Russian bonds are back in fashion and Gazprom hopes to take advantage of it with its first Eurobond offer in America since before sanctions were imposed on Russia.
The state-owned gas behemoth plans to road-show a US dollar-denominated Eurobond issue “of benchmark size” in the United States this month. If the placement goes ahead it will be the first Eurobond the company has issued since February 2013 when it raised $800mn and $900mn in a dual tranche deal.
Gazprom’s US Eurobond is only the latest in a string of issues as investors have been warming to Russian securities for more than a year now. The combination of relative high yields, a sold macroeconomic base and slow fade of political tensions have made for an intoxicating cocktail. Since February Russian issuers have raised almost $2.5bn through Eurobonds.
Participants in the conference Bonds, Loans & Derivatives, Russia & CIS, which was held in Moscow in early March by GFC Media Group, expressed cautious optimism about the revitalisation of Russia’s bond and credits in 2017.
“We have a gradually improving macroeconomic situation,” said Michael Dunning, Fitch Ratings’ managing director and head of corporate ratings for Europe. “The debt level has been properly managed. The Russian bond market will be active.”
“In 2017, growth of 1.5-2% is expected, which reflects positive investor sentiment,” added Alexey Ievlev, head of client coverage & lending at ING Bank. According to Ievlev, substantial growth in the bonds segment was already noticeable in 2016, as 22 Russian companies issued Eurobonds, which was more than the same figure for 2014 and 2015 combined.
“There is [investor] interest in strong, transparent and consistent bond issuers,” said Irina Bobrysheva, head of treasury at steel major Severstal, which issued Eurobonds earlier this year.
However the pick-up does not come out of the blue. “In 2016, the market was very good for bond issuances,” said Mikhail Sychev, deputy head of Gazprom Neft’s debt division. “There was high demand from investors for fixed-income instruments.”
Meanwhile, the segment of ruble-denominated bonds has been growing at an even higher pace.
“Last year was very active, and there was a substantial growth in the number of local bond issuances,” said Aleksandra Zakharova, head of debt capital markets at Gazprom Neft. “The volume of issuances in the first two months of 2017 already surpassed that in the January-September period of 2016.”
“We hope that the trend for low rates will continue in 2017,” she added, noting that the popularity of ruble-denominated bonds was mostly driven by low rates.
As the Central Bank of Russia (CBR) is expected to lower its key interest rate this year, investors are looking for longer-term bonds, said Denis Tulinov, head of the investment banking department at B&NBANK.
The CBR is expected to lower its key interest rate by 1.5 percentage points by the end of 2017.
“However, expectations [for the segment] are optimistic as there is enough liquidity in the market,” said Oksana Klypina, director of debt capital markets at Sberbank CIB. “Most likely, there shouldn’t be any problem with liquidity this year.”
Meanwhile, more demand for ruble-denominated bonds is expected from private individuals as interest rates on deposits, offered by banks are declining and people are looking for new options to capitalise on their savings.
“Banks’ rates on deposits are getting reduced, and bonds are supposed to become more popular investment instruments for private individuals,” said Dmitry Muz, director of finance and investor relations at Chelyabinsk Pipe Works.
“The most recent issuances showed that about 50% requests were coming from private individuals,” agreed Andrey Bush, head of the capital markets department at IFC Solid. “They are not satisfied with what they are offered by the banks and they are looking for quality investment options.”
“As private individuals’ financial literacy is on the rise, this trend is likely to continue,” Bush concluded.
When it comes to loans as an alternative to bond issuances, industry insiders say that borrowers are in a good position. In 2016, the corporate loan segment grew by 5-6%, but it is unlikely to keep the same pace this year as many companies are still recovering from the economic downturn and borrowing is not yet on their agenda.
“The supply and demand curve is favourable for borrowers,” said Yuri Korsun, senior managing director and head of the syndicated lending department at Sberbank CIB, adding that as not much investment is going on in Russia’s production sector, the number of borrowers is very limited. “Competition for top-tier borrowers is really high,” he added.
According to Evgeny Gaevskiy, director of syndicated finance at ING, the Russian market is very fragmented, and while top-tier companies are actively borrowing, there are many companies “still in survival mode”.
Most experts and industry insiders agreed that 2017 is unlikely to see a major pick-up in corporate borrowing in Russia.
“We’re seeing some picking up in commodity prices, which could lead to activity in borrowing, but not in 2017,” said Nicolas Lipovsky, managing director and head of loan origination for Central and Eastern Europe, Middle East and Africa at Credit Agricole CIB.
Meanwhile, what could drive the borrowing market in 2017 is mergers and acquisitions.
“The economy is growing at a very slow pace,” said ING’s Gaevskiy. “So M&A activity could be a key driver.”
Also, the number of potential lender is likely to go up.
“We’re getting calls from foreign banks that have not been active in Russia for seven or eight years,” Sberbank CIB’s Korsun said. “Demand for loans is not going to change, but competition will be more severe as investors return to the market.”