Банк Москвы

Fixed Income Daily Report

Local market

Activity slows down

Betting on new coupons in 1 tier

Global markets

Corporate eurobonds grow opposite to market

Gazprom plans a new eurobond issue

Subordinated banking bonds on the rise

Corporate news

Sistema-Hals sold for debt

S&P may withdraw ratings from ALROSA

Fixed Income Statistics

Bank of Moscow Bond Indices (BMBI)

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http://www.bm.ru/common/img/uploaded/analit/BMBI.zip http://www.bm.ru/common/img/uploaded/analit/BMBI.zip

News Flash

Economy

n GDP declined by 7 % in 1Q 2009, and the decline will slow down in 2Q, the presidential aide Arkady Dvorkovich has said. / Vedomosti

n International reserves in March 2009, according to the CBR, fell by 0.05 % to $ 384.08 bn. This is the smallest decline in eight months. Since the beginning of the year, IR fell by $ 43.2 bn., or by 10.1 %. / Vedomosti

n Russian debt had been growing until 4Q 2009. In January-October  it rose by 16.5 % to $ 542.1 bn. In the two recent quarters, the external debt contracted by $ 88.6 bn. and was 2.6 % less than in the beginning of 2008. / Vedomosti

n The share of NPL in the aggregate Russian mortgage portfolio in 2009 will not exceed 5 %, the senior deputy PM Igor Shuvalov said yesterday. / Vedomosti

Corporate news

n Lukoil has undertook to spend around $ 1.225 bn. on the capex program of TGC-8, according to the company’s financial statement for 2008. By late 2012, TGC-8 should build the total generating capacity of 890 MW. Lukoil owns the 95.53 % stake in TGC-8. / Interfax

n Lukoil in 4Q 2008 closed the deal to buy 100 % of the Grand – Mega oil-M association for $ 493 mn. The companies own a network of 181 gas stations in Moscow, the Moscow region, and other locations in the Central Russia. / Interfax

n The general director of Russian technologies Sergey Chemezov objects to an additional share issue of AutoVAZ, which is being considered as a means of supporting the company afloat. The additional share issue would dilute the rights of minority shareholders, including the staff, Mr. Chemezov says. / Interfax

n Italian-based Finmeccanica announced Monday that its subsidiary Alenia Aeronautica has bought 25 % + 1 share of Sukhoi Civil Aircraft for $ 183 mn., Reuters reports. This news is an additional reason to buy the ruble bonds of the company, yielding 20 % to put in September 2009.

Distressed debt

n  SAMTORG by 1 April 2009 has redeemed 44 % of overdue debt of SAMOKHVAL food retail chain. After SAMTORG bought the brand of SAMOKVAL and the rights to manage the retail business from the owners in March 2009, it also assumed the debt of the retailer. By early February, they stood at 3.2 bn. rub., while by the beginning of April, SAMTORG has settled almost 1.4 bn. rub. / Cbonds

n KD Avia yesterday stopped flight operations after its airplanes were arrested for the company’s failure to provide leasing payments. In late 2008, the company failed to pay the coupon and pass the put option for the 1 bn. rub. bond issue and acknowledged that it wouldn’t be able to continue flying. In December, the operational control over the company was assumed by the Bank Saint-Petersburg, the largest creditor of the company. It provides subsidies for the company’s operations until late March but in April ceased financing. According to Vedomosti, the promised support from the state hass not yet reached the company. This again confirms that the government promises to provide support to companies and the actual aid are not equal. / Vedomosti

Placements / Coupons / Puts / Redemptions

n JFC Group has set the sixth coupon for the debut 2 bn. rub. bond issue at 20 %. / Cbonds

n ULK has set coupons 9 to 12for the debut issue at 10 %. / Cbonds

n Sinergia has decided to buy out the debut bond of 1 bn. rub. total worth at 99 % of the par in 8 to 12 April 2009. the date of buyout is 13 April 2009. / Cbonds

Local market

Activity slows down

Market activity yesterday was considerably lower. Seeking yield, investors looked at rather exotic and even obsolete instruments, such as Sun InterBrew-2, Itera Finance-1, which were bought with 17.8 % and 18.66 % yield. Moscow city issues are still on the rise, and the city’s debt committee is likely to keep placing issue 58 at the secondary market. Since the last Thursday, the yield of the issue declined from 16.9 % to 16.4 %, with the price rise of 50 bps as well.

Meanwhile, amid the evident softening of the primary debt market are increasing the activity of emission documents preparation. If the market environment is still favorable, we expect an increase in supply of the quality debt at the primary market.

Betting on new coupons in 1 tier

As there are very few quality and high-yielding debt at the market, investors may bet on issuers’ willingness to keep the bonds in the market. Only 2-3 months ago, the tactics of increasing the coupon rate worked only for problem debt in the third tier, and issuers were able to redeem all outstanding bonds. Presently, companies have the real chance to attract investors by coupon increase, which is proved by the case of Sistema. Not all investors are ready to provide radical rate increase, but we advise to look at super-short issues. In the nearest term, issuers are expected to perform marketing on the eve of put options and sell back the bought-out papers. The rates should be really attractive.

For instance, we recommend the 1-year Zenit-4 issue with more than 16 % yield (the put option is today), or less quality, but much higher-yielding Renaissance Credit-2 returning 22 %. Within a few days, VTB and HCFB are also expected to set coupons for their fifth issues. Among the non-banking issuers, who are facing put options and have not yet defined the coupons, there are United Confectioners and TGC-8. Vedomosti reports that the controlling shareholder of the company – LUKoil – is ready to spend $ 1.2 bn. on the company’s capex.

