When the bear sits on the money
The rouble bond market has seen a dramatic growth in the last three years with the present pipeline bulging over Rbs700bn. Last year more than 232 bonds were placed representing around 221 issuers. Although the current liquidity squeeze has put the issuance on halt, corporates are still on the rise. Bakyt Azimkanov reports.
In the last three years the Russian domestic bond market has grown rapidly in size and liquidity, and currently totals slightly over Rbs4.25trn outstanding – with US$750m daily trade turnover: US$650m in the corporate sector and around US$100m in sub-federal and municipal sector. Federal state bonds (OFZs) make up the biggest chunk of the market followed by corporates. However, in the coming years financials, retailers, power sector companies and utilities are set to become main borrowers, according to current trends.
Rouble liquidity is still a little viscous, with yields of existing issues increasing dramatically – ranging from 100bp to 300bp. Although the rouble liquidity crunch is at its peak, not all borrowers have adjusted to the new realities and the backlog is building up. Credits are signing syndicated loan deals and issuing commercial papers as well as unsecured or zero coupon bonds.
Primary market liquidity is being strangled by the state budget with the Russian government deciding to inject cash into the limping banking system to improve the liquidity. The previous system of monthly tax payments already absorbed too much cash and this time rouble liquidity is expected to be hard hit. The credit crunch is expected to peak after April 20 2008 with tax payments scheduled for the following day. However, general market sentiment remains cautiously optimistic – with the tone slowly improving.
The credits which are tapping the rouble bond market are opting for paper with a shorter maturity and a shorter put option. The Central Bank of Russia's (CBR) current repo rate, at 6.25%, is likely to increase in the near future, but not all investors are eligible for repo with the CBR, said Lyudmila Khrapchenko, director for derivatives structuring at the Alfa-Bank. "The rate rise was not taken well by the market," added Eugene Belin, head of fixed income at the Citi.
In the first quarter of 2008, 31 issuers brought 35 bonds to market worth a combined Rbs232.728bn, according to Cbonds, including private deals but excluding state bonds, securitisations and commercial paper. Fewer borrowers were able to issue debt and those that did had to offer premiums to last year's levels. Several others were unwilling to pay up to secure funding coupled with a cash outflow of US$20bn-$25bn, which is negatively affecting liquidity.
Nevertheless, Muscovite bankers believe most of this year's deals have been purely technical placements, as they were priced off-market or exchanged between issuers. In fact, the number of true market deals has been less than 10: AHML (A3 by Moody's); Rosselkhozbank (Russian Agricultural Bank - RAB) (Baa2/BBB+); Sistema (Ba3/BB-/BB-); TGK-10; TransContainer; and Wimm-Bill-Dann (B3/B+). The deals totalled Rbs65bn – representing a very different picture than the headline figures show.
The sub-prime meltdown in the US has pushed premiums for Eurobonds to unaffordable levels, so that even Russian subsidiaries of foreign banks that normally do not print domestic debt, have announced chunky issuance plans. Current pipeline stands at an excess of Rbs700bn compared to less than Rbs200bn in mid-2007. Austrian Raiffeisen Zentralbank's Russian subsidiary in Moscow (Baa/BBB+/A-) plans to raise Rbs20bn from three debut deals of Rbs7.5bn, Rbs5bn and Rbs7.5bn.
Banque Societe Generale Vostok plans to raise over Rbs20bn this year, according to its general director, Marc-Emmanuel Vives with Rbs7.1bn-worth in bonds only. Another Societe Generalle-controlled Russian bank, Rosbank (Baa3/BB+/A-) intends to raise Rbs20bn through four bonds with three, five and seven-year maturities. These plans are being driven by the tough environment in external markets, since nobody has previously relied on such heavy domestic borrowings.
The booming domestic retail market has already led Russian credits to borrow in roubles with all income and spending denominated in the local currency. It is no longer a secret that issuers exchange debt paper with more vulnerable corporates keen on tapping the syndicated loan market. However, bonds remain as a popular instrument, especially among issuers outside Moscow.
