VTB Capital: Fixed Income Monitor

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.