Anastasia Mikharskaya

Global markets

Corporate eurobonds grow opposite to market

Most corporate eurobonds continued to grow yesterday despite the mass downgrades of credit ratings. However, most issuers whose ratings were lowered by S&P and Moody''s (besides ALROSA) are the internal market issuers (Moscow region, MOITC, RZD, Kamskaya Dolina). We think that the demand for Russian corporate eurobonds is again formed mainly by the local participants. Otherwise, the negative mood of the equity market would have proliferated onto the Russian segment as well.

The eurobonds of ALROSA, whose rating was withdrawn by S&P (due to the insufficient details in the financial and operational statements), and lowered to Ba3 by Moody''s, added 0.01 %. 

Russian eurobonds BUSALL''12 (a derivative of MUEGC) returned to the 70 % price level (-6.67 %), while the yield grew to 22.9 % to maturity in 2012. This is a rather high premium to the direct risk of MUEGC, yielding 17.2-18.6 % to maturity in 2011.

The eurobonds of Raspadskaya were also among the outsiders, with the price decline of  2.3 %. This is a good reason to buy for cheap.

A minor price decline was recorded in the Lukoil eurobond. The company posted US GAAP statements for 4Q 2008 and disappointed on the operational expenses side. The net debt of the company grew to $ 7.6 bn. (as of 31 December 2008) from $ 6.6 bn. as of late September 2008. The Net debt / EBITDA ratio stood at 0.5x. We expect the ratio to be around 0.8x in the end of 2009.

Gazprom plans a new eurobond issue

Gazprom plans to repeat its success achieved during CHF-denominated placement. On April 11, the company starts the week-long road show in USA. The company may decide to place a new eurobond issue if the results of the road show are positive.  

As a rule, the company places an “indicative issue”  for a standard term. We think that the term of the eurobonds is 3-5 years, with at least $ 500 mn. volume. Judging by the current USD-denominated curve of Gazprom, the fair yield for 3Y papers is 9.0 %, and 10.1 % for 5Y. The placement premium may amount to up to 100 bps. However, it is more likely to vary from 30 bps to 50 bps.

The new plans of Gazprom may have pressed the CHF issue, which lost 0.5 % and closed at 100.4 % price. However, this is one of the very few Gazprom issues which declined yesterday. We think that this has to do with the post-placement profit-taking. The company’s eurobonds maturing in 2020 and 2034 performed well.

Subordinated banking bonds on the rise

In the banking sector, almost all issues of the Bank of Moscow grew. Subordinated banking eurobonds continued to rise. The price of Russian Standard'' 10 rose 14.6 %. Yielding 42 % to maturity in 2010.

Egor Fedorov

Corporate news

Sistema-Hals sold for debt

AFK Sistema yesterday officially announced sale of a minority stake in Sistema-Hals to VTB. At the first stage of the deal, VTB bought 19.5 % shares for 30 rubles and got a call option for further 31.5 % for 30 rubles as well. Simultaneously, this 31.5 % stake was sold to a subsidiary of Sistema-Hals. A representative of Sistema has confirmed to Vedomosti and Kommersant the key parameter of the deal – Sistema assigns to the debt of the developer to the buyer and since 2Q 2009 ceases to consolidate Sistema-Hals, and its debt, in the holding’s financial statements.

Investors should not be distracted by the symbolic value of the deal, in fact very positive for Sistema’s credit stance.  It is very important that the holding gets rid of a problem asset, and, the most important, of its huge debt of $ 1.3 bn., with $ 700-710 mn. owed to VTB.

As we have pointed out before, the deal of sistema-Hals sale should be considered in connection with the recent acquisition of Bashkir oil and gas assets with the help of a credit from VTB. In fact, Sistema, assisted by the second-largest Russian state-run bank, exchanges a “bad” asset for the good asset, by only a $ 450 - 500 mn. increase of the net debt. From the formal point of view, Sistema pays dear for the energy assets versus the current market levels. However, we think that it is more than offset by a good assets swap and very attractive credit terms provided by VTB. The interest will become payable starting in the second year of the credit term while the principal will be paid in equal trenches starting in the fourth year.

After the deal with Bashkir oil and gas assets both Fitch and S&P put the ratings of Sistema on the watch for possible downgrade. We expect the sale of Sistema-Hals to make rating agencies soften their stance on the holding. Overall, we expect the market’s attitude to the credit risk of Sistema and its subsidiaries to improve. Although the long-term bonds of Detskiy Mir are unlikely to become attractive (yield 18 % to maturity in 2015), a higher activity in the liquid ruble bond Sistema-1 (almost 19 % to put in March 2010) is very probable. Also, the eurobond issue Sistema’ 11 (almost 25 %) still have growth potential, but much will depend on the rating agencies’ actions.

S&P may withdraw ratings from ALROSA

Moody''s has downgraded Alrosa to Ba3 from Ba2 with the negative outlook, seeing the rapid deterioration of the diamond market environment and huge capex program of the company. Yesterday, S&P did withdraw the ratings citing insufficient information disclosure.

In our view, even before the rating action the long-term eurobond Alrosa’ 14 (yielding 15-16 %) were unattractive, even compared to Gazprom. As the company’s ratings are in jeopardy now, it would be illogical to buy the issue. We also expect significant selloff in the company’s bonds and we do not recommend to use these price movements to open new positions.

Leonid Ignatiev