Borrowers Return to Bond Market

Rosselkhozbank is set to issue the first eurobond by a Russian bank since last summer, but the agricultural bank isn't the only corporate taking a dip back into the once-frozen bond markets.

Bonds are back --- and not least of all in Russia, where the past few weeks have witnessed a flurry of issuing announcements and rumors, the most ambitious being the 100 billion ruble ($3.2 billion) issue that Atomenergoprom said it was considering last week.

Gazprom Neft, MTS and Russian Railways pioneered Russia's return to local and foreign debt markets this spring, and now a bigger wave of issuers is coming in, said Mikhail Galkin, a fixed-income analyst at MDM Bank.

At least six borrowers, including City Hall, have announced issues in the past week, and there is talk that three more are on the way.

Gazprom and Russian Railways are expected to issue 15 billion rubles of bonds each and will join the ranks of VTB Leasing, Vneshekonombank and Pervobank, as well as retailers such as Sedmoi Kontinent and Pharmacy Chain 36.6, all of which announced an issue in the past week.

Thanks to a strong ruble and high oil prices, market participants have been more than happy to return to the local debt market, but the window for prospective borrowers can only last as long as positive investor sentiment, said Marina Vlasenko, a senior credit analyst at Commerzbank. "As soon as fears about the currency escalate, the window [for issues] could close," she said.

At the same time, corporate borrowers must temper the urge to rush in. Coupons will continue to fall as the Central Bank slashes its refinancing and repo rates and investor demand grows.

Both MTS's 15 billion ruble issue last month and Gazprom's 400 million Swiss franc ($373 million) issue in April were oversubscribed.

"The ruble is gaining, and rates are falling," Galkin said. "It's the perfect opportunity to jump on the train if you believe in the oil price -- and many do."

For now, the market is only ready to digest bonds from top-tier borrowers, and it may be a while still before second-tier companies get the chance to swoop in, Vlasenko said.

Dominating the field are semi-sovereign players such as Russian Railways and Gazprom, which have already issued multiple bonds this year, and Rosselkhozbank, one of the few that can afford to brave the eurobond market.

Rosselkhozbank plans to place over $1 billion worth of bonds, Bloomberg reported Thursday, with an expected coupon of 9.25 percent -- the same rate as Gazprom's eurobond issue in April.

The Rosselkhozbank bonds will likely perform even better than Gazprom's because of the rally on the equities markets over the past few weeks, said a credit analyst, who declined to be identified because she was not authorized to speak to the media.

While bonds on the domestic market have also been in high demand, much of the interest stems from state-owned banks that are deliberately trying to pique interest, Vlasenko of Commerzbank said.

"Part of the demand on the local market is created by state banks that are requesting larger amounts of the issues than they're actually going to buy," she said.

While this strategy may work for now, it probably cannot sustain the bond market rally in the long run. "During the second half of the year, larger banks might be dealing with their own credit portfolio problems," she said.