International investors gave a warm welcome to the first major hard currency bonds from Russia in nearly a year in October, but hopes of further deals will likely be dashed, bankers say.
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These deals have demonstrated there is plenty of pent-up demand. I don't see why other issuers wouldn't come to the market on the back of this Muge Eksi, |
Metals and mining firm Norilsk Nickel reopened the market on October 6 with a seven-year $1 billion bond that attracted $4 billion of orders from more than 300 investors, mainly from US and European fund managers. The following day, state-owned energy firm Gazprom also found substantial demand for a €1 billion three-year note.
Previously, the only benchmark international bond to have emerged from Russia since the intensifying of western sanctions in July 2014 was a short-dated note from Gazprom last November. Two Russian lenders, Alfa Bank and Ak Bars Bank, priced small dollar bonds in November and August respectively but both were sold mainly to domestic investors.
Borrowers
The success of the latest deals, say bankers, was partly due to the strength of the borrowers. As global commodity producers with dollar revenues and rouble expenses, both have benefited from the collapse of the Russian currency. Norilsk Nickel has proved particularly resilient to the commodity downturn, notching up an 8% increase in Ebitda in the first half of this year, while Gazprom is the only leading Russian quasi-sovereign entity not under western sanctions.
Demand was also boosted by the dearth of recent bond sales from Russia, which has left fund managers struggling to maintain their index weightings. “Most international investors are underweight Russia and the only way for them to correct this is via the primary markets as there isn’t sufficient volume available in secondary markets,” says Eric Cherpion, global head of DCM syndicate at Société Générale.
Simon Ollerenshaw, head of CEEMEA DCM at Barclays, says upheavals in other emerging markets have also helped revive interest in Russian names. “Over the past year or so, geopolitical concerns have tended to obscure the fact that a number of Russian corporates are very high quality and important globally,” he says. “The recent turmoil in other parts of their portfolios has helped to remind investors that Russia, on a case-by-case basis, is still a good investment proposition.”
Indeed, with former emerging market stars such as Brazil and Turkey facing increasing political and economic headwinds, some investors are starting to perceive Russia as a safe haven, according to Muge Eksi, head of CEEMEA debt origination at UniCredit.
Appetite for the Norilsk Nickel and Gazprom deals may also have received a fillip from investors’ conviction that supply from Russia is likely to remain severely limited, adds Ollerenshaw. “It was very clear that there was going to be very little else coming out of Russia over the medium-term,” he says.
Bankers stress that this was not due to lack of demand. “In the wake of the Norilsk deal we have had a lot of investors asking for more Russian paper,” says Jonathan Brown, head of fixed income syndicate EMEA at Barclays. “Unfortunately we just can’t find borrowers who are allowed to issue internationally or who need to issue.”
Limited appeal
For non-sanctioned Russian companies, the appeal of global bond markets has been limited by a combination of reductions in capex spending plans and the ready availability of affordable hard currency funding in their home market, according to Eksi. “Bank financing in Russia is robust, both from local and international players,” she says.
Cécile Camilli, head of CEEMEA DCM at Société Générale, agrees. “We are facing quite intense competition from local banks that have been given extra dollar liquidity,” she says. “Russian corporates find the pricing available in bond markets quite prohibitive compared to what they can access in the local bank market.”
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She is optimistic, however, that volumes will pick up again next year as large chunks of hard-currency debt issued by Russian borrowers at the start of the decade reach maturity. According to Dealogic, Russian entities sold $18.6 billion of international bonds in 2011 and $49 billion in 2012. “Also at some point the liquidity in the Russian market may dry up,” adds Camilli. “We are already seeing signs that local bank funding is becoming scarcer or more expensive.”
Eksi is also confident that the success of the Norilsk Nickel and Gazprom bonds will encourage Russian borrowers to return to the global markets. “These deals have really changed the perspective of banks and investors on Russian risk,” she says. “They have demonstrated that there is plenty of pent-up demand and I don’t see why other issuers wouldn’t come to market on the back of this.”
Other bankers are less sanguine, noting that only a handful of non-sanctioned Russian borrowers would be acceptable to international investors. “With the exception of Alfa, the biggest banks are all under sanctions,” said one. “On the corporate side it would have to be an investment grade firm with hard currency revenues and, apart from the two names that have already come to market, Lukoil looks to be the only likely candidate.”
The private sector energy firm picked banks for a bond issue in March last year but has yet to emerge with a deal. “It doesn’t feel like there is much in the pipeline from Russia at the moment,” says Ollerenshaw.
