Daily Market Commentary

FX and Money market

On Monday as expected, the rouble traded around RBL/US$28.70-28.72. The market is continuing to follow the euro, which has now broken US$/EUR1.20 reaching US$/EUR1.218. As a result, today in the morning trade session the rouble gained 13 kopecks rising significantly to RBL/US$28.58. At the same time, oil dollars are coming into the market creating additional strong upward pressure on the local currency. Today we expect to see the rouble in the range of RBL/US$28.57-28.61.

Yesterday as on Friday, the money market again faced low rouble liquidity, which was rather unexpected taking in account the absence of any major tax payments and the currency’s appreciation. Overnight interest rates rose to 5-6% and market players was forced to sell dollars to boost rouble liquidity. Nevertheless, we believe that this tension will be only temporary and we do not rule out interest rates gradually dropping in the next few days (currently we see overnight interest rates at 3%). From 15 July, the money market will enter a period of tax payments which is likely to push rates up once again.

Olga Golub, [email protected]



Rouble Bond Market

On Monday, trading activity on domestic bond market was rather weak - in fact, aggregate exchange turnover was the smallest since May 17. This lack of interest could be partly explained by the well-known beginning-of-week effect, but high money market rates also discouraged trading. On the other hand, the growth of the rouble exchange rate we saw yesterday on the euro’s upward correction helped the market. As a result, price movement was again very limited and on average prices of rouble bonds remained the same.

Moody’s announced yesterday that it had completed its review of government-related issuers (GRIs), which strangely resulted in several downgrades of Russian companies. Significantly, Moody’s lowered Gazprom’s LT credit rating from Baa2/Positive to Baa3/Positive and that of RZhD (Russia Railways) was lowered from Baa2/Stable to Baa3/Positive. We say strange as these ratings were recently raised by Moody’s as part of the same GRI rating review process. In any case, these games went unnoticed by the market as on Monday prices of both Gazprom and RZhD bonds did not fall. The only thing that can be inferred from all of this is that the probability of an upgrade of Russia’s sovereign credit rating by Moody’s by 2 notches at once to Baa1 has fallen dramatically. Russia’s current sovereign rating is Baa3/Positive, so only an upgrade to Baa2 should be expected.

Corporate sector

As we have already written, Perekryostok – a large Russian supermarket chain – is auctioning its debut bond issue today. The bond has 3 years to maturity, but also bears a 1-year put option to which it will be traded. Size of the issue – RBL1.5bn. Perekryostok is placing this bond following similar placements of Pyaterochka (RBL1.5bn) and Kopeika (RBL1.2bn). Kopeika’s bond was auctioned on June 21 and yielded 10.11% for 1.5 years. From a credit standpoint, Perekryostok should trade at a discount to Kopeika, as the former has more or less the same margins and debt level, but is larger in size. Taking in account the slope of the term structure between the two issues, we can estimate the fair YTP level for Perekryostok to be between 9.25 and 9.5%. Unfortunately for buyers, there’s a definite lack of second-tier bonds in the sector now, so there’s a probability that the Perekryostok bond will be placed with a YTP close to 9%. If the paper is needed, we would recommend placing orders for it at 9% and above, taking into account that this is a coupon auction and everyone will receive the bond with the same yield. Placing orders below 9% is not reasonable as it would be wiser to buy the already floating TMK/TMK-2 bonds that in this case would offer better risk/return trade-off. Perekryostok’s 9% YTP corresponds to a coupon rate of 8.81%, YTP 9.25% - to coupon 9.04%, 9.5% - to 9.28%.

The third rouble issue of Megafon (B+/B2), which entered secondary trading last Friday, continued growing yesterday gaining 28bp in price and reducing its YTM to 8.99%. This is exactly what we had anticipated, so today we will only repeat that our goal for this paper is set at 8.75%, which still offers price upside in excess of 50bp.

In contrast, Pyaterochka’s bond more or less remained unchanged after also floating on Friday, currently yielding 10.6% to maturity in 5 years. Nevertheless, we consider this bond strategically attractive as it should definitely trade at a discount to CenTel-4, whose YTM now equals 10.56%. In the mid-term perspective, Pyaterochka’s YTM could reach 10%, which provides a price growth potential of 225bp.

Other top corporate picks for today (unchanged from the previous update): CenTel-4, TMK-2, Salavat-2, UrSI-5, FSK UES, Lukoil.

Short-term market view

We recommend a reduction of overall portfolio duration in anticipation of a higher rouble liquidity deficit expected next week due to large tax payments by Russian companies (social tax on July 15, VAT on July 20, natural resource tax on July 25). It is unlikely that rouble bonds will experience a full-scale downward correction, but price dips could be deeper than those we saw in June. With this in mind, we would suggest selling long bonds, excluding only those that have really good growth prospects, such as OFZ 25058, MosReg-5, CenTel-4, Pyterochka, and Megafon-3. If it is necessary to make purchases now, it would be wise to look at the primary market and take part in placements such as Perekryostok (July 12) or OFZ 25057 (July 20).

Dmitry Dudkin, [email protected]

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