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Cbonds CIS & EM Eurobond Monthly Review - September 2012

October 8, 2012
The full Cbonds CIS & EM Eurobond Monthly is available at http://www.cbonds.info/comments/view_comment.php/params/id/84151

Following the announcement of monetary stimulus programs by central banks in Europe and the U.S., market conditions have been very favorable for international borrowing. Eurobond offerings are booming on the back of historically low interest rates and the insatiable investor appetite for risk. Volume of EM primary market following three quarters of 2012 have already broken historical records and exceeded last year volumes. Corporate borrowers in the CIS non-banking sector are bucking up: Gazprom Neft, Severstal and NLMK tapped the market in September. Sovereign borrowers start early funding of next year budgets. 

After the announcement of monetary stimulus programs by central banks in Europe and the U.S., emerging market Eurobond spreads dropped to the lowest level since last August, when they surged after S&P had lowered the U.S. rating to "AA+" on debt ceiling concerns. EMBI+ and EMBI Global spreads reached their maximum in October 2011 amid escalating fears over the Greek default. Another round of the European debt crisis in late May - early June 2012 and speculations around collapse of the eurozone led to a comparable jump in spreads indicative of risk aversion. With recovering optimism in early summer index spreads began to narrow. EM Eurobond yields fell first to pre-crisis levels, and then slumped to historic lows.

EMBI+ spread shrank 28 bp to 285 bp last month; EMBI+ Russia lost 22 bp to 179 bp. Growing yields of risk-free assets is another evidence of good investor appetite for risk:  UST yield curve widened 4 bp on 5-7 horizon, 6 bp on 10-year horizon, and 14 bp on the 30-year. Yield on Russia 2030 updated its historical low reaching 2.86% at the end of September.

The month of steel

Corporate borrowers of non-banking sector became active in the CIS: Gazprom Neft, Severstal and NLMK tapped the market in September.

On Monday September 10, Gazprom Neft raised USD 1.5 bln via 10-year Eurobonds. Alfa Bank, Citigroup and JP Morgan were the arrangers.

Head of Fixed Income Research at BCS Financial Group Leonid Ignatiev commented in a daily review "Debt Market Navigator" (September 11, 2012): "For Gazprom Neft it took only some five hours after announcement of preliminary marketing and a road show in three regions to raise triumphantly USD 1.5 bln in demand for its 10-year Eurobond. It is noteworthy that the initial amount was increased six-fold from USD 250 mln. Moreover, the final yield (4.375%) shrank 37.5 bp. Thus, despite the difference in ratings, the oil company managed to place the long debt almost 60 bp cheaper than its parent Gazprom in July. Only 15-20 bp premium to Gazprom's Eurobonds (Baa1/BBB/BBB) maturing in 2022 (YTM 4.15-4.22%) gives little reason to say that the new instrument was undervalued. And when you consider that yesterday's forwards prices soared to 100.625-100.875% of face value, it appears that investors generally put Gazprom and Gazprom Neft on the same level. Nonetheless, the difference in business size, profits, and credit ratings allows us to say that a fair premium of Gazprom Neft Eurobonds to Gazprom would be at least 30 bp. The daughter company is about four times less in terms of revenue, while its EBITDA margin (17%-20%) is 1.5-2 times lower (although the debt load is comparable)."

On September 12, bank Tinkoff Credit Systems (TCS) sold three-year Eurobonds worth USD 250 mln (Reg S) with a coupon of 10.75%. "Thanks to high demand, we could increased the size of the issue: initially we hoped to raise USD 200 million", said the bank's President Oliver Hughes. "We saw a well-diversified portfolio of bids from more than 70 investors, and were able to set the price and the coupon yield in the middle of the initial range." The proceeds will be used to increase the credit card portfolio of TCS Bank. Arrangers were Alfa Bank, Citigroup and JP Morgan.

On September 19, Alfa-Bank placed 7-year subordinated Eurobonds worth USD 750 mln at 7.5% (UST +634 bp). Initial yield guidance was 7.75-8%. UBS, Credit Suisse and Alfa Bank were the arrangers.

On September 19, NLMK offered 7-year Eurobonds in amount of USD 500 mln at 4.95% p.a. (UST +377.9 bp) The issue was arranged by Deutsche Bank, JPMorgan and Societe Generale CIB.

On September 19, Severstal issued 5-year convertible Eurobonds in amount of USD 475 mln to yield 2%. Bondholders can convert the bonds into Severstal's GDR at a price of USD 19.08. Arrangers were Citigroup and Deutsche Bank.

On September 21, Gazprom issued USD 600 mln in ECP maturing on December 27, 2012 via SPV Gazprom ECP S.A. Zero-coupon bonds were sold at 99.669% of par with a yield of 1.30%. UBS arranged the deal. The bonds were placed under a USD4 bln ECP program of Gazprom ECP S.A. launched on July 21, 2009 and guaranteed by Gazprom.

On September 25, VTB issued USD 125 million in zero-coupon ECP maturing in September 2013. The issue was placed under the USD 2 bln program of VTB ECP Finance Limited guaranteed by VTB Bank. VTB Capital and UBS arranged the deal.

During September, Globexbank issued two ECP tranches of USD 100 mln, while Alfa-Bank sold USD 140 mln in ECP.

The CIS

On September 13, Eurasian Development Bank placed USD 500 mln in 10-year Eurobonds yielding 4.767% (295 bp spread over mid-swaps and 303.7 bp over 10-year UST) Arrangers were BNP Paribas, Citigroup, HSBC and VTB Capital.

