Russian Fixed Income Daily
- Dalsvyaz: primary placement comment
- Economics: CPI - further slowing...

FX and money market

During the day the rouble gradually descended following the euro’s weakening and close to the evening it reached 26.82/USD. This morning, the euro dropped further below USD/EUR1.28 which consequently pushed the rouble to 26.86/USD; today we expect to see in the range of RUB/USD26.84–26.89.
Yesterday, CBR first vice Chairman Alexei Ulyukaev commented on the central bank’s FX policy and confirmed that the rouble would remain linked to the bi-currency basket. He stressed that although the CBR would not revalue the rouble against the basket in the coming months, it was not ready to make any commitments about the future (see our comments in the economics section of this report). Ulyukaev’s comment was quite opaque, but as this is typical for central bankers around the world, it did not affect the market. Nevertheless, we believe that currently the CBR has no incentive to allow a further jump of the rouble and that the currency’s trend will be determined by fluctuations of the euro against the dollar.
Rouble liquidity remains impressive and we do not expect this to change in the coming days.

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.
Dalsvyaz-2 and -3
Auction date:
Wednesday, 7 June, 2006
Parameters of issues:
Dalsvyaz-2: Size – RBL2bn, semi-annual coupons, term to maturity – six years, four-year put option, to which the bond will be initially trading, principal amortisation schedule starting after 3.5 years of floatation.
Dalsvyaz-3: Size – RBL1.5bn, semi-annual coupons, term to maturity – three years, principal amortisation schedule starting after 1.5 years of floatation.
Ratings:
The issuer is rated B by Fitch with Stable outlook.
General description:
Dalsvyaz is very well-known to the market being one the fixed-line telecoms of Svyazinvest holding servicing subscribers in the far-east region of Russia.
The company is the smallest among Svyazinvest telecoms, currently servicing about 1.3m actual fixed-line subscribers. The structure of Dalsvyaz’ business is very traditional, with the bulk of its revenue coming from local calls, intercity and international calls, as well as payments from other operators (mobile, etc).
Ownership structure:
Svyazinvest owns 38.13% of the company’s equity capital (50.6% of the voting shares). The rest is mainly controlled by portfolio investors, including the ADR programme (1.5% of the company shares).
Financials:
Dalsvyaz, as well as other Svyazinvest telecoms, has a relatively long story of IFRS reporting, which started in 2001. The 2005 report is not available yet.
Income statement:
Expected revenue in 2005 – US$372mn, up 17.6% from 2004.
EBITDA margin 23.7%, down from 27.2% in 2004. EBIT margin 16.3%, up from 13.3% in 2004. Net income margin 8.1% in 2005 (12.8% in 2004).
The company explains the decline in its net income margin by the fact that in 2005 it sold part of its assets.
Assets:
Total assets value – US$420mn in 2005 (+8.8% to 2004). US$5mn cash.
Debt:
Borrowings – US$87.2mn in 2005 (+67.4% to 2004).
74.8% of borrowings are short-term. Current ratio – 0.51 (quite low).
Debt/Assets –20.8% (13.5% in 2004).
Debt/EBITDA – 1.01, up from 0.62 in 2004.
The borrowings of Dalsvyaz currently consist of mainly short-term bank loans raised to finance its working capital. Dalsvyaz’ main creditors of are Sberbank, Vneshtorgbank, MDM-Bank, and Alfa-Bank.
Also, Dalsvyaz currently has a RBL1bn bond outstanding that matures in November 2006.
Purpose of the new issue:
The issue’s memorandum states that the new bond funds (~US$131mn) will be entirely used to refinance short-term loans of Dalsvyaz, as well as to redeem the maturing rouble bond. As a result, the net debt increase due to the new bonds should be zero.
On the other hand, the company is planning to attract more debt financing in 2006, as the leverage of Dalsvyaz is expected to increase in 2006.
Future projections:
2006: Debt/EBITDA – 1.5, Debt/Assets – 0.32, Revenue – US$370mn (down 7% to 2005 in rouble terms due to the liberalisation of the long-distance market), EBITDA margin – 30.5%.
2007: Debt/EBITDA – 1.2, Debt/Assets – 0.32, Revenue – US$400mn, EBITDA margin – 31.2%.
Market peers:
On the secondary market Dalsvyaz has many peers. The most adequate include UrSI-7 (rated B+, 8.7% for 34 months) and CenterTel-4 (rated B-, 8.85% for 39 months).
Also, on 24 May SibTel-7 (rated B+) was placed with a YTM of 8.84% for three years.
Pricing Dalsvyaz-2 and -3:
Three-year Dalsvyaz-3 is unlikely to place worse than SibTel-7, so in our view the reference point for it is 8.85%, i.e. the range of 8.8–8.9%, depending on the market’s appetite.
Four-year Dalsvyaz-2 will thus be placed 5–10bp above this range, i.e. at 8.85–9%.
Summary:
Supply in the telecoms sector is significant and regular, so we do not expect a large demand for Dalsvyaz bonds. On the other hand, taking into account the low leverage of the company, these two placements are a good opportunity to obtain rouble exposure to rated second-tier credit. It is very probable that Dalsvyaz-2 and -3 will not have immediate upside after entering secondary trading, unless the market moves in their favour.

