Is a corporate bond market emerging in Russia?

Oct 04, 1999 02:00 AM

by Ben Aris

A corporate bond market is slowly emerging in Russia as domestic companies, cut off from international financing, try and find new ways to fund their investment programs.
Russia can now boast three corporate bonds, all aimed at foreigners' money trapped in the state treasury bills (known as GKOs) upon which the Russian government defaulted in August of last year.
At the time, foreigners held an estimated $ 20 billion in GKOs. Now, experts estimate that about $ 700 million was held in restricted "S" accounts of the Central Bank of Russia (CBR) after "restructuring" was completed.
Foreign loans are currently hard to come by for Russian companies, which have since last year's market collapse been considered about as creditworthy as Colombian drug barons. Russian managers therefore see the GKO money as an attractive and cheap source of funds -- and are looking to corporate bonds as the best way of getting their hands on that money.
The bonds are being sold to a semi-captive audience. CBR rules make almost impossible for foreign investors to repatriate this GKO money. With inflation rising (it was 38% over the first three quarters of this year) and the ruble continuing to sink (currently at 25.20 rubles to the dollar), investors are looking for ways to avoid more pain.
The issuers of corporate bonds appear to be responding to buyers' needs. For example, Tyumenneft (TNK) retailored its latest bond issue to make it more attractive to investors. The offering of securities has been hailed as a big success. On September 21, TNK placed, in a second tranche, the rest of a bond issue worth 2.28 billion rubles ($ 89.8 million) bond. It sold half the issue in the first tranche between the end of July and the beginning of August. The five-year securities are ruble-denominated but dollar-indexed, yielding between 7% and 12.5% (depending on when they are redeemed). Coupons are paid twice a year and there is a put option at two, three and four years, allowing investors to bail out before itmatures.
Yet despite such reasonably attractive terms, foreign investors with money in their "S" accounts have yet to be overwhelmed with enthusiasm for the new instruments. "With the current uncertainty in the exchange rates and inflation, foreign investors are reluctant to by fixed income instruments with a ruble risk," says Margot Jacobs, a bank analyst with United Financial Group/Paribas. "Given the huge risks of investing in Russia at the moment, the big upside in the equity market looks more attractive than an fixed income instruments for people that want to expose themselves to Russia."
Three bonds have been sold so far. On top of the TNK bond, Gazprom and LUKoil have issued bonds worth 3 billion rubles ($ 12.1 million).

In the case of Gazprom, it is believed that 60% of the bond was sold to the company's own underwriters and most of the remaining 40% sold on the open market went to Russians. TNK had more success with its issue, but analysts still think that only 30% of the first tranche was sold to foreigners.
Insiders say that one of the reasons why TNK's bond was more successful is that the company offered investors up-front cash-back payments of rubles that can be exported.
Despite the jiggery-pokery, the bond issues are helping to develop much-needed supporting market infrastructure. At the end of September, Gazprom's bonds began trading on a secondary market, the MICEX (Moscow Interbank Currency Exchange).
Although first-day volumes were a meagre $ 100,000, the RTS (Russian Trading System), determined not to be outdone by its arch-rival, applied to the Federal Securities Commission (FSC) for permission to trade bonds as well as shares.
This is a small beginning, but several other companies have announced plans to join the ruble-denominated bond issue club before the end of the year. The national grid operator UES (United Energy Systems), the diamond monopoly Alrosa (Almazy Rossii-Sakha), Avtobank and the oil majors Sibneft and Tatneft have all announced plans to issue bonds.
Given the scary nature of Russian politics at the moment, Russian companies will have to struggle to find anyone to buy this paper. But the corporate bond issues are at least a step in the right direction. The Russian equity market is at present relatively well-developed, but the financial market is lopsided in that there is virtually no corporate debt or bond market. Nor are there any state treasury bills; the CBR's plans to issue a new bill called a "beaver" have failed to materialise.
Nevertheless, there are other hopeful signs. In addition to the corporate bonds, a market for short-term corporate debt is in the pipeline. Russia already has the unregulated "veksel" ­- little more than an unregulated IOU used in barter transactions and now more or less defunct. However, Alrosa has announced that it will issue two tranches of six-month debt (regulated by the FSC) in the coming months. Company managers hope the issues will raise $ 10 million each. Russian investment bank Renaissance Capital, for one, is keen to build up this business.

Source: NewsBase
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