Weekly Eurobonds_2010_02_08

Themes of the Week

Expected acceleration of negative processes occurred in reality, but Eurobonds of Russian issuers show resistance.
We continue to pursue our previous week’s investment strategy. Persistent nervousness on external markets on periodic comments concerning PIIGS/GIPS problems and unsatisfactory debt placements by the countries of these groups may result in risks revision, particularly of those which are sovereign.

Consequently, it is highly likely that spreads continue widening, though they hit historic maximums, at least in EU. CDS of selected EU countries are skyrocketing – CDS of Greece reached 444.7 points, CDS of Portugal – 238, CDS of Spain – 182.

It is interesting that CDS increased not only of problem EU countries – PIIGS – but of the USA as well. Over the week CDS curve grew by 12.25 in average, the strongest growth was evidenced in mid-term end of the curve – CDS added 14.3 points in five-year investment horizon.

On debt market, as on others, trends are the same – growing CDS, global widening credit swaps and higher yields on almost all debt markets, accompanied by higher VIX Index with stock indices being on red territory.
We believe that adopted earlier strategy of staying out of market risks is fully comfortable for the investors for few weeks ahead.

We advice to hedge from all markets’ risks (ruble and currency) and switch into short-dated issues in order to buy clear credit risks of high-quality first and second tier issuers. Due to limited investment choice on Eurobond market, our top picks remain the same: Rosbank-10, Cascade of Nizhne-Cherekskie HPPs-13, UAC-10 as well as banking Eurobonds with call-options, such as Promsvyazbank issues, Bank of St. Petersburg, Tatfondbank-12 new issue and others.

TMK placed convertible Eurobonds last week. It seems to be one of the ways for the pipe producer to raise funds available on foreign trading floors, and the investors’ demand is triggered by the possibility to convert bonds into equities.

TMK Eurobonds, as Evraz Eurobonds, have growth potential, in our view. But the problem for TMK is time of placement. We consider it less favorable than it was, when Evraz placed its bonds last year. Given our mid-term forecasted equity market downside potential of 10-15%, we would not expect growth of convertible Eurobonds’ quotes. Nevertheless, in case of eurobonds’ quotes go below their par value, we would advise investors to increase positions. On the one hand, investors may receive fixed quarterly coupon of 5.25% and three-year put option, on the other hand – in case of equity market rebound, they may gain on quotes’ surge and as a consequence, they get a chance to switch into TMK GDRs.
At present, fair value of TMK new issued Eurobonds, according to our estimates, is in line with the market, and they are quoted at 100% (for bid) and at 101% (for ask).