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Source Research
May 30, 2006
ING Wholesale Banking Russia Russian Fixed Income Weekly
- Economics: stabilisation fund and international reserves
- New placements: Technosila...
KIT Finance Investment Bank FIXED INCOME WEEKLY 21, 2006 (Eng)
ING Wholesale Banking Russia Russian Fixed Income Daily
- UrSI-6 and SibTel-6 most attractive telecoms on secondary market
- RSB-4 25-50bp above its fair YTM
- MosReg-6 retains upside despite growth...
Description
FX and money market Monday was calm in the Russian FX market due to holidays in both the US and UK, with the dollar continuing its appreciation and trading around USD/EUR1.275, pushing the rouble to RBL/USD27.06. Today, activity in the markets is reviving and this morning the dollar has fallen against the euro to USD/EUR1.283, resulting in an appreciation of the rouble to RBL/USD26.97.This week we expect the rouble to remain volatile following the euro/dollar exchange rate, which will be influenced by scheduled economic releases the most important of which are Wednesday’s Minutes of the 10 May FOMC Meeting and Friday’s change in non-farm Payrolls. Today, we see the rouble at RBL/USD26.96–27.01. Yesterday, despite profit tax payments rouble liquidity was in a good shape with interbank overnight interest rates at 1.5–3% on average. We expect that until mid-June the situation will remain stable with short-term interest rates around 1–2%. Today, MICEX is planning to introduce two new derivative instruments – one-day MosIBOR and 3-month MosPrime rate futures. Interest rates futures are very popular in international markets and are likely to be accepted by the Russian market. We welcome this idea, although the initial liquidity of these instruments is likely to be low. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market Monday, despite its typically low trading activity, was a rather strong day with buying appetites fostered by a rebound of the Russian stock market, as well as significant accumulation of rouble liquidity that this month began early, ahead of the end of large tax payments. The spread of Russia’30 over US10Y is currently 120(+0)bp (very wide, with a compression potential of 30bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 57(+0)bp (wide in a medium-term perspective, our target for the spread is 0bp). Secondary trading Price changes of high-grade rouble bonds: OFZ 46018 +12bp, OFZ 46020 -2bp, Moscow-39 +0bp, Moscow-44 -5bp, FSK UES-2 -2bp, Gazprom-4 +5bp, Lukoil +3bp, RZhD-6 +8bp. Second-tier papers: MosReg-6 +5bp, CenTel-4 -5bp, GPB-1 +5bp, Kopeika-2 +10bp, Pyaterochka-2 +5bp, RusAl-3 +0bp, RSHBank-2 -13bp, TMK-3 +3bp, UrSI-6 +5bp, UTK-4 -10bp, WBD-2 +15bp. Medium-term telecoms bonds UrSI-6 and SibTel-6 remain very attractive among other papers in the sector. Currently, both bonds are trading at 8.6–8.7% to put options in approximately 2.5 years, which is quite a high yield, especially considering that shorter papers, such as SibTel-4, NWTel-3, UrSI-4 are below 8% for 1.5 years. Due to the ongoing placements happening close to UrSI-6 and SibTel-6 (SibTel-7, Dalsvyaz-3), the speculative upside of the two bonds will probably not be realised in the nearest term perspective, but the YTP of the papers is definitely very attractive. Uralsvyazinform is rated B+ by S&P, Sibirtelecom – B+ by Fitch. RSHBank-2, a bond of Rosselkozbank – a quasi-sovereign entity created by the Russian government to finance the agricultural sector, remains undervalued in our opinion. Yesterday the paper was as usual located at 8% to maturity in five years promising a significant price upside. In the longer term, the fair value of the bond is in the range of 7.5–7.75%, so even in adverse market conditions, RSHBank-2 should behave quite well. Rosselkhozbank is rated Baa2/BBB by Moody’s/Fitch. TMK-3 – a bond of the Tube Metallurgical Company (TMK) – has been recently moving up and is now at 8.11% YTP for 21 months. Above 8% the paper definitely