Dmitry Dudkin, Moscow (7 495) 755 5480

CPI: further slowing
In May, CPI slowed to 0.5% (MoM), or 9.6% (YoY)
Yesterday, the FSSS released its inflation figures for May 2006, which were very pleasant for the government. Consumer prices rose just 0.5% (MoM), or 9.6% (YoY) in May – assuring the sustainability of the inflationary slowdown in March–April. Core inflation also remains low at 0.4%. We strongly believe that appreciation of the rouble against the dollar in April and May was absolutely essential for this positive trend. Nominal appreciation immediately reduces inflationary expectations and stimulates demand for roubles. Our calculations show that each 3% of nominal appreciation helps to remove 1pp from annual inflation.
The substantial slowdown in inflation gives the government a respite. Nevertheless, the CBR allowed the rouble to appreciate 18 kopecks above the bi-currency basket at the beginning of June to keep annual inflation below 9% in 2006. We fully agree that if the CBR allows the rouble to appreciate to RUB/USD26 this year, CPI is very likely not to exceed 9%. Yesterday, the first vice CBR Chairman Alexei Ulyukaev commented on the CBR’s FX policy and stressed that the bank wanted to calm down the market and avoid rouble appreciation against the basket in the coming months.
Investment implications: The inflationary slowdown and appreciation against the dollar reduce the incentive to allow rouble appreciation against the basket in the coming weeks. We do not expect any dramatic change in FX policy, while market sentiment on further appreciation of the rouble in 2006 remains strong. We maintain our forecast of the rouble at RUB/USD26 and CPI at 9% by 2006-end.

Paris Club negotiation
Negotiations on Germany’s share of the debt have been as tough as expected
Yesterday, Finance Minister Alexei Kudrin commented on the negotiations with the Paris club and was very optimistic regarding the USD12.5bn deal, saying that Russia and the club could reach agreement by mid-June. This would be a nice present for the Russian side just before the G8 meeting in St. Petersburg (the political component of the deal was always high in Russia) – and we welcome the prepayment in August 2006. However, the negotiations on the debt to Germany, including the part previously securitised into Aries, remain tough. Kudrin even said yesterday that it would not be redeemed ahead of schedule.
The difficulties around redemption of this part of the debt had been expected. In 2005 Russia successfully reached a compromise with the Paris Club and pre-paid on par, making the pre-payment conditions for USD12.5bn this year clear as they were set in May 2005 agreement, while a new deal will only be possible if Russia offers Germany a premium (at least enough to cover Germany’s Aries interest payments). Nevertheless, Russia still has a chance to reach an agreement on the matter. Although the Duma strongly opposes the idea, its extreme loyalty to the Kremlin will make the project realistic if the Kremlin and Putin personally strongly support it. We strongly believe that the extended pre-payment will be very beneficial for Russia
Investment implications: Although negotiations on Germany’s part of the debt are likely to be tough and time consuming, Russia might reach a new agreement in 2H06. The pre-payment of USD12.5bn (the non-German part of the debt) will become good news before the G8 summit in St. Petersburg.

Julia Tsepliaeva, Moscow (7 495) 755 5489