Банк Москвы

Fixed Income Daily Report

Local market

Gazprom vs. Gazprom neft

VTB – secondary placement at 16 %?

Summer bonds favored

Attitude to restructuring changes

Fixed Income Statistics

Bank of Moscow Bond Indices (BMBI)

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News Flash

Economy / Money market

n The CBR from 1 May 2009 ceases 1-week REPO operations. / Finam

Distressed debt

n Mosmart Finance has paid off the 4th coupon terminating the technical default status. The company’s shareholders Mikhail Bezelyansky and Andrey Shelukhin, owning over 80 % in Mosmart, are going to sell over 50 % shares of the chain operator. / Kommersant

n Rostelecom has filed with the Moscow arbitrary court four lawsuits against RTK Leasing worth 412.68 mn. rub. citing failure to accept bills presented for buyout in March 2009. the bills were issued by RTK Leasing in late 2008 to cover credits from Rostelecom. / Interfax

Placements / Coupons / Puts / Redemptions

n The rate of coupons 15-18 for VTB-5 bond issue has been set at 15 %, with an additional 1-year put option. / Finam

n The rate for coupons 4-6 for the debut issue of MUEC worth 6 bn. rub. has been set at 18 %. / Finam

n Southern fund company is postponing placement of the debut bond worth 900 mn. rub. from 21 April to 5 May 2009. / Finam

n Synergia last week passed the put options for the debut issue buying out 943.349 mn. rub. including the coupon yield which corresponds to 99 % of the par value of 1 bn. rub. The issue matures 22 April 2009. / Cbonds

Credit ratings

n Fitch today changed the outlook for ratings of 5 Russian banks - Chelindbank, Primsotsbank, SKB-bank, Bank Spurt and Uraltransbank – from stable to negative. / Fitch

Global market

n British economy, has likely passed the lowest point of industrial production decline, thinks a member of BoE MPC David Miles.

Local market

Gazprom vs. Gazprom neft

The main events on Friday were recorded at the primary market. Gazprom placed 10-year eurobond with a 3-year put at 9.25 %, without a premium. Due to this, the price went lower than the par value. At the ruble market, the situation was opposite.

Gazprom neft has closed the book with a 2-time oversubscription (demand of 20 bn. rub. vs. supply of 10 bn. rub.), setting the coupon rate at 16.7 %. This translates into the yield of 17.4 % to 2-year put option.

The placement of Gazprom neft is performed as book-building. This means that investors will get the paper only tomorrow, during technical placement at MICEX. As far as we know, it’s already impossible to buy the paper at the forward market at the par price. However, the speculative upside still exists as the demand in the first tier is still high. On Friday, Gazprom-4 added further 21 bps, with the yield reaching 10.61 %.

In order to understand, which deal is more profitable (Gazprom neft or Gazprom) for non-residents, it’s sufficient to look at the cost of ruble risk hedging. The 2-year hedging stands at around 13 percentage points, thus the net 2-year credit risk of Gazprom neft is evaluated at 4.4 percentage points, which is not very hefty, compared to the fresh issue of Gazprom.

Generally, the placement results of Gazprom eurobonds may prove that the demand for the Russian quasi-sovereign debt at the external markets is overestimated. Meanwhile, the low supply at the internal market does exist and may be a strong factor of support. Also, the REPO mechanism involving quality debt is still one of the most interesting instruments for carry trade. In view of the expected CBR rate cuts, this option looks even more interesting.

VTB – secondary placement at 16 %?

As we expected, issuers have started to compete for bondholders. As the opportunity to keep debt in the public market became real, they have started to set high rates. In the first tier, this process was started by VTB setting the rate for its 5th issue at 15 %. The paper has a quarterly coupon so the effective yield of VTB-5 will amount almost 16 %. We think that the instrument is very interesting, as the average yield of 1-year papers in the first tier hardly tops 12 %.

Such hefty premium may be reasoned by the last year’s experience. A year ago, investors presented 3.6 bn. rub. for buyout, and the coupon rate stood at 8.6 %, which made it difficult to return the bond into the market. Now VTB is likely to hold a secondary placement which may be why it has set such a high premium.

Summer bonds favored

Belon on Friday was trading better than the market, despite the persistent distrust towards the company (yield still over 100 %). However, investors have taken more favorable stance, and the paper has risen to 70 % from 50 % in early March.

By the way, we have pointed out that investors favor short-term bonds with put / redemption in June – August. The reasons for such choice are obvious. As the experience of the recent years shows, there has been many unfavorable surprises in autumn, so the players prefer to stick to cash  by the moment of possible environment deterioration.

Despite the rumors about possible restructuring, participants bought Cherkizovo, and Kopeyka-3. meanwhile, the issue of Magnit maturing in March 2012 has shed a few basis points despite excellent credit quality and good business outlook, confirmed by the recently announced 1Q operating results and a yearly financial report.

The issues of Moscow continue to rise, despite the wide supply. Overall, the Moscow city debt committee has placed 35 bn. rub. since the beginning of the year, versus the total yearly plan of 54 bn. rub. The recently placed issues 54, 58, and 59 has not yet entered the А1 list which constrains their attractiveness to a small extent. However, this is only a matter of time, and soon the papers will become available to a wider array of investors, the head of the debt committee has said.

Attitude to restructuring changes

The transformation at the ruble corporate debt market is still underway, and we see change of investors attitude to restructuring. While earlier the news on potential restructuring could press the prices to less than 50 % of the par, at present even outright statements about inevitable restructuring do not lead to immediate closing of positions (Seventh Continent with 75 % price being an example).

At first we thought that the reason is the change of investors’ attitude to restructuring. More and more bondholders prefer to keep the papers with 18-20 % coupon and get amortization payments on a regular basis, instead of going to court. In principle, such move is identical to not presenting the paper for buyout with an elevated coupon.

However, the real reason of the increased tolerance to restructuring is the change of restructuring issuers’ quality, we believe. Now the restructuring option is considered by second-tier issuers, such as GAZ, Nutritech, Mirax, Amurmetall, or seventh Continent.

Such issuers are resilient to crisis. Despite the difficulties in refinancing, the companies are viable, and it makes no sense to seek bankruptcy. It’s worth waiting for 1-2 years to get back everything plus the elevated coupon. Definitely, the bondholders must be sure that the banking creditors have agreed to restructuring, the company is not stripping assets but ccontinues to work normally and generate cash flows.

Such cases are small in number, but we expect more successful restructurings. In case of positive environment at the external markets, we expect restoration of interest towards such issuers, and higher demand for their instruments.

Anastasia Mikharskaya