retains speculative upside as we believe that its fair value in current market conditions is in the range of 7.75–8%. RusAl-3 was recently around 7.75–7.8% YTM for 29 months, while we estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006–2007 that Russian Aluminium promised investors in 2005. The company recently announced it was planning to borrow as much as USD1.5bn from a syndicate of Western banks in tranches of 5–7 years, but as the new funds will be used to refinance existing debt this should not cause a significant debt burden increase. MosReg-6, a bond of the Moscow region that we previously recommended for buying, rose 5bp yesterday and is now trading at 7.43% to maturity in five years. We continue to estimate the fair YTM of MosReg-6 at 7.25%, which makes this paper one of the most undervalued long rouble bonds. Moscow region is rated BB/Ba3 by S&P/Moody’s. RSB-4, a bond of the Russian Standard bank, was yesterday quoted next to 8.5% to maturity in 22 months. We believe that this bond is 25–50bp above its fair point and recommend accumulating it for passively managed portfolios, as its poor liquidity does not allow for active speculation. RSB is rated B+/Ba2 by S&P/Moody’s. Market view In the long-term perspective, the long end of the OFZ curve has the potential to narrow its spread to US10Y to approximately 100bp. As a result, looking a year ahead, the rouble bond market has a significant advantage compared to Russian dollar Eurobonds, especially considering excess return, which is very likely to be earned over this period due to the forecast appreciation of the rouble. In the nearest future, the local market will find itself between the potentially falling US10Y, which we expect to relocate itself to the 5.2% area, and excess rouble liquidity at the beginning of June. Therefore, for the moment our recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 495) 755 5480 Rouble optimism The Ministry of Economic Development and Trade upgrades its official forecasts of the rouble for 2006-08 Yesterday the government budget committee approved the social and economic indicator forecasts for 2006–08 presented by the Ministry of Economic Development and Trade. Mid-term forecasts of the rouble were significantly upgraded in response to stronger inflationary pressure as expected. As commodity prices continue growing, inflation remains one of the key macroeconomic problems in Russia. Consequently, the CBR and the government have to allow stronger appreciation of the rouble to slow down price growth. The impressive CA surplus is also helping to strengthen the rouble. Finally, the government approved a rouble upgrade from RBL/USD27.4 to RBL/USD26.5 (2006-end) and from RBL/USD27.4 to RBL/USD26.5 (2007-end). We share the government’s optimism regarding the rouble and believe that fundamental factors are very supportive for its further appreciation. According to our estimate, the equilibrium rate for the rouble is much stronger that the government’s forecasts (currently, around RBL/USD25). Nevertheless, the Ministry of Economy’s views are not essential for actual performance as the CBR is responsible for the rouble and inflation. In 2006-07, the CBR plans to continue its current policy keeping the rouble more or less stable relative to the bi-currency basket. However, dramatic depreciation of the rouble against the dollar does not look likely even if the euro drops significantly. Investment implications: The government is ready to see a stronger rouble and has upgraded its 2006–08 forecasts. We share the government’s optimism and expect that the rouble will remain stable against the bi-currency basket in the mid-term. The CBR will remain the main decision-maker for the national currency. Julia Tsepliaeva, Moscow (7 495) 755 5489
VTB Capital MNB Daily Market Comment
May 29, 2006
ING Wholesale Banking Russia Russian Fixed Income Daily
- Opportunity in GPB-1 eliminated
- RSHBank-2 still cheap
- Baltika attractive above 7.5% YTM...
