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VTB Capital: Fixed Income Monitor

January 10, 2013
Russian/CIS bonds: mixed price action

There was no single trend in Russian/CIS bonds yesterday. We noted some ongoing
profit-taking in the Russian sovereign and high grade spectrum. Specifically, RUSSIA
42 (YTM 4.25%) lost near 50bp in price together with GAPZRU 22 (YTM 3.90%) and
VTB 35 (YTM 5.62%). In the meantime, we also noted that the bonds of VimpelCom
were under pressure with VIP 18 (YTM 4.37%) down near 1.00pp in price, while
longer-dated VIP 22 (YTM 5.08%) only slipped about 40bp. Other sub-investment
corporate names (mostly metals) also suffered, but fairly moderately; in particular, the
mid-term notes of Severstal, EuroСhem, Evraz Group and Alliance Oil retreated only
about 25bp in price. At the same time, banks looked stronger with visibly smaller
activity on the offering side. As a result, the subordinated bonds of Nomos Bank and
PSB added 0.75-1.50pp in price, while the mid-term notes of VEB and VTB gained
near 40bp.

Separately, we highlight that yesterday ArcelorMittal (Ba1/BB+/BB+) announced a
USD 3.5bn capital raising (new stock and converts combined). The deal gained broad
attention among investors, as the book-building was fast and successful. Ultimately,
the new proceeds would help the company to scale down the leverage considerably
by mid-2013. Later, it could potentially encourage some rating upgrades. The stock
was obviously under pressure, but Arcelor's bonds rallied markedly; in particular,
MTNA 22 (YTM 5.17%) jumped near 4.0pp in price, charging up the yield drop of
almost 50bp. Thus, the spread between the bonds of Severstal/Evraz Group and the
respective ArcelorMittal notes tightened sharply as well (see charts below). Clearly,
the bonds of Russian steel makers do not look cheap relative to EM peers at the
moment, but rather are fairly priced, we think. At the same time, the success of
ArcelorMittal’s capital mobilisation highlights investors' positive interest towards the
industry, in our view. Therefore, we believe the notes of Evraz Group remain a good
pocket of value.