Russian Fixed Income Daily
- GPB places a new Eurobond
- Impex is definitely above its fair point
- SibTel-6 and UrSI-7 - good value for the well-known credit...

FX and money market

On Thursday, the rouble was very volatile moving parallel to the euro/dollar exchange rate. Trade opened at 26.85/USD and during the day the local currency gradually weakened, touching 27.00/USD as the euro fell below USD/EUR1.27.
Yesterday, the main driver of the international FX market was the ECB meeting, at which the bank raised its refinancing rate by a quarter percentage point to 2.75% (the most expected view), disappointing some market players who had expected a more aggressive move. In a later a press conference, ECB president Jean-Claude Trichet gave no clear signs of the pace its monetary policy tightening, which pushed the euro further down. This morning the euro has dropped to USD/EUR1.263 and as a result, the rouble depreciated to 27.01/USD. Today, international FX markets will remain volatile ahead of the release of US trade balance figures, import price index and a speech by Fed chairman Ben Bernanke in which comments on further interest rate prospects will be in the market’s focus. We see the rouble in the range of RUB/USD26.97–27.04.
This morning rouble liquidity has worsened slightly with interbank overnight interest rates at 2.25%. Taking into account the long weekend in Russia (10–12 June), companies have begun to accumulate rouble funds for mineral oil excise and social tax payments scheduled for 13 and 15 June respectively. However, we do not expect any strong squeeze of rouble liquidity in coming days.

Olga Golub, Moscow (7 495) 755 5176



Rouble bond market

Thursday was a relatively weak day on the domestic debt market: on average prices of long bonds fell 10–15bp in all three market sectors on the background of limited trading activity.
The spread of Russia’30 over US10Y is currently 132(+7)bp (very wide, with a compression potential of 40bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 49(-1)bp (wide in a medium-term perspective, our target for the spread is 0bp).

Gazprombank places a new Eurobond – spread trade opportunity
Yesterday evening it was announced that Gazprombank had placed a new Eurobond with the following parameters: size – US$300mn, coupon rate – 7.97%, term to maturity – five years.
On the rouble bond market GPB-1 is trading approximately at 7.75% to maturity in five years. If we look at the domestic forex market, RBL/USD27.02 is the current spot, while RBL/USD27.965 is the five-year forward dollar bid. This implies an annualised forward premium of about 70bp.
If we add 70bp to the yield of the new Eurobond of GBP, we get something like 8.7% – 95bp above the YTM of the rouble bond GBP-1. Hence, an obvious trading idea is to sell GBP-1, buy the new dollar Gazprombank Eurobond, and fully hedge its return into roubles.
Gazprombank is rated BB/Baa2 by S&P/Moody’s.

Secondary trading
Price changes of high-grade rouble bonds: OFZ 46018 -21bp, OFZ 46020 -14bp, Moscow-39 -9bp, Moscow-44 +5bp, FSK UES-2 -8bp, Gazprom-4 -15bp, Lukoil +2bp, RZhD-6 -13bp.
Second-tier papers: MosReg-6 -10bp, CenTel-4 -25bp, Irkut-3 -9bp, RusAl-3 -8bp, UrSi-4 -23bp.
SibTel-6 and UrSI-7 remain quite attractive among telecoms bonds. SibTel-6 is now at 8.75% for 28 months, while UrSI-7 is trading at almost the same yield for 34 months. If we exclude CenTel-4 (8.95% for 39 months), which is typically notably worse in credit quality, SibTel-6 and UrSi-7 currently offer the best yields in the telecoms segment. At the same time, their issuers have solid and controllable credit quality, so the risk-return trade-off for these bonds is definitely in favour of their purchasing. Uralsvyazinform is rated B+ by S&P and Sibirtelecom B+ by Fitch.
RSHBank-2, a bond of Rosselkhozbank – a quasi-sovereign entity created by the Russian government to finance the agricultural sector, remains undervalued in our opinion. Lately the paper was located at its usual 8% to maturity in five years. In the longer term, the fair value of the bond is in the range of 7.5–7.75%, so even in adverse market conditions, RSHBank-2 should behave quite well. Rosselkhozbank is rated Baa2/BBB by Moody’s/Fitch.
FSK UES-3 is currently looking quite attractive as a short-term speculative purchase. At its YTM 7.35% in 30 months it is 140bp above the NDF curve, while the shorter FSK UES-1 has a spread of 115bp. FSK UES is rated B+/(P)Baa2 by S&P/Moody’s.
MosReg-6, a bond of the Moscow region that we previously recommended for buying, fell 10bp and is now at 7.43% to maturity in five years. Currently, the spread of MosReg-6 over the OFZ curve is 88bp, while the spread of MosReg-5 is 75bp. In the long run, we continue to estimate the fair YTM of MosReg-6 at 7.25%. Moscow region is rated BB/Ba3 by S&P/Moody’s.
TMK-3 – a bond of the Tube Metallurgical Company (TMK) – has been recently stable in the range of 8.1–8.2% YTP for 21 months. Above 8% the paper definitely retains speculative upside as we believe that its fair value in current market conditions is in the range of 7.75–8%. Short-term investors should also not forget that TMK-1 currently also offers a good buying opportunity, being traded at 7.7–7.8% for five months.
Impex-3, a bond of Impexbank recently acquired by Raiffeisen, was quoted at about 8.1% to put in 12 months. Due to the acquisition, the bank has been upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, and by S&P to BB+, so now it continues to be above its fair yield, which is located somewhere in the range of 7–7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios.
Also in the banking sector, we continue to recommend buying RSB-4, an RBL3bn bond of the Russian Standard Bank, which was seen on Thursday at 8.64% to maturity in 21 months. RSB is rated B+/Ba2 by S&P/Moody’s.
Among relatively short bonds, Baltika also appears to be largely undervalued at its current 7.95% for 18 months. If we look at the credit quality of this issuer, its fair value can be estimated at 7.5%, and only the low liquidity of this bond prevents it from occupying this position.

Market view
The widening of the spread between Russia’30 and US10Y is depressing the rouble bond market, which on the other hand, is being supported by low money market rates. The good liquidity situation should continue into July, and on 1 July, capital account operations will be liberalised. As a result, although the current situation looks shaky, we would not recommend the complete unloading of positions from long rouble bonds.
In the long-term perspective, the long end of the OFZ curve has the potential to narrow its spread to US10Y to approximately 100bp. As a result, looking half a year ahead, the rouble bond market has a significant advantage compared to Russian dollar Eurobonds, especially considering the additional return that is very likely to be earned over this period due to the forecast appreciation of the local currency.

Dmitry Dudkin, Moscow (7 495) 755 5480