The book exceeded USD 6 bln. Thus, demand was more than 12 times the amount on offer. It is the second international eurobond issue by EDB. According to the bank's press-release, it the best issue in terms of offering conditions of all 10-year Eurobonds issued by financial institutions of the CIS. "We are extremely happy with successful offering of our new Eurobonds", comments Dmitriy Krasilnikov, Board Member of EDB, Managing Director of Corporate Finance. From the very launch of this deal, EDB planned to significantly "extend" their debt, while securing a competitive rate in order to continue supporting major regional infrastructure projects that would contribute to further economic integration in EurAsEC countries. Since investor response to the road-show was very constructive, lead banks were suggested to announce the price guidance a day earlier than had been planned. This allowed pricing the issue before major economic announcements in Europe and the U.S. Great demand from investors has allowed us to lower the initial price guidance by 35 bp."

On September 19, Ukraine tapped sovereign Eurobonds maturing in July 2017 with a 9.25% coupon and issue size of USD 600 mln. Additional issue price was 107.125%, which corresponds to a yield of 7.461%. It is 179 bp lower than at the initial offering in July 2012. Spread over 5-year UST equaled 677.8 bp against the spread of the July tranche of 863 bp.  Arrangers were JP Morgan, Morgan Stanley, VTB Capital, Sberbank CIB.

On September 28, Eurasian Development Bank once again tapped international markets but this time it was a ruble-denominated Eurobonds. Demand for the 5-year paper yielding 8.0% reached RUB 13 bln. Arrangers were Raiffeisen Bank International AG and Sberbank CIB.

Emerging Markets

In the first week of autumn, the market was flooded with issues from emerging markets on the wave of optimism in anticipation of the Fed and ECB decisions. On September 4, Romania tapped the issue due 2018 with 750 million euro worth of new bonds. As a result, total issue size reached 1.5 bln euro. The yield was set at 5.15%. Arrangers were BNP Paribas, Deutsche Bank, JP Morgan and UniCredit.

On September 5, Brazil issued USD 1.25 bln in bonds maturing in 2023 with a coupon of 2.625% and a record low yield of 2.686%. BTG Pactual and Deutsche Bank arranged the deal. The country also raised USD 100 mln via greenshoe option in Asia. Brazil is expected to tap dollar bonds at least once more in 2012. Aruba was another issuer from Latin America to offer securities on September 5: the country sold USD 253 mln in bonds due in 2023.

On September 10, Poland placed sovereign Eurobonds maturing in 2023 in amount of USD 2 bln. Deutsche Bank, Goldman Sachs, HSBC were the arrangers.

On September 13, Zambia managed to raise USD 750 mln in debut 10-year Eurobonds yielding 5.625%. Barclays Capital and Deutsche Bank acted as the lead-managers.

On September 18, Turkey sold Islamic dollar bonds in amount of USD 1.5 billion maturing in 5 1/2 years. The debut Sukuk issue was arranged by Citigroup, HSBC and Kuwait's Liquidity House. The book reached USD 7.1 bln. The yield amounted to 2.803% (185 bp over mid-swaps).

On September 19, Lithuania tapped the Swiss market with debut bonds worth CHF 175 mln with a 2% coupon. Credit Suisse and BNP Paribas led the deal. Proceeds will be used to repay Eurobonds in March 2013. For the same purpose Lithuania placed bonds on Germany's domestic market in September. The issue included two tranches totaling 167 million euro.

On September 27, Serbia followed the suite of Romania and opted for the strategy of tapping outstanding issues. The Eastern European state added USD 1 bln to Eurobonds due in 2021 issued last September, thus doubling the total size. The yield on the further issue was 6.625%, nearly 113 bp lower than the initial paper. Deutsche Bank and JP Morgan were the lead-managers.

In October, Russian issuers sold three issues of Eurobonds. On October 3, Russian Standard Bank offered 5 1/2-year subordinated notes worth USD 350 mln with a coupon of 10.750%. Initial yield guidance was 11%, which was lowered to 10.75%-10-875% during book-building. Goldman Sachs, UBS and VTB Capital were the arrangers.

On October 4, VTB Bank  once again tapped the market with subordinated notes. The Russian bank sold USD 1.5 bln in ten-year LPN with a yield of 6.95%. Initial yield guidance was announced at around 7.25% p.a., and subsequently lowered to 7.0% -7.125%. The deal was arranged by Barclays Capital, Bank of America Merrill Lynch, Societe Generale and VTB Capital.

Severstal tapped the international market for the second time this fall. On October 4, the steel company placed 10-year LPN in amount of 750 million. The issue yielded 5.9%, at the low end of the announced 5.9% - 6% guidance, down from the initial guidance of 6.125%. Arrangers were Citigroup, ING Bank, JP Morgan, VTB Capital, with Societe Generale as the co-lead.  In September, the company sold convertible Eurobonds.

Sovereign issuers of Eastern Europe continued financing their next year budgets. On October 1, Czech Republic tapped 10-year Eurobonds initially issued in February of 2012 with further 750 mln euro in bonds, having increased the issue size to 2.75 bln euro. The yield of the tap issue equaled 2.871% compared to 3.977% in February. Bank syndicate was the same as in February: Barclays Capital, Erste Group, Societe Generale, UniCredit.

On October 2, Poland followed the suit of the Czech Republic and offered euro-denominated Eurobonds. The bonds maturing in July of 2024 yielded 3.385%. Commerzbank, HSBC, ING Bank and Societe Generale were the arrangers