Russia Forum Buzz – Credit, FX and Rates: Pricing Challenges in a Changed Environment

February 4, 2011

 

Panel members discussed a wide scope of problems, from the cost of borrowing and institutional constraints in Russia to global economic performance and the potential rating downgrade of the US.

Michael Wexler mentioned that he has both short-term and long-term concerns regarding investments in the Russian market and hence has zero exposure to it. At the moment, foreign investors’ share of the OFZ market is only 2%. International investors do not like the Russian local fixed income market. Rates are low and the yield curve is flat. Eurobonds are a little more attractive, but still do not attract a lot of attention. So in the short term, his concerns are more about pricing. From a long-term perspective, he sees problems in corporate governance, accounting standards, transport infrastructure, lack of rule of law and property rights.

Steven Dashevsky mentioned that Russian corporate debt is a special situation. Local companies, rather than foreign enterprises, are paying 200-400 bps more for credit. Russia and the CIS is the right place to find a 9-10% yield. In contrast to shareholders, bondholders have the opportunity to agree with the issuer’s changes to covenants and avoid conflicts. Eurobonds are more attractive than ruble bonds, as local interest rates are rising. The biggest risk for Russia is the potential incorrect functioning of political and economic systems.

Giacomo Baizini said that Evraz Group raised about R50 bln on the ruble bond market in 2009-10. The company tried to place bonds on the high-yield US market, but finally decided to stick to the local market. The cost of borrowing was 9.95% in rubles, or less than 6% in dollars after the currency swap. Apart from the price, ruble bonds are more convenient for the borrower due to the smaller number of covenants. Evraz Group is not hedging against commodity prices, because as a natural resource company, it is not accepting any opinion on price changes.

Scott Bugie indicated that the economy and financial system are in a process of slow rehabilitation. He sees more risks in Sovereign debt in 2011, which was growing rapidly during the crisis due to government bailout operations. The Russian credit profile is still unbalanced with a strong public financial position and a slow pace of reform.

Nassim Taleb said that he pays little attention to rating agencies’ decisions, as they usually forecast badly. He also sees a huge risk in US finance with the problem of the $1 trln deficit. The government needs to place at least $0.5 trln in bonds to finance the fight with unemployment. He sees more value in euros (rather than in dollars), because of Germany’s presence in the EU.

Uday Patnaik spoke more about his investment priorities at the moment. He prefers EM over DM, discussing EM corporations versus EM Sovereigns and high-yield instruments versus low-beta bonds. He expects further spread compression on the back of higher than expected economic growth in the US. Bonds from Russia’s Promsvyazbank, Ukraine’s PrivatBank and Kazakhstan’s BTA are good examples of how to implement this strategy.

He sees the following three major risks: Sovereign debt in developed markets, higher than expected lending rates in China, risk of interest rate growth in the US.

Shamil Kurmashov said that Aeroflot actively uses hedging to manage risk. For example, the company linked the interest rate on part of its debt to oil prices. If prices go up, the rate declines. In addition, the company plans to match the currency of its revenues and expenditures. Mr Kurmashev also said that time of cheap assets in Russia is over. At the same time, he sees discrimination against Russian companies on the side of rating agencies, which put too much attention on the virtual risks of corporate governance and similar things. Aeroflot can even avoid foreign borrowings, especially if we take into account that ruble credits are cheaper in comparable terms (via cross-currency swap). He also mentioned that investors’ attitude toward Russia should improve.