Russian Fixed Income Daily
- Short-term view remains modestly positive
- TuranAlem to place debut bond today
- Buy recom. re-issued for HCFB-2, maintained for KrVostok...

FX and money market

On Monday as expected, activity in the Russian FX market was calm, in part due to the Columbus Day holiday in the US, and the rouble traded limply in the narrow range of RBL/US$28.46-28.48. However, closer to the evening, the euro rebounded to US$/EUR1.208 which consequently pushed the rouble down to RBL/US$28.51. Today, trading activity will revive and we expect to see the rouble in the range of RBL/US$28.54-28.59 as the euro continues to slide.

Olga Golub, Moscow (7 095) 755 5176

Rouble bond market

As yesterday Columbus Day was celebrated in America, US Treasuries were not traded. As a result, exchange turnover in the government sector was minimal, which is an additional indication of how much OFZ trading is now connected with Eurobond market and how many foreigners are participating in the government sector.

Luckily, apart from government paper, we also have corporate and municipal bonds. Although these were also not trading actively yesterday, some turnover was present and the prices of long issues finally began to rise. We continue to believe that the primary driver behind market demand is now excess rouble liquidity, as 1-day MIBOR was yesterday at a very low 1.74%.

Municipal bonds

On the primary market, Kazan (the capital of the republic of Tatarstan), is planning to place its RBL1bn bond on Wednesday. The bond will have 1.5 years to maturity and quarterly coupons. An important aside: the issue will be placed privately, but its secondary trading will later be organised on MICEX. We believe that the closest peer of this bond is Ufa-3 (Ufa is the capital of the republic of Bashkortostan), rated B by S&P. As Kazan is unrated by the major rating agencies and is also issuing a debut bond, a primary placement premium is definitely necessary here. As a result, we believe that the yield of Kazan should be in the range of 7.5-7.75%.

Corporate sector

The most important event on the primary market this week will occur today, when Kazakh bank TuranAlem will offer to the public its debut RBL3bn bond. The issue will have eight semi-annual coupons, four years to bullet maturity, and a one-year put option to which the bond will initially be traded.

TuranAlem is one of the main determinants of the Kazakhstan banking system and is very well known on the financial markets. Being rated BB-/Positive by S&P, Baa2/Stable by Moody’s (investment grade), and BB/Stable by Fitch, the bank’s obligations are likely to be placed with a small premium to VTB, which is rated BB+/Stable, Baa2/Positive, BBB/Stable.

Currently, the longest bond of VTB outstanding is VTB-4, an issue with low liquidity traded to 6.5-month put at 5.75-6%. Taking into account the slope of the yield curve between the two terms, this yield corresponds to about 6.25% for 12 months. As a result, we see a 6.5-6.7% range for TuranAlem, which, as we believe, is a very good deal for passive investors having a low credit risk tolerance.

As the paper is likely to be mostly sold abroad, there’s a good chance that after entering the secondary market it will have poor liquidity. The bond’s size of RBL3bn is quite low for such a high-quality borrower, so demand will be relatively very high.

Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 +3bp, Lukoil +21bp, RZhD-3 +38bp, FSK UES-2 +47bp. Second-tier issues: SibTel-4 +8bp, Salavat-2 +13bp, UrSI-4 +16bp, ChTPZ +22bp.

Overall, the majority of papers fully recovered the losses incurred at the end of last week.

As our current recommendation regarding long rouble bonds is a Hold, we would like to recommend market participants to take a look at shorter issues, some of which are looking very attractive.

First of all is HCFB-2, a bond of the Home Credit and Finance bank, currently yielding 8.4% to put in seven months. The bank is rated B- by S&P and Ba3 by Moody’s and currently offers a good premium over the bonds of its primary competitor RSB.

Secondly is KrVostok, which is yielding 8.65% for 16 months and is not lacking some, although limited, speculative potential. An additional positive aspect of this bond is that it has a put option in 4.5 months, to which it is currently yielding 1.25%. This is of course very low, but it is still locking-in a positive yield, and considering the very short duration of the bond to put, significantly lowers the sensitivity of the issue to large adverse movements in interest rates.

Short term market view

We do not see any fundamental ground for the domestic market to experience difficulties now. The cost of rouble funds is currently very low, so prices should remain well-supported throughout the week. It is unlikely that without a positive movement in Russian Eurobonds rouble issues will demonstrate a big rally, but gradual edging up remains the most probable scenario. Our general recommendation regarding long rouble bonds remains a Hold.

Dmitry Dudkin, Moscow (7 095) 755 5480