U.S. investors bought more than half of Russia’s Eurobonds for $1.25 billion

Russia for the second time this year has entered the market of international capital, using a good global environment, and a good appetite of investors to the Russian papers. Thursday, September 22, she has successfully placed 10-year Eurobonds for $1.25 billion, announced late in the evening, the Ministry of Finance.

“We saw huge interest from investors. (…) The new Eurobonds were placed solely among foreign buyers, the share of investors from the United States accounted for 53%, Europe 43%, Asia — 4%”, — told reporters the Minister of Finance Anton Siluanov (quoted by Interfax).

“The option for the additional placement of $1.25 billion, the Ministry of Finance decided to implement after it had been postponed indefinitely the privatization of “Bashneft” in question is the sale of state-owned Rosneft. The government needs to Finance a budget deficit expected this year at the level of 3.2% of GDP, and the Ministry of Finance has spent on these purposes is already 1.2 trillion rubles from the Reserve Fund.

The placement price amounted to 106,75% of the nominal value, the Finance Ministry said. This implies a yield of 3.9% per annum. “The issue can be considered a success,” — said General Director of “Sputnik — capital Management” Alexander Losev. The initial landmark placement price was 106% of par (yield of 3.99% per annum), but the good demand has allowed to improve the conditions of the loan. To the closure of the order book, the demand for bonds exceeded supply by six-fold, rising to over $7.5 billion on Thursday stocks and bonds on world markets grew in value, reflecting the decision of the U.S. Federal reserve not to raise its key interest rate, the Finance Ministry just came on the market. The may issue of Eurobonds for $1,75 bln, which became Russia’s first since 2013, it has risen since by more than 6 percentage points and the yield fell by nearly 1 percentage point, to 3.82% on Thursday night (data from Bloomberg terminal).

The papers were placed exclusively among foreign investors, the United States accounted for more than half of the volume, said the Ministry of Finance. Market participants noted that the Finance Ministry has chosen a very good time for deals, and offered buyers a discount to the current market price is allowed to increase investor demand. “The Ministry of Finance, thus, receives no additional funds in the budget, but a good premium, and so tactics issuance of Eurobonds by parts is justified,” — said Losev.

“The Finance Ministry has chosen the right moment for the placement Eurobonds. Now the profitability of Russian securities at a very low level — with the yield on sovereign Eurobonds were traded in 2013,” — said the Director of debt capital markets at ROSBANK Anton Kiryukhin.

More foreigners

The first part of the output of Russia was posted in may 10-year Eurobonds for $1.75 billion under 4.75% per annum. It was the first out of the country on the international capital market since autumn 2013. The total volume of the order book was about $7 billion, “More than 70% of accommodation had on foreign investors. It is on this group we have been,” — says the Finance Ministry.

The demand for dorazmeshchenie paper $1.25 billion was higher than in may, due to the fact that at the end of July, the international clearing system Euroclear, after several months deliberation, made a new Russian Eurobonds to the calculations. Now the clearing of securities is carried out simultaneously national settlement Depository (NSD) and Euroclear. As noted by the head of corporate and investment block of Sovcombank Mikhail Avtukhov, after the issue was resolved with Euroclear, for investors there are no special obstacles to acquire the paper. In this regard, in his opinion, the placement could participate for those unable for this reason to buy Eurobonds in may 2016.

Participation Euroclear positive impact on the demand from international investors, agree senior economist for Russia and CIS Dmitry Field of ING. “The last time the total volume of the order book amounted to about $7 billion Then the lack of participation of Euroclear questioned the existence of foreign capital in the course of the placement. Despite the fact that the Ministry of Finance said that 70% of investors were foreign, there were suspicions that a large part of this money could have been of Russian origin. The foreigners were not so many,” he says.

Sanctions risks

Although Western sanctions did not apply to government borrowings Russia, they still affect the placement process, said the head of research at emerging markets Commerzbank’s Peter Kinsella. It specifies, in particular, that accommodate only one organizer. “It’s not normal but it is a reflection imposed on Russia financial sanctions,” he said. However, Kinsella said the high demand for Eurobonds, because “investors still holding interest in higher-yielding assets.

Sanctions risks for investors, which are indicated by the Ministry of Finance in may, four months has not changed. According to the updated prospectus of (have), Russia is obligated not to use obtained from the placement of funds for assistance under the EU sanctions and the United States natural or legal persons. In addition, as with the may placing, the possibility of payments to investors not in dollars but in other currencies (pounds sterling, euros or Swiss francs at the Issuer’s discretion, if the calculation is in us currency will be blocked. “The payments on the bonds may affect geopolitical events, and if the payment is in dollars it would be impossible, provides for payments in alternative currencies”, — stated in the prospectus of the securities, see “risk Factors”.

“On the current situation, the Ministry of Finance could place significantly more, as the interest of investors, I think, will be high. Moreover, additional liquidity future release will add the fact that securities can be traded on the foreign exchanges,” — said the Deputy Director of asset management Department of MC “Alfa-Capital” Eugene Kochemasov. Russia has applied for listing of the securities on the Irish stock exchange, it said in the prospectus.

Purpose of the loan

The Ministry of Finance need to Finance the deficit due to low oil prices and uncertainty with large privatization transactions. The budget law allows him to bring this year abroad $3 billion, that is, the quota of foreign loans is already selected. Earlier, the Director of the Department of state debt and state financial assets of the Ministry of Finance Konstantin vyshkovsky said that instead of offering of $1.25 billion can be chosen denominated borrowing. But in the conditions of a stable rouble, the government is more profitable to place foreign bonds, says economist BCS Vladimir Tikhomirov. “In principle, it would be possible to place ruble bonds — they would be too high demand, but because of foreign currency bonds yield is lower and, apparently, the government is confident that the exchange rate of the dollar against the ruble will be stable enough that it is more profitable to lower yield, because bonds would still be somehow tied to the rate of the Central Bank and inflation, and it is quite high numbers,” he explains.

Additional borrowing in dollars will be used to service foreign currency debt, it said in the prospectus securities and the remaining balance will be sold to the Bank of Russia will replenish its currency reserves. According to the law on budget for 2016, this year the Ministry of Finance to spend 164 billion rubles (0.2% of GDP) external debt service.

The second stage of placing of Eurobonds of the Russian Federation — planned and is not a substitute for privatization, said on Thursday, September 22, to journalists the Minister of economic development of Russia Alexei Ulyukayev. “It’s usual, normal work. It in no way does not replace the decision on the privatization of large assets,” — said the Minister (quoted by TASS).

To reduce the load on the Reserve Fund, which remained a little more than 2 trillion rubles, the Finance Ministry seeks to involve the maximum number of instruments, says the chief economist of the Eurasian development Bank Yaroslav Lissovolik. “Note on the volume — it is not so significant. You can say that it is an aid both in order to Finance the budget deficit, and in order to continue to test the financial markets and gradually withdraw them to Russia as a borrower,” he said.

With the participation of Catherine of Marjolie