Fixed Income Weekly
- NK Alliance
- Razgulay
- Unimilk
- MOESK

NK Alliance

NK Alliance is an oil products trader operating mainly in Russia’s Far East and in Ukraine. Basically, the company buys oil from major oil producers, refines it at its refineries and then sells the products both wholesale and through its own chain of gas stations. Approximately 40% of NK Aliiance’s products go for export, while the rest is sold domestically.

We believe that the upcoming placement is a very rare opportunity for investors to obtain credit exposure in the oil sector with a 9%-figure yield, approx. 300bp above Lukoil and Gazprom.

NK Alliance has relatively little debt, reports its results according to IFRS, so with the planned IPO the YTP of the paper should be expected to notably decline, probably to the level of 8.5% (provided the long-term interest rate base remains unchanged), bringing investors significant speculative profit.

We believe that in spite of the lower leverage, NK Alliance will not be able to place its bond at a discount to Russneft. A premium is necessary for the debut nature of the issue and for the primary placement. As a result, we would regard credit spread 300-315 to be fair for NK Alliance at the upcoming auction.

3-yea OFZs are currently located at 6.10, so the fair YTP value of NK Alliance should lie in the range of 9.1-9.25%.

Razgulay

Razgulay, established in 1992, is one of the largest integrated agroindustial holdings in Russia and top 5 globally. It rates number one in grain and rice production and is a top 3 in sugar with 11% Russian market share. Since 2003 when government program for support for the national agriculture industry emerged, Razgulay started consolidation of production facilities for grain and sugar processing. Within grain division Razgulay is expanding it’s own rice harvesting to take advantage of the deficits of supply in the market.

Government support for the national producers include subsidies to compensate for the interest paid on debt, protection from foreign goods through imposition of import tariffs, corporate income tax benefits and government interventions on the wheat market to eliminate price volatility. As a number one participant in the government interventions program, Razgulay benefits during periods of low prices, as the spare elevator capacity is used to store government wheat reserve.

Razgulay is no stranger to both the rouble and Eurobond market. Rouble issue Razgulay-2 is trading to 5 month put at 11.38%. We consider that 11.8-12.1% to put is a good compensation for the risk associated with the new Razgulay bond, with the company borrowing appetite unclear to the management itself, as they state they feel comfortable with Debt/EBITDA surging to 3.5 or even 5.

Unimilk

Unimilk is the second largest (after WBD) milk and diary products manufacturer in Russia and Ukraine, with market shares of 8% and 12% correspondingly. The total milk products sold by Unimilk in 2005 amounted to 629 thousands ton. Since 2006 Unimilk unites 25 companies, operating in Russia and Ukraine. Net sales amounted to USD458m in 2005.

The funds from the new bond (~USD75m) will be used for the short-term debt refinancing (40%), the other part (60%) – used for capex financing.

Unimilk has very ambitious plans for the future, including significant increase of the market share, margins and Debt/EBITDA improvement. Long-term goal of Unimilk is to become #1 company on the Russian diary market.

Although catching up with WBD looks unrealistic, acquisitions of new companies in 2006 have already boosted Unimilk revenue and may strengthen company position on the market by the end of 2006.

We estimate the fair level of Unimilk to be in the range 10.0%-10.2% and believe that rapid EBITDA growth will help the company to decrease leverage in the future and bring Unimilk margins higher. Still, as the current Unimlk results demand substantial premium to WBD and Cherkizovo issues, we don’t see immediate upside if the issue is placed below 10%.

MOESK

OAO MOESK (Moscow Regional Power Grid Company) – is the largest Russian regional electric power company. MOESK was established in Apr 2005 on the bass of Mosenergo subsidiaries, located in Moscow and Moscow Region. Net revenue of MOESK in 2005 amounts to US$666m.

The company core business lines are electric power transmition and connection of new customers. MOESK provides approximately 92% of the energy distributed in Moscow region. The company is a natural state-controlled monopoly and that’s why the tariffs for services for electrical transmission are subject to state regulation.

As the most assets of MOESK are close to the critical age, replacement of the obsolete equipment is a key point in the company investment program, which also includes construction of new facilities. The total capex for 2006-2009 is planned at the level USD5.4bn. According to MOESK, investment program will be financed mostly via own funds, however the company is planning further borrowing on the ruble bond market (USD1bn).

We estimate MOESK fair yield to be in the range 7.90%-8.10% and find the issue quite attractive at this level and higher. Moreover, unlike FGC UES case, the demand for the paper will be limited due to poorer information disclosure and, thus, investors can count on sufficient premium during the primary placement.