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Wednesday, 18 October 2017

CIS remains stalled

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The remarkable improvement in market sentiment since March 2009's nadir has triggered an impressive revival in emerging markets issuance. This year’s EM supply has already exceeded 2008's total. Yet one region lags its peers: CIS credits - for so long the cornerstone of EEMEA and even EM primary markets – have been limited to a mere handful of deals so far this year. John Weavers reports.

There is certainly no shortage of appetite from cash rich investors for interesting opportunities at the moment. Russian quasi-sovereigns and CIS energy blue chips are especially appealing: Gazprom secured stellar books of €9.4bn and US$7bn for July's increased €850m and US$1.275bn 8.125% dual tranche five-year issues.

Even troubled Kazakhstan's state-controlled KazMunayGaz attracted US$3bn of orders for its US$1.25bn 11.75% long five-year, printed in July before being tapped by US$250m two weeks later at 11%.

These two energy giants were preceded by Rosselkhozbank, which in early June became the first Russian bank to print a Eurobond in almost a year with a very well-received US$1bn five-year 144a/Reg offering. That deal that priced at the tight end of 9.0%–9.25% guidance.

On the other hand Russia's second largest bank, Vneshtorgbank, did not find levels to its liking in the dollar market. Instead, it focused on the Swiss franc market in 2009, raising Sfr750m from a 7.5% two-year issue.

The Eurasian Development Bank (A3/BBB/BBB) became the year's fourth US dollar Eurobond issuer from the CIS on September 21, having attracted a US$5.4bn book for a US$500m five-year debut that priced at 7.375%.

Recent deals confirm that the international bond market welcomes Russian quasi-sovereigns and CIS blue chips. That bodes well for investment grade oil firms like TNK/BP and Lukoil, if and when they decide to return to the international market.

The key question for EEMEA syndication desks is whether investor appetite will stretch further down the credit curve. So far, Russian Double B corporates have been excluded from the party, and it remains to be seen whether they, and their lower rated peers, will find their way in before the end of the year.

Jonathan Brown, head of emerging markets and European credit syndicate at Barclays Capital, expects little issuance from the Double B space in 2009. Such names have alternative sources for funding, he said, not least via Vnesheconombank and the rouble market. "The growth in Russia domestic liquidity has become, and will remain, a key source of funding for local credits," he said.

Renaissance Capital (B1/B+/B) surprised the markets on September 25 by securing more than US$120m of fresh money. It exchanged just over US$100m of its November 2009 Eurobond into a new, 12.0% April 2011 issue via a voluntary debt exchange. However, with the new bond's reoffer price at 96.099, an implied yield of 15.0% for 18-month risk is a pretty hefty re-entry level for other Single B names to follow.

Meanwhile, steaming ahead

Outside the CIS, Turkey has already exceeded its 2009 Eurobond issuance target of US$3.5bn, while Croatia (for the first time in four years), Macedonia, Lithuania, and Hungary have all raised money from the international market this year. And more is in the pipeline: Romania and Croatia have mandated for fresh supply in 2009, while Turkey is also expected to return.

Lithuania, Hungary and Romania had little choice but to return to the market, despite their budget and balance of payment positions unravelling to the extent that they had to pay a heavy price to attract investors. "EU entry is no longer seen as a one way ticket out of EM," said one syndication manager.

Not to be outdone, South Africa returned to the international market with a blow out, upsized US$1.5bn in May that was tapped by a further US$500m three months later. Its government is anxious to avoid crowding out state-owned enterprises, which have massive financing requirements in the next few years. Eskom, SANRAL and TCTA have colossal financing needs which could potentially represent a significant proportion of EEMEA supply – and could even exceed all CIS issuance.

For now, SOEs are happy to utilise the local bond and syndicated loan markets, given the pick up they currently have to pay over the sovereign curve. But syndication desks that are sitting on a number of SOE mandates obviously hope that the Eurobond market will secure a larger proportion of their funding needs in the future.

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