LONDON (Reuters) - Russian companies are increasingly borrowing on rouble debt markets rather than selling Eurobonds, driving sales sharply higher this year but fears are growing that another round of U.S. sanctions will undercut the boom.
Gross corporate bond issuance in double’s is up by more than 20 percent in the first six months of the year with around 90 debt placements, according to the Moscow Exchange MOEX. Of these issues, 18 came from debut entrants.
The market has boomed since 2014, a major catalyst being the West’s move that year to prevent a host of Russian companies, individuals and state-run firms from raising new finance on global markets, as punishment for Moscow’s annexation of Ukraine’s Crimea region.
Curbs were broadened this year over accusations of Kremlin meddling in U.S. elections. Russia has denied any interference.
As a result, many firms, even those not subject to sanctions, have chosen not to borrow overseas due to higher premiums foreign investors are demanding to hold Russian securities.
That has helped the corporate rouble debt market to double since early-2014, amounting now to 11.3 trillion roubles ($179 billion), according to data from Moscow Exchange MOEX.
“Companies are rolling their hard currency debt or loans over and issuing rouble bonds instead,” Anna Vasilenko, head of primary markets at MOEX told Reuters. “Russian corporates have decided that this is the time to borrow on the domestic markets.”
Rouble issues now account for 60 percent of outstanding bonds, compared with 40 percent a few years ago, Vasilenko said, predicting rouble debt issuance would accelerate further in the second half of 2018 due to interest from more new issuers.
Forthcoming issuers may also include two of the biggest Russian firms, Gazprom and Russian Rail, which have announced their intention to tap markets, said Stanislav Bozhenko, chief credit analyst at VTB Capital.
The market’s biggest risk, however, is the possibility of fresh sanctions after a meeting between U.S. President Donald Trump and Russian President Vladimir Putin in Helsinki sparked a backlash against Moscow in Washington.
Some U.S. politicians are pushing for more “heavy-handed” sanctions to discourage interference in upcoming elections. These could punish the finance, defense and energy sectors.
The impact should be felt to a lesser extent than the Eurobond market, given foreign investors and local branches of international banks accounted for just 2.7 percent of buyers across new issues in the second quarter.
This was as high as 8-22 percent back in 2013, when rouble debt became eligible for processing via international post-trade settlement service, Euroclear, which made it easier for foreigners to invest. But five years on, local banks dominate the corporate markets, Sberbank CIB data shows.
To view a graphic on Ruble bond holdings by Russian banks, click: reut.rs/2LzcbjV
“The local market is less sensitive than the external one, but still investor appetite is being driven by general environment, it will make people more cautious,” Bozhenko said.
Issuance volumes, the size of the local investor base and Euroclear eligibility should make rouble corporate issues interesting for foreigners, who already hold around a third of Russia’s rouble-denominated Treasury bond market.
But across emerging markets, companies find it hard to persuade risk-averse foreign investors to lend to them in their own currencies, with the latter preferring to buy sovereign bonds even if they pay lower yields.
In Russia’s case, local buying and a scarcity of liquid bonds from companies with good credit profiles have compressed corporate yield spreads over the sovereign, making company debt less attractively valued than in the past, investors say.
Alaa Bushehri, portfolio manager at BNP Paribas Asset Management, noted for instance that Russian Railways’ 2022 bond yields just 20 basis points (bps) over similar-tenor OFZs while bonds from private lender Alfa Bank trades at a 60 bps yield spread over the sovereign.
Add to that the specter of more sanctions on Russia. Those will likely drive up OFZ yields, further eroding the attraction of corporate bonds.
“Markets are perhaps expecting, or do not rule out at least, further sanctions - but it is just very, very difficult to predict what impact they could have,” said Busheri.
Reporting by Karin Strohecker in London, additional reporting by Andrey Ostroukh in Moscow; Editing by Sujata Rao and Alison Williams