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Russian companies plan Eurobonds ahead of possible Fed tightening

03.06.2016

Reuters UK

By Kira Zavyalova

Russian corporate borrowers plan to use a window ahead of a potential rate hike by the U.S. Federal Reserve to issue Eurobonds, as some of the demand for Russian risk is back with pricing still attractive, companies and analysts say.

U.S. central bank chief Janet Yellen said in May that the Fed should raise interest rates “in the coming months” if the economy picks up as expected and jobs keep being generated.

There has been speculation the Fed would raise rates as early as its next meeting on June 14-15, although weaker-than-expected U.S. jobs data has cooled anticipation of an imminent hike.

This week Russian steel producers Evraz and NLMK and shipping firm Sovcomflot announced plans to issue Eurobonds - bonds issued on foreign markets - to buy out some of their outstanding papers totalling $3.2 billion.

“A specific trigger for the deals already announced is the upcoming Fed meeting when rates could be raised and borrowing becomes more expensive,” said Sergei Goncharov, an analyst with Sberbank CIB.

“In general, many Russian companies have (Eurobond) redemptions peaking in 2017-18, which need to be refinanced, which is sensible to be done in the next year to year-and-a-half.”

According to ThomsonReuters data, Russian corporate borrowers have to redeem $17 billion in Eurobonds next year and another $21.4 billion in 2018. That compares with $3.9 billion this year and $10.7 billion in 2019.

DEMAND

Russian firms raised a total of around $2.4 billion in Eurobonds this year, with a Swiss franc deal by gas giant Gazprom four times oversubscribed.

The yield for the sovereign benchmark 10-year Eurobond maturing in 2023 has fallen by 30 basis points over the last two months to 3.8 percent on rising oil prices, suggesting the price of any new issues by Russian firms has become more attractive for borrowers.

The finance ministry raised $1.75 billion via a 10-year Eurobond issue last week, offering a yield of 4.75 percent in the first sovereign issue since 2013. Demand was over $7 billion, supported by some Russian banks with surplus forex.

Russian state banks were excluded from the issue by the finance ministry, with priority given to foreign investors who bought around 75 percent of the issue, the ministry has said.

“This means that in reality there is over $5 billion (in unfulfilled demand) ready to buy long papers,” said Denis Poryvai, an analyst at Raiffeisen bank in Moscow.

According to ThomsonReuters data, state banks Sberbank, VTB and Russian Agricultural Bank along with oil firm Rosneft and Russian Railways are among those that have to redeem Eurobonds in 2017.

In 2018, oil company Lukoil, Gazprom, VTB, Russian Agricultural Bank and Rosneft will have to redeem Eurobonds, the data shows.

VTB, Russia’s second biggest bank by assets, has already said it plans to use some of its spare forex to buy out some of its outstanding Eurobonds this year.