Russian Fixed Income Daily
- Euro takes a notable step down
- Novosibirsk rated B+ at S&P
- ST RZhD bonds appear very attractive...

• Euro takes a notable step down
• Novosibirsk rated B+ at S&P
• Short-term RZhD bonds appear very attractive

Rouble bond market

On Thursday, liquid long-term bonds in the corporate and municipal sectors suffered from weak US Treasuries, while OFZs on the contrary, were surprisingly strong and even succeeded in demonstrating limited growth along the curve.
The spread of Russia’30 over US10Y is currently 111.7bp (fair, has a compression potential of at least 15bp from a historical standpoint), while the spread of OFZ 46018 over Russia’30 is 101bp (low, limited compression potential).

Euro takes a notable step down
Yesterday, shortly following the publication of the US February existing home sales statistics, the euro started falling against the US dollar, and in subsequent trading shifted from 1.2080 US$/euro yesterday morning to the current 1.1975 US$/euro taking the daily decline to a significant 100pips.
The existing home sales data was strong (6.91mln against the consensus 6.5mln), but we would prefer to view the release as a trigger for several large orders, rather than a fundamental ground for the dollar’s strength: existing home sales usually don’t affect the euro-dollar pair so strongly, so we can conclude that the market was already prepared for the weaker euro, most probably due to the recent speculation that the Fed would continue raising the funds rate after the FOMC meeting on March 28.
From a technical standpoint, the euro pushed itself down from the downward sloping trendline limiting its upside since September 2005. This trendline is formed by the two price tops: 1.2590 US$/euro on September 2, 2005 and 1.2325 US$/euro on January 24, 2006. As a result, currently the euro remains in the downward sloping channel, which is bounded by the aforementioned trendline from above and from below – by the parallel line formed by the two price lows: 1.1870 on July 5, 2005 and 1.1640 on November 15, 2005. In our opinion, to confirm the intention to reach the lower bound of this channel, the euro must cross the recent price low 1.1827 established on February 27, 2006, and is this happens, the single currency may reach level 1.15 US$/euro in May 2006 (we previously expected this to happen already in April, but the March rebound probably postpones this event).

Results of Dixy primary placement
Dixy placed its debut five-year, RBL3bn bond yesterday with a coupon rate of 9.25%. The resulting YTM of the issue was 9.46%, which lies within our expected range 9.3-9.5%. Again, as previously in the case with UrSI-7, the coupon rate was exactly what had been underwritten by the syndicate, which means that the end-buyers’ demand for the bond was limited.
Nevertheless, we believe that the buyers of the bond acquired a good asset at a fair price: the paper is likely to benefit in the nearest future from Dixy’s IPO, not to mention the general fact that food retail remains one of the fastest growing sectors of the Russian economy.

Novosibirsk rated B+ at S&P
S&P announced yesterday it had assigned the long-term rating B with a Positive outlook to the city of Novosibirsk. This is the first international rating of the city. Below is an excerpt from the agency’s press release.
\"The ratings on Novosibirsk, situated in Siberia, are constrained by its weak liquidity due to low reserves and high short-term debt… Other constraining factors include operating and capital expenditure pressures, weak--albeit improving--budgetary performance on average, and uncertainty due to the city\'s dependence on federal and regional decisions. Due to the accumulation of short-term debt (currently 45.9% of total debt or 17.5% operating revenues), the city is now heavily reliant on refinancing. Nevertheless, the city\'s debt level--38.2% of operating revenues in 2005 -- is moderate by international standards. Novosibirsk\'s growing, diversified, and services-oriented economy and its management\'s committed efforts to improving financial performance and debt structure support the ratings. Further positive impetus is given by the increased stability of budget revenues due to recent municipal reform. Standard & Poor\'s expects that the efforts of the administration to improve the city\'s budgetary performance, liquidity position, and debt profile will continue. This will lead to a stabilization of the operating surplus at 7%-10% of operating revenues in 2006-2007 and a small deficit after capital expenditures, while short-term debt will fall below 30% of total debt by the end of 2007… Conversely, the outlook could be changed to stable, if the city fails to stabilize its performance at the improved levels.\"
The currently floating bonds of the city (Novosibirsk-2, 7.2% for nine months, and Novosibirsk-3, 7.47% for forty months) are already traded to incorporate the new rating. Specifically, Novosibirsk-3 is located at only a 30bp premium over MosReg-5, while Moscow Region is rated BB-/Ba3 by S&P/Moody’s. Novosibirsk-2 is traded completely in line with Yakutia-5 (republic of Sakha is rated B+ by Fitch).
As a result, only the short Novosibirsk-2 can be recommended for buying into a passively managed portfolio as a fairly valued asset. Novosibirsk-3 is long and, in our opinion, does not adequately compensate the inherent interest-rate risk.

Secondary trading
Price changes of high-grade bonds: OFZ 46018 +36bp, OFZ 46020 +17bp, Moscow-39 -3bp, Gazprom-4 -5bp, RZhD-6 -24bp, FSK UES-3 +6bp. Second-tier issues: MosReg-5 -31bp, VolgaTel-3 +3bp, Pyaterochka-2 -1bp, Salavat-2 -10bp, CenTel-4 +1bp.
Our top picks among long bonds.
OFZ 46020, duration 12.1 years, +17bp yesterday, now at 6.97% YTM, our target located at 6.85%.
MosReg-5, duration 2.9 years, -31bp yesterday, now at 7.16% YTM, our target – 6.75%. Moscow region is rated BB-/Ba3 by S&P/Moody’s.
Pyaterochka-2, duration 3.9 years, -1bp yesterday, now at 8.7%YTM, our medium-term target is 8%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s.
VolgaTel-3, duration 3 years, +3bp yesterday, now at 8.54% YTM, our target is 8.15%. VolgaTelecom is rated B+ by S&P.
Attractive short-term papers.
RZhD-4 (Russian Railways), term to maturity 15 months, now at 7% YTM. Russian railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch.
TuranAlem, term to put 7 months, now at 7.25% YTP. Bank TuranAlem is rated BB/Ba1(Pos)/BBB- by S&P/Moody’s/Fitch.

Short-term market view
The price retreats we are currently observing on the market due to the increased cost of rouble funds and the falling Treasuries should be used to top-up the position at attractive prices. The expected reduction of money market rates in the first half of April should help the market compensate current losses, while for the US Treasuries our view remains unchanged that US10Y is likely to reverse its downward movement in the area of the 4.9% yield resistance. As a result, we maintain our general Hold recommendation for long rouble bonds, and recommend accumulating the cheapest papers.

Dmitry Dudkin, Moscow (7 495) 755 5480