Description
FX and money market Last week, driven by euro/dollar turbulence, inter-day fluctuations of the rouble in the Russian FX market were high (up to ten kopecks) and it finished the week at RBL/USD27.03 (minus five kopecks over the period). This morning the dollar is continuing its appreciation that started on Friday, and is currently trading at USD/EUR1.274, pushing the rouble to RBL/USD27.06. Today we expect a very calm day due to holidays in both the US and UK, although the rest of the week is expected to be tense on the back of coming macroeconomic releases, with the most important being Wednesday’s Minutes of the 10 May FOMC Meeting and Friday’s change in non-farm Payrolls, which may give the market some clue of further developments in US monetary policy. Today we see the rouble in the range of RBL/USD27.04–27.09. In the money market, despite the tax payment period and end-of-month effect, interbank overnight interest rates were around 2.5–3% on average most part of the week and notable liquidity tightening (interest rate spiked to 6%) was seen on tax payment days. Today profit tax is due, so some deterioration of money market conditions is possible. In addition, given last Tuesday’s massive dollar sales, the market is full of rouble funds (NOSTRO balance have exceeded RBL400bn) so we expect the market will manage these payments without any significant problems. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market Friday was a strong day in all three market sectors: fuelled by a rally in Russian stocks, long rouble bonds also enjoyed the attention of buyers, which led to price increases in the range of 10–20bp. On the other hand, trading activity was below average, implying that this movement was not seen by participants as the beginning of a larger growth. The spread of Russia’30 over US10Y is currently 120(-2)bp (very wide, with a compression potential of 30bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 57(+3)bp (wide in a medium-term perspective, our target for the spread is 0bp). This week’s highlights Today, US10Y is at 5.05% and is unlikely to change its position due to the holidays in both the US and UK. We have many times mentioned that we don’t believe the benchmark rate will be able to remain below 5% for a long time. As a result, the current position is only neutral if the Fed target rate remains unchanged at the next FOMC meeting on 20 June, and is too low in yield if the Fed raises its rate again to the 5.25% level. Meanwhile, another rate hike is still very possible: July Fed funds futures are now at 5.14%, i.e. almost in the middle between the two probable outcomes. Bloomberg economists’ survey gives an average rate of 5.1% – slightly more conservative, but still very close to the middle of the range. Therefore, the question about the next FOMC decision remains unsettled for the investment public. The key data release that might help shift the balance to one side or the other is the publication of the minutes of the 10 May FOMC meeting on 31 May, i.e. this Wednesday. Overall, our view is that US Treasuries are currently low in yield and have a higher probability of reaching 5.2% than shifting below 5% by the end of the week. On the other hand, the situation on the money market will be improving. In spite of the ongoing tax payments, the overnight rate is currently at 2.75%, which is rather modest and promises further improvement in the first days of June. The natural accumulation of rouble funds at the beginning of next month will cause a fall of money market rates to their lows fostering demand for long rouble bonds. Secondary trading Price changes of high-grade rouble bonds: OFZ 46018 +15bp, OFZ 46020 +28bp, Moscow-39 +2bp, Moscow-44 +22bp, FSK UES-2 +9bp, Gazprom-4 +15bp, RZhD-6 +14bp. Second-tier papers: MosReg-6 +27bp, CenTel-4 +20bp, RusAl-3 -5bp, RSB-4 +13bp, RSHBank-2 +23bp, TMK-3 +4bp. The buying opportunity in GBP-1 we mentioned in our previous update has essentially disappeared: the cheapness of the bond of Gazpromabank was spotted not only by us, but apparently by many others, and as a result, GBP-1 jumped up in price 55bp on Friday driving its YTM (in five years) lower to the 7.75% area. At this point the bond appears to be fairly valued, at least in the short-term perspective. Gazprombank is rated BB/Baa2 by S&P/Moody’s. On the other hand, RSHBank-2, a bond of Rosselkozbank – a quasi-sovereign entity created by the Russian government to finance the agricultural sector, remains undervalued in our opinion. On Friday the paper was as usual located at 8% to maturity in five years promising a significant price upside. In the longer term, the fair value of the bond is in the range of 7.5–7.75%, so even in adverse market conditions, RSHBank-2 should behave quite well. Rosselkhozbank is rated Baa2/BBB by Moody’s/Fitch. TMK-3 – a bond of the Tube Metallurgical Company (TMK) – has been recently moving up and is now located at 8.1% YTP for 21 months. Above 8% the paper definitely retains speculative upside as we believe that its fair value in current market conditions is in the range of 7.75–8%. RusAl-3 was lately around 7.75% YTM for 29 months, while we estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006–2007 that Russian Aluminium promised investors in 2005. The company recently announced