Russian Fixed Income Daily
- Belon: primary placement comment
- Economics: stabilisation fund impressive

FX and money market

On Monday, the rouble continued Friday’s growth against both the dollar (following the euro/dollar exchange rate) and the bi-currency basket. As a result, the rouble reached RBL/USD26.7. The CBR allowed the rouble to appreciate by another five kopecks against the basket, resulting in a total appreciation of 18 kopeks during last two days. Market sentiment remains positive regarding the rouble‘s prospects and players are preferring to keep short dollar positions. In coming days, the international FX market will remain volatile, in particular in anticipation of the ECB meeting on 8 June which may result in some strengthening of the euro, and thus the rouble, against the dollar. Today we see the rouble at RBL/USD26.71–26.76.


Olga Golub, Moscow (7 495) 755 5176

Rouble bond market

This week is full of primary placements, so following our weekly update we continue covering new auctions.

Belon
Auction date:
Wednesday, 7 June, 2006
Issue parameters:
Size – RBL1.5bN, semiannual coupons, term to bullet maturity – three years.
Ratings:
The issuer is unrated by international rating agencies.
General description:
Belon is structured as a holding having four main business lines: coal production, metal trading, production of construction materials, and innovative technologies. Out of these, the first two are the major lines, while the third and the fourth are currently in an early development state.
Belon’s coal business is located in the Kuzbass region and includes mining of both energy and coking coals, their processing/enrichment, and the distribution of energy coals to Kuzbass region consumers such as Kuzbassenergo, and of the coal concentrate – to major Russian metallurgical enterprises, like NLMK, MMK, Urals Steel, etc.
Belon’s metal trading unit acts as a dealer for large metallurgical enterprises. Belon trades the metal-roll of NLMK in West Siberia and Urals, is a dealer of the West-Siberian Metallurgical Plant in the Kuzbass and Novosibirsk regions, and also sells the products of MMK and NTMK. The main customers of Belon are coal enterprises of Kuzbass and also machine-building companies supplying machinery for the coal industry.
Due to space shortage we here omit discussion of the construction materials and innovative technologies businesses of Belon, as they currently contribute a relatively small part to total revenue.
Ownership structure:
The company is basically a family business – 56.25% of it is controlled by Andrey Dobrov and 43.75% by Tatiana Dobrova.
A very important step in the improvement of the company’s corporate structure was the election of two foreign independent directors, who are covering the segments of audit and budget, as well as investment planning.
Financials:
Since 2003 Belon has reported its consolidated financials according to IFRS. Audited 2005 data is not available yet.
Income statement:
Expected revenue in 2005 – USD472mn, up 16.7% from 2004. The growth rate in 2005 was relatively low, as in 2001–2005 the company demonstrated a CAGR of 31.3%.
EBITDA margin 15.4%, up from 13.2% in 2004. Net income margin 10% in 2005 – a very impressive result.
Assets:
Total asset value – USD307mn in 2005 (+67% to 2004), USD24mn cash.
Debt:
Borrowings – USD78.5mn in 2005 (+38% to 2004).
0.2% of borrowings are long-term. Current ratio – 1.51.
Debt/Assets –25.6% (30.9% in 2004).
Debt/EBITDA – 1.1, down from 1.08 in 2004.
The borrowings of Belon currently consist of bank loans mainly provided by Vneshtorgbank (VTB) – 63% of total debt. 82% of the loans are not collateralised.
Purpose of the new issue:
The issue memorandum states that the new bond funds (~USD55mn) will be used to refinance some of Belon’s short-term debt, as well as for capex purposes. Therefore, after the bond is issued Belon will experience some leverage increase, although the share of long-term debt on its balance sheet will also grow.
Market peers:
Amurmetall – a medium-sized metal producer, which placed its debut bond in March 2006 with a YTM of 10.04% for three years. It should be made very clear that Belon is significantly better than Amurmetall, at least in two key points: it has consolidated IFRS financials and notably lower leverage. Right now, Amurmetall is trading at 9.85%, so Belon should be placed below that level.
On the other hand, below Amurmetall in yield we have a bond of Kopeika – a B- rated food retailer, which is trading at 9.05% to maturity in 33 months. Kopeika also has higher leverage and lower margins than Belon, but it can demonstrate a long market track record, plus as mentioned, it has a formal rating from S&P.
Pricing Belon:
The only problem of Belon is that it is completely new to the market, and not many market participants know what it is. As a result, it will have to pay a price to enter the market.
We believe that Belon will result somewhere in the middle between Amurmetall and Kopeika, i.e. in the area of 9.5% to maturity in three years. We would put the fair range for Belon’s YTM at the auction as 9.4–9.55%.
Summary:
Belon appears to have very solid credit quality supported by the fact that its consolidated results are audited by KPMG. The debt/EBITDA of 1.1 and the current ratio of 1.5 depict the company as having relatively low debt burden and good liquidity. If Belon was known on the market, it would place its bond at 9% YTM and possibly lower. At the current auction, the company is likely to pay a debut premium, which promises significant upside after the paper starts secondary trading.

Dmitry Dudkin, Moscow (7 495) 755 5480

Stabilisation Fund impressive
In May the Stabilisation Fund gained RBL129bn (USD4.8bn), reaching RBL1929bn (USD72.1bn)
Yesterday, the Finance Ministry reported that accumulation in the Stabilisation Fund in May had exceeded its average monthly level of USD3–4bn and reached USD4.8bn. As a result, the fund continues to grow, and on 1 June 2006 totalled RBL1929bn, or USD72.1bn. High petro-revenues are likely to continue to boost the fund in 2006 and beyond. Even taking into account new plans of larger pre-payments of the Paris Club debt, the ministry foresees the fund to spike to RBL2100bn (USD80bn) by the end of 2006 – which is close to our forecast, too. In 2007–08, the fund is likely to continue growing by USD25–30bn a year.
At the same time, the accelerated accumulation of money in the fund increases the temptation to spend it, and we expect new debates about this subject in the near future. The Finance Ministry’s position, fortunately, is quite conservative and it has won the first round of the battle. In May, the government set the fund’s composition at 45% dollars, 45% euros, and 10% pounds and decided to place it in a CBR deposit. The government is continuing to search for optimal allocations in foreign bonds (the law on the fund investment allows investing into the most reliable foreign bonds and includes a list of fourteen AAA-rated countries that are permitted for investment) and potential investments in Russia\'s equity market, although these plans are unlikely to materialise in 2006.
Investment implications: We welcome accelerated accumulation in the Stabilisation Fund and expect it to reach USD80bn by 2006-end. We welcome the idea of currency diversification of the stabilisation fund as it is positive in the long-term. In 2007–08, the fund is likely to grow even further (up to USD140–150bn), which will provide a solid financial cushion to reduce mid-term risks.

Julia Tsepliaeva, Moscow (7 495) 755 5489