The completion of the book building process for Gazprom Neft’s recent RUB15bn 30-year local-currency bond is a testament to the growing demand for long-term local currency debt in Russia. The company’s bond, which carries a 5-year put option, saw participation from over 40 investors and an oversubscription of over 3x according to a release on the company’s website.
The demand allowed for pricing to be set at 90bp over federal bonds, with a coupon rate of 9.4% per year. According to the company’s deputy CEO for economics and finance, the coupon rate is the lowest of any Russian corporate local-currency debt offering in the last two and a half years.
“The liquidity in the Russian market is strong, and comes mainly from the Ministry of Finance spending the reserve fund to finance the budget deficit, something that has been occurring for over two years now,” said Alexander Sychev, analyst at Rosbank.
Since the beginning of 2016, Russian borrowers have issued local-currency bonds totalling RUB1tn. The country’s corporate bond market is around RUB8.5tn in size, and net corporate issuance to date amounts to around RUB300-400bn.
“The local markets are actually the first choice for Russian issuers.”
Analysts suggest this looks set to continue. Yields are declining in line with inflation and the CBR key rate and the markets remain liquid. The Central Bank of Russia’s key rate remains at 10.50%, whilst inflation hovered around 7.2% as of July this year.
Despite clear demand for Russian paper and the current search for yield amongst the global investment community, international funds are not involved in Russian corporate local currency bonds. Such institutions tend to buy government local currency paper, or OFZs. Non-resident holdings of these notes have been growing steadily to around RUB1.3tn, which translates to a market share of around 30% compared to 20% at the beginning of 2015.
Although many companies are under western sanctions, the pricing on the bonds of sanctioned companies is starting to fall in line with those on non-sanctioned entities’ debt.
Sychev noted that it all depends on demand. “Local pension funds usually do not really worry about Western sanctions; they tend to focus on yields instead. Gazprom Neft is actually a good example of this.”