Julia Bushueva of UniCredit -

Russian companies are queuing to place new debt. The Russian primary debt and equity markets began to thaw in June. The first five months of 2009 resembled the second half of last year - a dead season for Russian issuers - but June saw a number of placements. These were mostly on the domestic debt market, although the Eurobond and even equity markets are slowly coming back to life as well.

In only two weeks, Russian banks and companies raised RUB42bn ($1.4bn) with domestic issues, with another $0.9bn remaining in the June pipeline. On the Eurobond market, after a 10-month break Gazprom and Russian Agricultural Bank reopened the door for Russian issuers, raising a combined $3.25bn. Moreover, Alliance Oil raised $390m selling convertible bonds and shares, while two smaller oil companies operating in Russia - Tethys Petroleum and Victoria Gas - attracted $47m in share placements. We expect the debt market to continue to recover, at least for top-tier names, with only sporadic deals on the equity market until the world economy returns to steady growth. This is good news for high-quality Russian companies, especially those with high leverage or plans for aggressive expansion, such as X5 Retail Group, Lukoil, Acron, Vimpelcom, and Evraz Group. An active debt market and a decrease in yields should also help companies that were forced to borrow in early 2009 at high yields; they may now have a chance to refinance on better terms.

Good demand

Demand has been strong. On June 11, X5 Retail Group placed RUB8.0bn ($258m) in bonds at 18.46%. The underwriters initially expected yields in the range of 18.5%-19.5%, but investors subscribed for nearly RUB13bn, which brought the yield down. The bonds have a nominal maturity of seven years with a put option in two years. State-owned Russian Railways placed a RUB15bn ($48m) bond issue on June 15 which was almost 2 time oversubscribed; the yield on the issue was 14.33%. On June 16, VTB Leasing, a subsidiary of the second-largest Russian bank, placed two tranches worth a total of RUB10bn ($323m) with a yield of 14% (exactly in the middle of indicated 13.5%-14.5% range). The bonds mature in seven years, with a put option in June 2010. Lukoil, VTB 24, and Sistema-controlled Moscow Reconstruction and Development Bank have also announced plans for bond placements. Moreover, to attract some of the foreign currency liquidity Russian banks accumulated during the ruble devaluation cycle, Vnesheconombank placed $2bn in one-year, dollar-denominated domestic bonds in June, with a yield of six-month Libor+100 bps.

After a 10-month break, Gazprom and Russian Agricultural Bank reopened the Eurobond market for Russian issuers. The gas monopoly placed 10-year bonds worth $2.25bn at 9.25%, while the state-controlled agricultural lender sold $1bn in 5-year notes at 9.0%. Independent Russian oil producer Alliance Oil (formerly West Siberian Resources), raised $390m selling convertible bonds and shares. The bond issue consists of $265m in notes maturing in 2014 with a quarterly coupon of 7.25% and convertible into Swedish depositary receipts at SEK121.125. Other evidence of growing Russian activity on the Eurobond market are reports on VTB pre-paring a $1bn-2bn 7-year issue (with a 3-year put option) with a yield of around 9%, and Gazprom Neft preparing a $0.5bn-1.0bn deal.

We expect the debt market to continue to recover over the course of 2009, at least for top-tier names, but only sporadic deals on the equity market until the world economy returns to steady growth. The global increase in liquidity and ensuing improvement in investors' risk appetite have so far been more than enough to meet the considerable deferred supply of Russian issuers. The situation with liquidity on the domestic market has also changed for the better since January, as the monetary authorities have injected several trillion rubles into the system in an attempt to save it from collapse. According to the Central Bank of Russia (CBR), the total amount of cash held by commercial banks on their correspondent and deposit ac-counts increased 1.5 times in February-June, to about $3bn. The fact that bonds from top-tier issues can be used as collateral for CBR loans has stimulated demand for top-tier bonds among Russian banks. The rebound in oil prices has alleviated concerns about the possibility of another cycle of ruble devaluation and increased the attractiveness of ruble-denominated instruments, while three rounds of interest rates cuts by the CBR (it has lowered the key refinancing rate from 13.0% to 11.5%) mean that borrowing via ruble bonds makes economic sense again.

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