estate by the government is the primary source of cash flows for living estate developers, even though such model will likely lead to lower operating margins (see our daily report of 16 October). We think that the sharp decline of consumer demand for homes, lower mortgage credits, higher refinancing risks of construction companies and slowing market make selling homes to state at artificially lowered prices less of a problem compared to the possibility of full stop of work and therefore bankruptcy.

On the other hand, the allocated funds (around 83 bln. rub. in total) together with higher AHML limits of mortgage buyouts from banks (60 bln. rub.), are insufficient to support developers on the national scale. The Moscow city government has allocated almost $ 1 bln. for one-off purchase of 341 thousand sq. m. of living estate in Moscow while the total volume of unfinished construction in regions is estimated by the Ministry for economic development at 78 mln. sq. m.

Despite the modest size of the buyout program, we appreciate the first steps in this direction. It''s been less than a month since this issue was brought forth in the government, and there are already concrete results. However, we think that restoration of AHML mortgage program is a more important issue. First, the volume of funds within the program is much bigger - 620 bln. rub. and second, the program is a more market-oriented, as the final price of the estate would be defined by end consumers, not the state. Our recommendations on the construction companies'' bonds are included into our Daily report of 16 October and in the November strategy. They haven''t been changed since then.

Leonid Ignatyev

BM__Toc214438259BM__Toc214438113BM__Toc214436394BM__Toc214436340BM__Toc21434 5655BM__Toc214345348BM__Toc214345318BM__Toc214345175Fitch downgrades PIK Group by 5 notches

According to Kommersant, PIK Group has withdrawn its claim to FAS whereby it disputed the Moscow city government''s demand of additional 12-17 % discount to estate purchase agreement. Earlier, the company has agreed to sell to Moscow government 350 000 sq. m. of living estate for 80 000 rub. per sq. m. The papers reported that the company submitted to the city government a renewed offer providing for a 25 % discount, or less that 60 000 rub. per sq. m. According to Vedomosti citing PIK representatives, part of the estate will be sold at the open market. We think that the variant of selling the homes to the city government is a more preferable variant for the company.

On the ratings front, Fitch on Wednesday downgraded PIK from ВВ- to ССС citing high refinancing risks. We think that PIK willingness to cooperate with the city government may make Fitch to soften its stance.

Leonid Ignatyev

BM__Toc214438260BM__Toc214438114BM__Toc214436395BM__Toc214436341The Ministry for transportation supports Aeroflot - S7 merger

Interfax reported Wednesday that the Ministry for transportation supports the idea of Aeroflot about transferring to the latter the state''s share (25.5 %) in Siberia airline operating under S7 brand.

The ministry''s decision may be treated as support to Aeroflot''s strategic goal of merger with the second largest airline in Russia. The possible merger would be positive both for Aeroflot and S7 in terms of market positions, operating profile and creditworthiness. We think that chances for the merger have increased after the Minister for transportation Igor Levitin became the Aeroflot''s board chairman.

The bonds of Siberia airline are trading at 87 % price with put in February 2009.

Leonid Ignatyev

BM__Toc214438261BM__Toc214438115BM__Toc214436396BM__Toc214436342Sistema to manage Bashkir energy assets

Yesterday Sistema signed the agreement to manage Bashkir energy assets. According to the paper''s sources, the holding may purchase the assets going on.

Until 2006, had been controlled by Bashkir capital. At the moment, the former owners of assets are under criminal investigation the assets are arrested.

In 2005 and 2006, Sistema bought blocking stakes in 6 energy enterprises for $ 600 mln. The purchase was considered to be aimed at subsequent resale. However, Sistema chose to hold the assets even after their price went up several times. Since the beginning of the year, the aggregate value of the enterprises fell 70 % to $ 2.6 bln.

On the one hand, sistema has a unique opportunity to purchase half of the Bashkir energy complex and increase the total stake to over 75 % at the 2-year old price. On the other hand, complicated financial position of the holding and falling oil prices may make the deal negative for Sistema''s shareholders.

Our equity analysts think that the deal may prove positive for Sistema if it manages to increase its stake to 75 % at the price not higher that $ 1.2 bln. From the credit point of view, it would be very difficult for the holding to find such a big sum.

The yield of Sistema 2011 bonds has approached 35%. Although the yield of MTS eurobonds is substantially lower, Sistema is not attractive to us.

Leonid Ignatiev

/Банк Москвы/