Russian corporate supply is low, investor portfolios are underweight and the rest of EM is not offering much yield. Macro market shocks aside, Russian corporates will find ample demand and they didn’t need a showy headline trade to prove that.
Russia’s 10 year sovereign bond issue was a display of machismo, rather than an answer to funding needs. It sent a strong message of independence, flipping a finger at those international banks which were unable to act on the deal for fear of angering their host regulators — despite the unwillingness of countries to actually sanction the Russian sovereign.
But it didn’t attract the international renown it may have hoped for. The deal size fell short of the expected $3bn and questions remain over how international the allocations really were.
Sole lead VTB’s president and chairman Andrey Kostin was reported in the local press as having said that the aim of the sovereign’s deal had been to help corporate borrowers access the bond market. But corporate Russia does not need its sovereign’s help.
Even without this “message” to the international community, Russia’s corporate borrowers have open access to the capital markets and its debt is in very strong demand.
Last week Evraz, Sovcomflot and Novolipetsk Steel (NLMK) printed almost $2bn of debt between them.
Each opted for a combined new issue and tender offer, a strategy that was deemed “defensive” by several market participants.
But the pricing on the deals was anything but defensive. Evraz and NLMK revised pricing 75bp from initial talk and the three were all deemed to have priced flat to or through their existing curves.
Investor orders came in in size. NLMK took a $4bn book for a $700m seven year note and Evraz’s topped out at $2.2bn for $500m. Evraz’s deal even rallied nearly a cash point in the secondary market after the deal.
Another point which negates the defensive claim was that none of the issuers wanted to increase their debt load. Sovcomflot issued $750m, of which $653m was rolled over from the borrower’s existing bond. It took only $100m of new money. As one DCM banker pointed out, these deals were about refinancing, rather than financing. Several bankers agreed that had Evraz, Sovcomflot and NLMK wanted to issue standalone new deals, they could have done so easily.
Three Russian deals in a week is certainly a peak in issuance in a year that has seen just $5.9bn of international bond issuance, as opposed to the pre-sanctions figure of $28.8bn year to date in 2014, with just $5.2bn of that coming from the corporate sector. But the fact that Russian paper is in hot demand is nothing new.
The first round of European and US sanctions against Russian were introduced in March 2014. In April, US sanctions were extended to include several individuals as well as 17 Russian companies. While this blacklisted many large international borrowers, it merely increased demand for the Russian borrowers which were able to come.
Alfa Bank burst back into the markets with a €350m 5.5% 2017 which was swiftly carbon copied by Sberbank. Issuance was certainly slower than in previous years, and paltry in 2015, but depending on wider market conditions, demand was there for those that needed it.
The first standalone deal of 2016 came from Global Ports in April and was 3.5 times subscribed. The deal also found good follow-on demand and was 17bp tighter in secondaries just a couple of days after printing at 6.875%. VimpelCom took a massive $8bn book two weeks later for its dual tranche four and seven year note.
Russian corporates have plenty of options when it comes to dealing with the $40bn payments in 2016 and 2017 that Fitch expects. Local banks have an abundance of FX liquidity which they are willing to deploy as loans, the Russian domestic bid is strong for rouble, and international investors have shown themselves willing to roll into longer debt and buy new issues.