it was planning to borrow as much as USD1.5bn from a syndicate of Western banks in tranches of 5–7 years, but as the new funds will be used to refinance existing debt this should not cause a significant debt burden increase. MosReg-6, a bond of the Moscow region that we previously recommended for buying, rose 25bp on Friday and is now trading at 7.45% to maturity in five years. We continue to estimate the fair YTM of MosReg-6 at 7.25%, which makes this paper one of the most undervalued long rouble bonds. Moscow region is rated BB/Ba3 by S&P/Moody’s. Impex-3, a bond of Impexbank recently acquired by Raiffeisen, was quoted at about 8.1% to put in 12 months. Due to the acquisition, the bank has been upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, so now it continues to be above its fair yield, which is located somewhere in the range of 7–7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios. Also regarding the short papers, Baltika was recently traded at about 7.9% to maturity in 18 months, which is definitely too high for this high-quality paper. Its fair value is probably 7.25%, but lack of liquidity prevents the paper from moving there. Therefore, if Baltika can be found above 7.5%, it’s a candidate for buying. Market view In the long-term perspective, the rouble bond market retains significant attractiveness relative to dollar Eurobonds due to the expected further appreciation of the rouble and the removal of capital controls on 1 July. Specifically, we believe that the spread between OFZ 46018 and Russia’30 could shrink to zero by the end of 2006, while in addition, the spread between Russia’30 and US10Y is currently extremely wide and does not incorporate the further expected Paris club debt prepayment. As a result, these two wide spreads create a good safety cushion for the rouble market, which should drive the yields of rouble bonds down – or at least leave them intact in case of a sharp fall of US Treasuries. In the nearest future, the local market will find itself between the potentially falling US10Y, which are now possibly too low in yield, and excess rouble liquidity at the beginning of June, so for the moment our recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 495) 755 5480 New window for international business cooperation Russian steel company Severstal merges with Arcelor, which will become the new positive example of a successful merger after the TNK-BP deal Last week, two steel giants – the Russian Severstal and global Arcelor – signed an agreement for their merger. This is a very important deal not only for the equity market as its macroeconomic and political implications for Russia are far reaching. First of all, the deal is very big (USD13bn), and secondly, Russian oligarch Alexei Mordashov has won control of over 32.2% of the new company. The deal is good for Arcelor, which is a public company, as it helps to protect it from unfriendly merge with Mittal group, while Severstal with Alexei Mordashov is much more loyal investor. On the other hand, Alexei Mordashov won the merger deal with one of the world’s steel giants, which is not typical for Russia. Previously, there has been only one similar case – TNK-BP deal, after which the Kremlin became opposed to such ideas in general. A tendency of the government’s strengthening control over economic activity in the so-called strategic sectors (a list of strategically important sectors has not been determined, which has resulted in all big businesses possibly being considered as strategically important) has become dominant. Nevertheless, Alexei Mordashov – one of the most loyal big businessmen to the Kremlin – managed to persuade the Russian authorities that the deal will strengthen their reputation and improve Russia’s image in general. Indeed, with the deal, Russia will be able to show a second positive example of an international merger, which could play a role of a second policy window display for of President Putin’s administration regarding relationship with big business and international mergers. Nevertheless, the Severstal-Arcelor deal is unlikely to begin a new trend although some experts believe that the deal might be considered as a signal of a more liberal position of the Kremlin. In any case, the “rules of the game” are not transparent at all, which make some one-off deals possible while strengthening control over oligarch-controlled business as a mainstream policy. Investment implications: The deal between steel companies Severstal and Arcelor has positively impacted the Russian equity market. It is also important from a political point of view: the Kremlin now has a second positive example 9after TNK-BP of a successful merger between a Russian and a foreign company. Nevertheless, we do not expect similar deals to become popular in Russia, as the main tendency remains the same, with the Kremlin strengthening its control over business. Consequently, we do not expect any slow down in the flow of IPOs. Julia Tsepliaeva, Moscow (7 495) 755 5489
May 26, 2006
Gazprombank Eglish version of our credit&pricing research Sibacadembank
VTB Capital MNB Daily Market Comment
May 25, 2006
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y bounces back up from 5%
- SibTel-7 auction harms CenTel-4
- RSHBank-2: cheap exposure to quasi-sovereign risk...
