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Despite ratings upgrades, Russian corporate bonds unlikely to move

Russian steel exporting corporates are demonstrating strong fundamentals, which not even EU tariffs are likely to impact. However the debt of these companies, similarly to that of the majority of the Russian corporate space, is already trading relatively tightly, so despite their appealing fundamentals, there are unlikely to be any major shifts in Russian corporate fixed income.

Aug 5, 2016 // 4:57PM

Two Russian steelmakers, NLMK and Severstal have had their long-term credit ratings upgraded to investment grade by S&P Global Ratings, up to BBB- from BB+. The outlooks on the ratings are negative.

Although the steel market is oversupplied, the Russian steel space is not as saturated as others, such as China’s.

Furthermore, excluding China, there will be a steel deficit this year according to Caroline Bain, senior commodities economist at Capital Economics.

“I can see why people are becoming more positive on Russian steelmakers given that there probably is a shortage in the rest of the world.”

Even EU 5-year tariffs against Russian and Chinese steel exporters are unlikely to dent the fundamentals of Russian steelmakers. Schildershoven Finance noted in a report that the tariffs will amount to a €170mn and €120mn haircut on the revenues of NLMK and Severstal respectively, which is not hugely significant.

Despite the positive rating action, it is unlikely that there will be much movement on the companies’ bonds, as yields on the outstanding notes from both NLMK and Severstal are already relatively tight.

There is also unlikely to be a positive spillover effect onto the bonds of other Russian corporates, as the top-tier companies are all currently trading tightly.

The two corporates are also not likely to issue new debt over the course of the next year, according to Alexander Sychev, an analyst at Rosbank.

“NLMK already recently issued (a US$700mn 7-year bond in mid-June at 4.5%) and has almost bought back its outstanding 2018s and 2019s, and Severstal’s CFO has said the company will use its cash reserves to redeem outstanding bonds over issuing new debt,” Sychev said.

The corporates join Norilsk Nickel and Lukoil, two other commodity-related companies which also carry a BBB- rating from S&P.

Despite now having a higher rating than the Russian sovereign, which is rated below IG at BB+ with a negative outlook by S&P, Sychev noted that it will not impact the popularity of either Russian corporate or sovereign debt.

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