Agricultural Bank will replenish the capital of “perpetual” bonds

Russian agricultural Bank (Rosselkhozbank) in early October plans to place perpetual subordinated bonds on the domestic market. According to information for investors (), the issue volume is 5 billion rubles. the raised money will go to the capital of the first level.

The benchmark rate of the first coupon is set at 14.25 – 14.5% per annum. The papers in this series are included in the program of indefinite duration ruble bonds of Rosselkhozbank total capacity of 75 billion rubles.

In July 2016 Rosselkhozbank became the first Bank that issued perpetual subordinated bonds under Russian law. The Bank placed two issue worth RUB 10 billion, however, as told by the market participants, the October placing could be the first perpetual issue of ruble bonds for a wide range of investors. Rosselkhozbank to such securities the banks had placed at the international capital market. In particular, perpetual Eurobonds issued earlier, VTB and Gazprombank.

Perpetual bonds — bonds without a maturity. This means that investors can unlimited time to earn income or to be able to sell securities on the market. But at the same time, the Bank may redeem securities at predetermined dates at a price of par. Posted by Russian agricultural Bank issue a perpetual bond includes a call option whereby the Bank may repay ahead of schedule after every 10 years of treatment. This kind of borrowing can be a way for banks that are limited in attracting funding from abroad.

“The market is ready for this kind of tools, he is already Mature enough. If you were offered to investors perpetual subordinated bonds, then you would be considered crazy. Now, I think the demand will be, but it’s hard to say whether it is a market,” says senior portfolio Manager GHP Group Fedor Bizikov.

“Even with the proposed 10 years holders of the award in 100 b.p. the current yields on 10-year OFZ not the fact that the yield of the coupon will be above the current offered by Rosselkhozbank. If now the premium to OFZ is about 6 percentage points if in 10 years the yield of government securities will decrease, say, to 5% per annum, the coupon rate on bonds of Rosselkhozbank will fall to 12%,” he says. However, according to him, even taking into account the possible fall in interest rates, investment in Bank subordinated paper look attractive and be interesting, in particular, pension funds.

“However, the perpetuity of the bonds becomes fraught for the Issuer with the increase in interest expense as if the Bank will not execute the call option, to pay for debt service, he may have all the more,” — said the Manager. He believes that placing, the perpetual bonds of Rosselkhozbank performs the current task, the Bank needs to replenish capital. “It is unlikely that the top management of the Bank considers the debt as “perpetual”. I want to believe that in 10 years they would still be able to rectify the situation with the business,” — says Bizikov.

The Manager recalled that a similar mechanism of attraction in the capital of Rosselkhozbank already used in 2011, but the placement of Eurobonds. Then the Bank issued 10-year Eurobonds with reference to the yield of U.S. Treasury securities with a five year call option. Rules of etiquette suggest that the Issuer will fulfill these commitments, but RAB had problems”, — said Fedor Bizikov. But eventually in July, the Bank will execute the call option on subordinated Eurobonds worth $800 million.

New offer from Rosselkhozbank looks unique for the ruble bond market is the first perpetual issue, which also has the status of subordinated. In this regard, the market is likely to perceive it with a certain caution, that may affect the liquidity in the secondary market”, — said the head of the Department asset management fixed income UK “Kapital” Renat Malines.

In the first quarter, assets of agricultural Bank rose 4.4% to 2,451 trillion rubles; capital adequacy ratio H1 amounted to 16.4%. On 1 September the Bank’s capital amounted to 401,1 billion rubles (4th place among the Russian banks). In the Federal 2016 budget included an increase of capital of Rosselkhozbank by 10 billion rubles, in 2017 — increase the share capital by 10 billion rubles, and in 2018 — by 19.5 billion rubles.

“Proposed issue of subordinated bonds is not very large (of the order of 0.2% of assets, weighted by risk), but it will be useful to the Bank, as likely to be included in the core capital, i.e. tier I capital,” says associate Director Fitch Ratings Sergey Popov. — Liabilities market placements of the Bank for the next two years is not very large and it can cope with them, having a good supply of liquidity, in addition, part of placements may be refinanced”.

At the end of 2015, Fitch Ratings affirmed the long-term rating of Russian agricultural Bank at ‘ BB+, Outlook “negative”. “The negative Outlook on the Bank’s rating is solely due to a negative Outlook on the country rating, as the rating of Russian agricultural Bank is on the support of the state”, — adds Sergey Popov.