Description
FX and money market On Wednesday, the rouble opened at RBL/USD27.03 and during the day appreciated by ten kopecks to RBL/USD26.93 on the back of the strengthening euro. Last night the dollar again rebounded to USD/EUR1.276 from USD/EUR1.287 following the somewhat better than expected US April new home sales figures. The market has been focusing on US and EU interest rate differentials, making the euro/dollar exchange rate very volatile. The next ECB meeting will be on 8 June while FOMC is on 29 June where a decision regarding further movement of the refinancing rate will be made. As a logical response to the weakening of the euro, this morning the rouble dropped to RBL/USD27.02 and today we expect to see it in the range of RBL/USD27-27.05. In addition, today’s release of revised US 1Q06 GDP figures could increase turbulence in the market. In the money market, rouble liquidity has worsened due to the tax payment period, and this morning overnight interest rates rose to 4.5% (excise payments are due today). Up to the end of the month, the situation in the market is likely to remain tense, while at the beginning of June it should stabilise with interbank interest rate back to around 2%. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market Wednesday was a day of consolidation on the local market, with stable prices of government bonds inducing similar dynamics in the municipal and corporate sectors. Trading activity was quite substantial in the government and the municipal bonds, while corporate papers showed modest turnover. The spread of Russia’30 over US10Y is currently 126(-2)bp (very wide, with a compression potential of 30bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 54(+3)bp (wide in a medium-term perspective, our target for the spread is 0bp). US10Y bounces back in yield from 5% Ten-year Treasury notes are currently consolidating their gains of last week. Right now, US10Y is at 5.04%, up from yesterday’s intraday yield low of 4.99%. This is the second time that US10Y has bounced back from 5% (the last time was on 22 May). Correspondingly, as we noted in our update yesterday, the downside risk for US10Y is increasing as currently the benchmark rate is located at the lower border of its recent 5–5.2% range. It is very reasonable to expect US10Y to return to the 5.2% area in the nearest future, especially considering that the Fed target rate is now at 5%, and there’s a considerable probability that the rate will be raised to 5.25% at the next FOMC meeting on 29 June. SibTel-7 auction harms CenTel-4 Yesterday the regional fixed-line telecoms company Sibirtelecom placed its seventh rouble bond with a size of RBL2bn. The demand at the auction totalled RBL2.8bn, which is quite modest, and as a result, the coupon rate for the three years of floatation was set at 8.65%, yielding 8.84% to maturity. We expected the YTM of SibTel-7 to result in the range of 8.7–8.85%, so the relatively weak demand drove the yield to the upper bound of this range. Therefore, investors in this bond simply received an additional premium resulting from the currently nervous market situation. An interesting fact is that this auction definitely damaged the position of the traditionally overbought CenTel-4, which yesterday had to shift down in price by 40bp not to turn out at a discount to the better quality SibTel-7. Secondary trading Price changes of high-grade rouble bonds: OFZ 46020 -7bp, OFZ 46018 -10bp, Moscow-39 +7bp, Moscow-44 -11bp, FSK UES-2 -20bp, Gazprom-4 -10bp, Lukoil -1bp, RZhD-6 -13bp. Second-tier papers: MosReg-6 -19bp, CenTel-4 -43bp, Megafon-3 -5bp, TMK-3 -3bp, VolgaTel-3 +5bp, WBD-2 -3bp. Long bonds of the Russian Agricultural bank, RSHBank-2, were trading yesterday slightly above 8% to maturity in 58 months. In our view, the fair value of these bonds is in the 7.75% area and possibly below in the long run, so we advise accumulating RSHBank-2 for actively managed portfolios. Russian Agricultural bank is rated Baa2/BBB by Moody’s/Fitch. RusAl-3 was lately at 7.74% YTM for 29 months, while we estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006–2007 that Russian Aluminium promised investors in 2005. The company recently announced it was