Russian corporates are cashing in on the enthusiasm for emerging market debt and the leaders are following the Russian government sovereign issue earlier this year into the international Eurobond market. A dozen planned corporate Eurobond issues over the next four months should more than double the value of Russian bonds placed this year. 

There has been a series of large corporate issues in the last few months into an increasingly receptive market. Gazprom Neft, the oil-producing subsidiary of Russian natural gas producer Gazprom, placed RUB15bn ($231mn) of bonds with 9.4% coupon, the lowest for a Russian corporate issuer on the domestic market in 2.5 years, the company said on August 24.

So far this year there has been a total of 10 corporate bond issues worth a collective $4.75bn, plus the sovereign issue of $1.75bn in May, as Russia’s bond boom gathers pace. However, with only four months left in the year 12 more companies have announced firm plans to issue a Eurobond that could double or triple the value of bonds issued this year.

The Eurobond issues started in March with typical value of around $100mn, but after the sovereign issue the amounts offered by Russia’s best companies jumped up to around $700mn. And that was the point of the sovereign issue. The amount the government raised was a useful amount but was far too small to have an impact on the budget funding problems the ministry of finance is facing in its efforts to close this year’s expected RUB2 trillion ($30bn) budget deficit. But the sovereign issue did act as a very useful benchmark for corporate issues and made the point that the international capital markets are not entirely closed to high-yielding Russian debt.

The next bonds expected to be offered to the market are FC Otkritie Bank and real estate developer O1 Properties, which launched road shows for potential dollar Eurobond primary placements in the second week of September.

“Following five large corporate placements in June-July (shipping company Sovcomflot, steel miners NLMK and Evraz, and transportation sector company GTLK), primary corporate offerings from Russia stalled amid a market correction following the Brexit vote and holiday season. However, we expect it to pick up in the next few weeks, reflecting the deferred supply factor,” Sberbank analyst Alexey Bulgakov said in a note.

A happy meeting of mutual interest drives the Russian corporate issues. In the near zero interest rate developed world investors are becoming increasingly desperate to earn returns, while the yields that Russian companies are being asked to offer have been falling steadily.

“Corporate spreads have now fully recovered, reflecting the positive technical backdrop for the entire EM Eurobond space,” says Bulgakov. “The hunt for yield has returned, spreads between issues from different credit categories have compressed and longer-dated bonds outperformed.”

Apart from dollar placements, some corporates may consider negative yielding segments with an increasing scarcity of tradable paper (such as euro and Swiss franc issues). Recent media reports also suggest some companies are toying with the idea of ruble Eurobond offerings.

Amid fairly low supply across EMs, investors willing to maintain exposure to Russia will view the new placements as an opportunity to reinvest proceeds from the maturing short-dated paper. However, the new supply of Russian corporate bonds is unlikely to cover the reduction in the bond stock caused by the sanctions: 40% of outstanding Russian Eurobonds are from sanctioned companies. More new supply will boost trading activity but is unlikely to affect secondary quotes, says Sberbank.

 

Russian Eurobond primary placements in 2016
	Sector	Average  rating	Status	Type	Issue	Tenor	Placement
Gazprom	Oil and gas	BB+	C	Senior	CHF0.5 bln	2.75y	Mar
Koks Group	Metals and mining	B-	C	Senior+exchange	$60 mln	2.5y	Mar
B&N Bank	Private banks	B-	C	Senior	$0.15 bln	3y	Mar
VimpelCom GTH	Telecommunications	BB	C	Senior	$1.2 bln	3y,7y	Apr
Renaissance Capital	Financials	B-	C	Exchange	$0.1 bln	5y/2y put	Apr
Russia	Sovereign	BB+	C	Senior	$1.75 bln	10y	May
Evraz	Metals and mining	BB-	C	Senior	$0.75 bln	6y	Jun
NLMK	Metals and mining	BB+	C	Senior	$0.7 bln	7y	Jun
Sovcomflot	Transport	BB	C	Senior	$0.75 bln	7y	Jun
ABH (Alfa Bank parent)	Private banks	BB-	C	Senior	$0.1 bln	1y	Jul
GTLK	Leasing	BB-	C	Senior	$0.5 bln	5y	Jul
FC Otkritie	Private banks	BB-	RS	Senior	TBD	TBD	Sep
O1 Properties	Real estate	B+	RS	Senior	TBD	TBD	Sep
Gazprom	Oil and gas	BB+	E	Senior	$/EUR, TBD	TBD	2016
Sibur	Chemicals	BB+	E	Senior	TBD	TBD	2016
Uralkali	Chemicals	BB-	E	Senior	TBD	TBD	TBD
PhosAgro	Chemicals	BB+	E	Senior	TBD	TBD	TBD
TMK	Metals and mining	B+	E	Senior	TBD	TBD	2016
Nordgold	Metals and mining	BB-	E	Senior	TBD	TBD	TBD
Polyus	Metals and mining	BB-	E	Senior	TBD	TBD	TBD
Alfa Bank	Private banks	BB	E	Senior	TBD	TBD	TBD
Brunswick Rail	Infrastructure	CCC-	E	Restructuring	$0.6 bln	TBD	TBD
FESCO	Infrastructure	D	E	Restructuring	$0.6 bln	TBD	TBD
Roust Corporation*	Other	NR	E	Restructuring	$0.7 bln	TBD	TBD
C - completed, M - mandated, RS - road show/marketing under way, N -Negotiations ongoing, E -Expected
Note: The table excludes transactions, for which Sberbank CIB Investment Research has temporary restrictions for analytical coverage.
* Russian Standard Vodka
Source: Debtwire, Bond Radar, Interfax, Bloomberg, Sberbank CIB Investment Research