Wednesday, 19 December 2018

Sovereign revival

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After a couple of fallow years CIS Eurobond issuance returned with a vengeance in 2010. Russia, Ukraine and Belarus took full advantage of growing investor appetite with a combined US$8.5bn of supply. Russia and Ukraine look set to become annual issuers, but smaller states are unlikely to follow Belarus’ debut offering anytime soon. John Weavers reports.

The Russian Federation (Baa1/BBB/BBB) returned to the Eurobond market in April 2010 in rather different circumstances to its previous visit just prior to the 1998 domestic debt default.

Although execution was less than perfect, thanks to overly aggressive pricing and a deteriorating market backdrop, Russia raised US$5.5bn from five and 10-year offerings that priced in line with official guidance at 125bp and 135bp wide of US Treasuries.

Both the US$2bn 3.625% 2015s and the US$3.5bn 5.0% 2020s lost ground on the break but nevertheless achieved the Finance Ministry’s strict pricing goals. This enabled Russia’s 10-year dollar bond to print inside the Polish, Italian and Spanish sovereign curves and just wide of Brazil, Ireland and Portugal.

By the middle of September Russia 2020s had recovered to 102 5/9-103 for a 4.58% yield on the bid side, representing a spread over Treasuries of 260bp (following a concerted Treasury rally), versus 360bp and 370bp for Portugal and Ireland 10-year debt.

Fund managers and the US investor base in particular have been looking to boost their exposure to CIS sovereigns. They offer good value versus LatAm, US high grade and high yield, while their fundamentals are (mostly) far superior to many peripheral eurozone countries. 

It is not just energy rich, investment grade CIS countries that are in demand. Four months after Russia’s return, the Republic of Belarus (B+/B1/NR) took its long-awaited international bow with a well-received US$600m five-year offering that was tapped by US$400m three weeks later. The bond initially priced at the tight end of 9.0%−9.25% guidance, 727bp wide of US Treasuries, while the addition came at 102 (versus the 99.011 reoffer price) for a 8.251% yield, underlining its strong performance on the break.

Indeed, despite this strong rally, the Belarus 8.75% 2015s remained a buy recommendation from several analysts, helping the yield to retreat all the way back to 7.75% by mid September.  

Although this was a Reg S only transaction, US offshore took about one quarter of both the initial deal and subsequent tap. Such demand was largely due to American pension funds’ growing appetite for sovereign EM debt. US desks also tend to be fully staffed during the traditional European August holiday period. 

Welcome back

Belarus benefits from cordial relations with Moscow, something that Ukraine cannot claim given the regularity of its rows with Russia over issues such as gas charges. But international and domestic political concerns did not prevent the Republic of Ukraine (B2/B+/B) from returning to the Eurobond market in September after a three year absence. The Finance Ministry delivered a well-received five and 10-year Reg S/144a transaction that raised US$2bn, US$750m more than any previous Ukraine sovereign issuance.

With investor interest, especially from the US, skewed towards the longer-dated offering, the 10-year issue was increased to US$1.5bn and printed 12.5bp inside guidance at 7.75%, while the US$500m five-year tranche came in line with 6.875% price talk.

Rival syndication desks had argued that the absence of any fees for joint bookrunners JP Morgan, Morgan Stanley and VTB Capital would compromise execution given the lack of incentive to price tightly and support the deal in the secondary. However, the 2015s and 2020s both performed reasonably well on the break.

The notoriously price-sensitive Republic - which pulled a previous transaction in 2008 - postponed the deal in July, a decision that paid dividends given the near 100bp rally in yields between the summer roadshow and launch.  

USinvestors took 36% of Ukraine’s new five-year and 43% of the longer dated offering.

Not all CIS countries have been willing to tap the obvious demand for their sovereign paper, however. The Republic of Kazakhstan (Baa2/BBB–/BBB-) cancelled its planned 2010 Eurobond in July, citing May’s US$1bn loan agreement with the IBRD. Yet this doesn’t sit well with Finance Minister Bolat Zhamishev’s earlier comments that the bond would be aimed at establishing a benchmark for corporate issuance.

Kazakhstan’s unwillingness to visit the Eurobond market contrasts with smaller CIS nations’ inability to access the market with inaugural deals. Despite their stated goals, potential debutants may still be some way behind Belarus in establishing a sovereign benchmark with the possible exception of Azerbaijan, origination desks believe.  

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