Troika Dialog in Moscow -
--The Russian Eurobond market has a more optimistic feel since the beginning of 2009, in stark contrast to the end of the previous year. Significant demand for Eurobonds from traditional equity investors and local players (which were trying to escape from ruble territory) pushed yields down significantly, especially at the short end of the curve. But the global environment is still far from stable, meaning volatility is likely to remain high in the near term.
--Ukrainian Eurobonds suffer. This has stemmed from January's gas conflict between Russia and Ukraine, as well as the new wave of political instability within the country. The Ukrainian Eurobond yield curve is inverted, which demonstrates investors' doubts over the country's ability to service its debt in full. We think Ukraine has a very good chance of avoiding default.
--All the investors on the ruble bond market are focused on the exchange rate. The rapid pace of the local currency's depreciation killed interest in ruble bonds. We expect demand to grow as devaluation expectations decline.
--The global financial crisis, a series of ruble bond defaults and devaluation are likely to change the local market's architecture. We expect newly issued bonds to better protect investors (for example, by including covenants into the prospectus).
--The potential violation of financial covenants could affect the refinancing capacity of emerging market borrowers. There have been several cases of broken covenants on Russian corporate Eurobonds. We believe that in the current environment, many borrowers, facing obvious liquidity challenges, will find it more difficult to renegotiate the existing terms.
--Affiliation with a particular holding structure loses importance. Over recent months, Russian corporate debt markets have seen numerous cases of default by issuers belonging to presumably strong business structures, which received little or no support from parent entities or shareholders.
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