Several Muscovite bankers told IFR that the rouble market can be a temporary shield from the global credit crunch, but cannot provide long-time sanctuary. "The rouble market cannot meet the demands of all local borrowers and cannot be a refuge from the troublesome global market," noted Alexandre Kozbenko, head of rouble loan and bond origination at the Commerzbank (Eurasija).
The rouble market is simply not deep enough to meet the borrowing needs of Russian credits with ambitious plans. "Foreigners need to come to the rouble market in order for it to meet all demands," said Boris Ginzburg, head of fixed income at the UralSib. One of the main concerns is population's trust of banks remains thin. The shadow economy is still present and customer deposits are not enough for financials to keep their liquidity in a healthy state.
The current backlog is pretty sizeable, while windows are limited. State-controlled banks still have access to the market while relying on the government, and can afford to wait for the market to re-open, according to Stepan Amosov, director of structured products at ING. With the cash being tight, not all issuers are adjusting to today's realities. On the other hand, some Muscovite bankers think banks' liquidity is healthy enough so even some non-state issuers can afford to wait with their offerings.
However, "Private banks are more keen to re-adjust to current conditions," said Stanislav Ponomarenko, head of financial markets research at ING. Corporates are likely to increase the premium to secure a descent deal, he added. Michael Zak, head of research at Gazprombank, added that the benchmark has fallen itself with the spreads widening further.
Bonds with short maturity and shorter put options dominate the soaring rouble pipeline. Some issuers have decided to print commercial papers, with its popularity likely to grow this year. First-tier issuers' premiums have risen by 50bp-100bp from 2007 levels while second-tier borrowers are paying 100bp-300bp more to secure funding, with banks tending to pay more.
"The differentiation and division between tier I and tier II issuers became apparent with a lot of refinancing scheduled for this year," warned Konstantin Chernov, executive director of the structured and syndicated finance and corporate solutions at Gazprombank. "Deep tiering, lack of foreign participation and appetite is definitely affecting the local market sentiment," said Belin, adding that 18 months ago as much as 50% of the market players were non-Russian.
Local credits are likely to rush to the rouble market in the second half of the year when a lot of Eurobond and domestic bonds refinancing is due. Some even tried to print their deals before the first quarter tax payments, such as the Moscow Bank for Reconstruction and Development (B1/B+).
Previously considered a safe haven, municipal bonds are no longer an investor paradise. This year only for the third time the City of Moscow (Baa1/BBB+/BBB+) has failed to auction the Rbs5bn it was seeking. Each time it tried to borrow Rbs5bn but only ended up selling around Rbs1bn.
"There is no such discrimination for municipals and issuers from regions, but not all of them are ready to pay higher new issue premiums just like some borrowers in Moscow," said Alexey Porkhun, head of investment banking at Rosbank. However, in 2007 more investors than usual rushed into buying municipal bonds since they have guarantees of their respective municipalities.
Liquidity is of concern on the secondary market as well. Repricing already has taken-off and is likely to continue during the credit crunch. Government's involvement is set to go on with the yields for second-tier and third-tier issuers to grow while spreads are likely to widen further. However, Denis Gaevski, head of capital markets and the first deputy head of investment banking at the Bank of Moscow, believes that even second- and third-tier borrowers have the access to the bond market while Kirill Tremasov, head of research at the same bank, added that yields on average increased by 200bp-250bp.
On a more optimistic note, more western techniques are being utilised in the Russian domestic bond market, for example bookbuilding process in syndication and pricing of the issue. Russian banks have not ruled out employing new financial tools, including the Islamic ones. Popularisation of such financing in Russia could pave the way for local credits to issue Sharia-compliant instruments. "Reminiscent to the first securitisation deals in the country, someone has to pioneer the Islamic issuance for others to follow," said Khrapchenko.
With Russian credits starting to accept the new prices and terms of the Eurobond market, local market makers hope the positive spills will filter through to the rouble bond market. Even non-Russian issuers are opting to tap the rouble market, namely Ukraine's Naftogaz (Ba3/BB-) which is hoping to print up to a Rbs60bn in bonds while Belarus (Ba2/B+) is also contemplating a Rbs10bn offering in the Russian market.
Overall, despite the current tight liquidity, the rouble market is sealed-off to a certain level from the turmoil in the global markets thus making it still attractive for both Russian and foreign credits to be active in.