Russia Returns to the International Bond Market

Apr. 27 – After eight days spent on a road show in Asia, Europe and the United States, Russia has returned to the international bond market when it placed two tranches of sovereign Eurobonds of US$5.5 billion, from an expected 7 billion. It sold US$2 billion in five year bonds with 3.74 percent and US$3.5 billion in 10 year bonds with 5.08 percent coupon.

The profitability of the bonds on 125 (1.25 percentage) and 135 (1.35 percentage) basic points has exceeded quotations of the core for the majority of investors of U.S. Treasury notes, reports Vedomosti .

“Orders booked were more than double the final issue volume”, the Head of Debt Capital Markets Division of VTB Capital Andrey Solovev said to Kommersant.

After the transaction, Eurobond (nominated in dollars) prices have fallen a little. At 19.00 hrs, Moscow time on Friday, the profit made 4.04 percent (on five years) and 5.25 percent (on 10-years), reports Vedomosti.

Attracting money was not the very idea, explains Kommersant, the government wants to establish a new reference point for Eurobonds in both state run and the private companies of the Russian Federation which plan to enter foreign markets within 2010. Before this, placing a reference point of profitability for Russian external debt, a 30-year Eurobond was released in 2000 under re-structuring of a soviet era debt to London Club of Creditors.

“We think that we had a successful placement. The main thing that we achieved is a significant reduction of spreads for Russia. Historically these are the lowest rates that Russia could have allowed itself,” Russian Finance Minister Alexei Kudrin told Reuters. He said another Eurobond this year may not be needed due to strong domestic liquidity.

At the same time, according to Reuters, Russia decided to return to the external debt market to patch a budget hole and erase a budget deficit expected to be at least 6 percent of GDP this year. It had originally planned to borrow up to US$17.8 billion.

“Market sentiment was hit by the Goldman Sachs case and the situation with Greek debt. If it was as good as in the beginning of the roadshow, the Finance Ministry could possibly have counted on an even better price,” Nikolay Podguzov, analyst at Renaissance Capital said.
He added that the U.S. and UK investors were top buyers, together taking nearly half of each tranche. Russian investors got less than 10 percent of the total size.
For the first time in history, supervision cost of credit risk of Russia, measured as a CDS-spread (a swap “credit-default”), became less than a similar indicator like Italy.

Profitableness of the Russian Eurobonds is close to similar tools of Italy and Spain. For example, profitableness of the Italian bonds with repayment in 2023 lies at 5.35 percent (in dollars). Spain does not have dollar bonds, and profitableness of bonds in euro with repayment in 2020 has made 3.97 percent annual while the same bonds in Italy attracted 3.99 percent.

The position of Russia is better than Italy, argues Podguzov, the country debt to gross national product makes only 7 percent, therefore demand for the Russian bonds is considerably high. A state debt of Italy is 116 percent of gross national product and on this indicator the country overtakes even Greece (115 percent of GNP), the analyst of Gazprombank Anna Bogdankevich said to Vedomosti.
CDS of Russia on Friday was up to standard 143.8 basic points, Italy at 144.4, Spain 171.1, Portugal 261.9, Greece 611.7 ( on Thursday the historical maximum 638 was recorded).