Russia swiftly places additional $1.25bn Eurobonds with foreign investors

By bne IntelliNews September 22, 2016

Russia’s finance ministry swiftly raised an additional $1.25bn worth of Eurobonds to help cover the budget deficit in 2016, the Financial Times and Interfax reported on September 22, citing unnamed banking sources.

“The quality of the demand has improved,” as the “new Eurobond was placed entirely among foreign investors, with the US investors accounting for 53%, EU for 43%, and Asia for 4%,” Russia’s Finance Minister Anton Siluanov confirmed the isse to the press, while adding that the placement was swift taking less than 10 hours.

The yield guidance for the 10-year issue was 3.99%, and the book was oversubscribed at $7.5bn due to strong demand. Reportedly the bonds were placed at 3.9% yield or at 106.75% to the nominal value of original bonds.

The deal organised by VTB Capital is cleared on Euroclear and Clearstream from the start of the issue, which proved to be a critical point for foreign investor participation.

In May, the ministry’s attempt to place $1.75bn Eurobonds in defiance of Western sanctions was largely avoided by foreign investors as it took full two months to arrange Euroclear clearance for the issue.

The fact that the new issue was immediately included in international clearing systems “confirmed Russia’s access to external capital markets even under informal (“soft”) sanctions,” Gazprombank commented on September 23.

“The low yield of the placed bonds could become a positive benchmark for further corporate bond placements, including Russian Railways that recently announced its intention to make FX borrowing,” Gazprombank argues, adding that the deal indicates high interest in Russian debt. 

The analysts and investment bankers surveyed by Vedomosti daily note a very favourable timing of the additional placement, with US dollar liquidity surplus, lower rates on US dollar deposits, precise pricing to the secondary market, and recent US Fed decision to keep rates unchanged all contributing to fast placement of the issue.

Nevertheless, potential buyers this time round “will have to feel comfortable with statements in the documents that the funds raised will in no way be used to finance sanctioned activities – and that the Russian Ministry of Finance can suitably ring-fence the funds,” Timothy Ash, a strategist at Nomura International, told the FT.

Another unnamed foreign investor that decided to stay away from the issue told Thomson Reuters that “spreads on Russian markets remain relatively low as compared to peers, given weak prospects of economic growth, the ability of the authorities to preserve and replenish fiscal reserves on the background of unstable oil price recovery.”

But at lower rates on the debt market the government might prefer borrowing to spending reserves, VTB Capital believes. Especially given that the privatization revenues, one of the major sources of budget revenues in 2016 is still lagging behind.

With the additional placement the Finance Ministry has exhausted the limit of foreign borrowings for 2016 budgeted at $3bn.

“We believe that next year, we can go back to the kind of foreign borrowing which was taking place a few years back [before Russia’s economic crisis],” Russia’s Finance Minister Antont Siluanov said on September 23.

The minister believes that instead of $3bn worth of Eurobonds budgeted annually currently “we should have $7bn readily available to us".

Interfax cited Russia’s Minister of Economic Development Alexei Ulyukayev as saying the Eurobonds placement will not substitute planned revenues from privatisations of state companies that started in summer with the SPO of diamond major Alrosa. The minister still asserted that another sale would be possible by the end of the year but did not specify which company.

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