The bond market was doing a lot of defying this month. Russia’s Gazprom defied UK prime minister Theresa May’s threatened new punishments following the attempt on the life of former double agent Sergei Skripal, who was poisoned on March 4 with a military-grade nerve gas in Salisbury, by issuing a €750mn Eurobond.
The Russian government followed on March 16 — the day May announced the new measures — by getting a new sovereign $3bn Eurobond away to strong demand. The Russian government will follow up with another $4bn worth of bonds that will be swapped for the outstanding 2029 Eurobonds that are largely held by the failed Financial Corporation Otkritie bank.
Bond investors have shrugged off the politics and are snapping up Russian paper thanks to the relatively generous yields and the apparent belief that the west will not impose anything more than symbolic sanctions on Russia as a result of the spy scandal.
The Russian issues show that the break between politics and business can be now measured in basis points, as bond investors are uninterested in the James Bond style spy assassination stories filling the papers and are concentrating on the yields these bonds are paying: currently the market prices suggest the scandals are costing Russian issuers an extra 30bp on yields that have been falling dramatically over the last year.
Emerging markets in general were attracting bids in February, with a total of 327 issues worth $152bn versus 275 issues a year earlier worth $128bn, according to CBonds. Ahead of the Gazprom and Russian sovereign issues, Russia’s market was already ahead of last year with 11 issues in February worth $4.6bn, against the 10 issues worth $3.1bn a year earlier.
The biggest deal in February was by Credit Bank of Moscow (CBOM), one of the four troubled so-called Garden Ring banks and the only one to survive the recent turbulence. CBOM issued a $500mn bond that matures in 2023 and pays a 5.55% yield.
That was joined by Moscow airport Domodedovo (DME) that issued a $300mn bond that also matures in 2023 with a 5.075% yield, and broker/dealer BCS Global Markets that has become a regular visitor to the bond market with smaller issues. In February BCS GM issued a $100mn bond that matures in 2028, which the bank has been using to fund its growing business.
As usual the Russian issuers made up the bulk of issues from the Commonwealth of Independent States (CIS), which got a total of 14 issues away in February including the Russian ones, worth a total of $5.7bn, which was one less bond than the same month a year earlier, but worth more than the $4.9bn raised last year.
A large part of the non-Russian bonds was Belarus’ sovereign issue for $600mn that matures in 2030 paying 6.2%, which follows on from last year’s very successful $1.4bn dual tranche Eurobond issue. The Belarusian ministry of finance has said that it intends to raise a total of $1bn this year and every year for the meantime, and these exotic bonds have proven to be very popular with investors. Belarus will spend $3.7bn on repaying and servicing its public debt in 2018 versus $3.4bn this year, according to Alena Pechan, a department head at the Belarusian finance ministry, but has most of this is already covered by its borrowing programme.
The other big CIS issuer was the London-listed Kazakh oil company Nostrum Oil & Gas that raised $400mn with a bond that matures in 2025 and pays 7%.
The bond market in the wider Central and Eastern Europe (CEE) market was also active with a total of 16 issues in February worth $11.1bn, up from last year’s 12 issues worth $7.1bn.
Turkey was the most active issuer, accounting for just under half (48%) of all the issues by value, followed by Romania (25%), Slovenia (18%) and Poland (13%), according to Cbonds.
The biggest issue was a sovereign bond offered by Romania for €1.25bn that matures in 2038 and pays 3.375%, and a second tranche of €750mn that matures in 2030 and pays 2.5%.
Romania was doing very well in 2017 and grew at 7% last year, but more recently analysts have voiced worries over political uncertainty, as well as that the economy is overheating. Support for Romania’s senior ruling party, the Social Democratic Party (PSD), has plunged from more than 40% at the general elections in 2016 to 34%, only 1pp above the main opposition party, this year. The upshot of the problems is Romania’s borrowing costs have been rising since mid-2017, while foreign direct investment (FDI) has been stagnating.