Russian Daily Monitor

S&P upgrades Russia to BBB

On Thursday, Standard & Poor
,s lifted its credit rating for Russia from
BBB-minus to BBB. As usual the rating agency cited the obvious factors of
Russia
,s prudent debt management and strengthening of fiscal and external
balances above expectations. At the same time, Russia
,s long-term local
currency rating was upgraded from BBB to BBB+. The outlook on both ratings
remains stable.
On the whole, the upgrade came unexpectedly as S&P traditionally
attributed substantial weight to political risks, a lack of structural
reforms and general state management inefficiencies. But evident
improvements in Russia ability and willingness to pay its debt, as
manifested by tight payment and fiscal discipline and early debt
redemptions already undertaken, probably convinced S&P of the need to
amend the country
,s sovereign rating. Whatever S&P
,s considerations, the
rating move itself is positive. Russia
,s BBB rating from S&P comes in line
with the BBB rating already attained from Fitch and the Baa2 from Moody
,s.
It is possible that the move could provide support to the market as the
upgrade was not widely expected. However, optimism should be tempered.
Russia
,s debt assets see little to no reaction as their already tight
spreads and relatively low interest rates leave little room for upside.
Sovereign debt is unlikely to respond to the news, while some
+
,catch-up
,
,
rating play might re-open in corporate bonded debt. We recommend watching
corporate issuers of Eurobonds and Russia
,s second tier companies issuing
domestic rouble debt. Their bonds might accrue some gains from consequent
rating upgrade for domestic companies and banks, which traditionally
follow sovereign upgrades.

Pyaterochka acquires 25 shops in Moscow

Pyaterochka, Russia
,s largest retailer, announced Thursday that it had
acquired the Retail Trade Network (RTN), which operates 25 shops in
Moscow, paying USD 90 mn and assuming USD 7 mn debt from the company. The
deal looks likely to add value to Pyaterochka as it improves its positions
in the promising Moscow market. Given RTN
,s expected 2005 sales of USD
110-120 mn, the deal
,s EV to sales ratio was only 0.85
) very low level
for Russia
,s booming retail sector.
Investors traditionally loved Pyaterochka for its rapid expansion, and we
expect its recent acquisition to support interest in the stock.
Furthermore, the move indicates the company has started the realization of
an action plan that should boost company revenues in core markets. With
EV/Sales and EV/EBITDA multiples of 1.61 and 14.62, and assuming that the
company remains one of the most profitable Russian retailers, relative to
its peers Pyaterochka looks fundamentally attractive.

Money market

On Thursday the dollar saw a moderate rebound globally in the wake of
record high demand for U.S. assets and stronger-than-expected data on
business activity. This allowed the greenback to gain a few kopecks
against the rouble on the Russian FX market, which continues to track
euro-dollar movements. The dollar continues to trade near RUB 28.7.

Eurobonds

We believe the S&P upgrade should be capable of prodding some tightening
of spreads, especially in the corporate sector. However, U.S. Treasuries
should remain the dominant force on the Russian Eurobond market.
Continued strong business activity in the United States and an apparent
lack of disinflation in core prices weighed on the U.S. Treasuries market,
prompting Russian Eurobonds to show yield expansion as well. The yield of
the Rusia
,30 added 5 bp on the day to hit 5.68%, while the yield of
10-year UST increased 2 bp to reach 4.47%. The EMBI+ Russia spread widened
to 118 bp.

Equity market

Uninspiring performance from Russian equities early Thursday was
transformed later by S&P
,s upgrade of the country
,s long-term foreign
currency sovereign rating from
+BBB
)
, to
+BBB
, (see story above). However,
the news brought just a fraction of the enthusiasm that greeted previous
such upgrades and the RTS index slipped 0.41% to close at 1,101.12.We are
keeping an eye on Pyaterochka and expect it to bounce after the recent
beating that followed its earnings downgrade. In general, we expect
directionless pre-weekend trading on Friday. Investors will be trying to
fasten above the psychological 1,100 mark, while the recent rally may
tempt many to take profits.