Russian Fixed Income Daily
- TMK-2 still attractive above 7.9%
- RSHBank-2 guidance 7.7-7.95% YTM
- Kopeika-2 forecasted at 8.75-8.95% YTP...

• TMK-2 remains attractive above 7.9% after the TMK-3 placement
• Rosselhozbank-2 interesting above 7.7% YTM
• Kopeika-2 guidance: YTP 8.75-8.95%
• General recommendation for long bonds changes from Hold to Buy

Rouble bond market

On Tuesday, trading activity in both the government and municipal sectors was quite low, while in the corporate sector, on the contrary, it was substantial. The prices of long-term bonds continued to fluctuate in a consolidation phase, showing no clear tendency but remaining well-supported.

TMK-3 placement results
Yesterday, TMK successfully placed its RBL5bn bond. The coupon rate for the first two years of flotation was set at 7.95%, yielding 8.11% to a two-year put option. Our forecast range for the YTP of TMK-3 was 8.1-8.2%, so the placement went very much as expected.
In the light of this auction, TMK-2 demonstrated high trading activity (RBL127m) and shifted up in price reducing its YTP to 7.97% for 13 months. We believe that this bond remains attractive above 7.9% and maintain a Buy recommendation for it.

Rosselhozbank-2 placement today
Issue parameters. Size: RBL7bn, term to bullet maturity: five years, quarterly coupons.
Rosselhozbank (RSH Bank) is 100% owned by the Russian government, and is rated Baa2/BBB- by Moody’s/Fitch. The bank should be considered a quasi-sovereign entity.
RSH bank was established in 2000 for the purpose of supporting the government’s programme for agricultural sector financing. The bank has been reporting audited IFRS financials since 2003.
The bank already has a floating rouble bond of RBL3bn, RSHBank-1, which has been recently trading at 7.1% to put in ten months - approximately 185bp over the NDF curve. The NDF level for five years is 6.1%, so 185bp above this is 7.95%. On the other hand, spread compression towards the long end of the yield curve is a market reality, so 7.95% can be viewed as a higher bound of the possible range for RSHBank-2. Besides this, we currently view 8% as a fair level for BB- rated papers such as Pyaterochka-2, so the investment grade–rated RSHBank should be placed with a discount to this. On the other hand, the discount should not be large, as at the short end RSHBank-1 is currently traded with only 50bp discount to the papers of B+ - rated issuers such as UrSI-3 and SibTel-3.
Therefore, we would recommend placing orders for RSHBank-2 in the range of 7.7-7.95%, taking into account that if it places in this range, after entering secondary trading it will have a medium-term yield reduction potential to the 7.5% level.

Also, Kopeika places its second bond today – the largest issue among Russian retailers
Issue parameters. Size: RBL4bn, term to bullet maturity: six years, quarterly coupons, three-year put option, to which the bond will be initially traded.
Kopeika is rated B- by S&P. 50% of the company is owned by Financial Corporation Uralsib, while the rest is divided between three individuals – the original co-founders of Kopeika.
The company is one of the leading Russian food retailers operating in the soft discounter format. At the end of 2005 the number of Kopeika stores was 118 (106 its own stores, the rest - franchisees), 74% up from 2004. The net sales of Kopeika amounted to US$570m, +53% over the year.
The company publishes yearly audited IFRS financials and also distributes interim statements. The latest data (apart from sales figures and number of stores) available for the issuer is 3Q2005. According to this, the EBITDA margin for 3Q2005 was 7.2% compared to 7.1% in 2004. This figure is close to the industry average, being between that of Magnit (about 3%) and Pyaterochka (12%). The Debt/EBITDA ratio for 3Q2005 was close to 2.2 versus 1.86 for 2004, and debt occupied about 40% of the company’s capital.
The natural benchmark for Kopeika in secondary trading is Magnit-1, which is currently located at 9% for 34 months. From a standpoint of credit quality, Kopeika is stronger than Magnit (higher EBITDA margin, slightly lower Debt/EBITDA ratio, notably less debt in the capital structure), but Magnit is an industry leader, approximately threefold larger than Kopeika, and already trading. Taking this into account, we would estimate Kopeika’s fair YTP level in secondary trading at 8.75% and recommend placing orders for the bond in the range of 8.75-8.95%, depending on the extent speculative interest is in place here.

Short-term market view
We believe that the coming days until the end of the month are likely to be the most problematic from a money market standpoint. After this period, at the beginning of March the usual accumulation of rouble liquidity is likely to drive short-term rates down. In anticipation of this, it looks wise to start increasing the average portfolio duration now. Our general recommendation for long rouble bonds is thus upgraded from Hold to Buy.

Dmitry Dudkin, Moscow (7 095) 755 5480