planning to borrow as much as USD1.5bn from a syndicate of Western banks in tranches of 5–7 years, but as the new funds will be used to refinance existing debt this should not cause a significant debt burden increase. MosReg-6, a bond of the Moscow region that we previously recommended for buying, weakly retreated in price yesterday and is now trading at 7.5% to maturity in five years. We continue to estimate the fair YTM of MosReg-6 at 7.25%, which makes this paper one of the most undervalued long rouble bonds. Moscow region is rated BB/Ba3 by S&P/Moody’s. We continue to recommend investors the bonds of TMK, for which we have a very positive view. Specifically, in the current market situation TMK-1 and TMK-3 represent good buying opportunities for short-term and relatively long-term investors accordingly. TMK-1 was recently seen at 7.9% for five months, while we estimate its fair YTM range at 7.25–7.5%. TMK-3 was yesterday at 8.2% for 21 months, while in our opinion it should be located between 7.75% and 8%. RZhD-6, one of the longest bonds of Russian Railways (RR), remains attractive relative to other papers on the RR curve. Currently RZhD-6 is at 7.4% to maturity in 54 months, while the fair yield of RZhD-6 can be estimated at 7.2–7.25%. As a result, the speculative upside of the paper is limited to within 50bp, but if exposure to quasi-sovereign risk is necessary, RZhD-6 is one of the best candidates. RR is rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. Impex-3, a bond of Impexbank recently acquired by Raiffeisen, was quoted at about 8.1% to put in 12 months. Due to the acquisition, the bank has been upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, so now it continues to be above its fair yield, which is located somewhere in the range of 7–7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios. Short-term market view The rouble bond market retains significant attractiveness relative to dollar Eurobonds due to the expected further appreciation of the rouble and the removal of capital controls on 1 July. This is the key reason why we maintain our positive view for rouble bonds in a medium-term perspective. Specifically, we believe that the spread between OFZ 46018 and Russia’30 may shrink to zero by the end of 2006, while in addition, the spread between Russia’30 and US10Y is currently extremely wide and does not incorporate the further expected Paris club debt prepayment. As a result, these two wide spreads create a good safety cushion for the rouble market, which should drive the yields of rouble bonds down – or at least leave them intact in case of a sharp fall of US Treasuries. In the nearest perspective, the local market will find itself between the potentially falling US10Y and excess rouble liquidity at the beginning of June, so for the moment our recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 495) 755 5480 Stabilisation Fund The Stabilisation fund is planned to be converted into foreign currency and put in a CBR deposit account The Stabilisation fund is becoming more and more sizable, which is stimulating the government to diversify it. In April, it’s accelerated accumulation continued and it reached RBL1800bn (USD67bn) by 1 May 2008 (+USD4.5bn in April). The government can easily afford more substantial pre-payments of the Paris Club debt (about USD22bn in 2006) and unofficial buy-backs of tradable debt. Currently, the fund remains in roubles in the treasury account at the CBR. In April 2006, an investment plan for the Stabilisation Fund was finally approved by the PM. The law, which allows the government to invest the fund\'s money in the government bonds of the 14 countries with the highest credit ratings, was approved in September 2004. However, its practical implementation was postponed for technical reasons (the scandal involving Noga and Yukos creditors) accompanied by a new round of debates on the issue of fund spending. Now, these problems have been resolved. Nevertheless, as the first step in the stabilisation fund diversification the government has chosen a hard currency deposit in the CBR. Yesterday, Finance Minister Alexei Kudrin said that the fund money would be placed in a hard currency deposit in the CBR: in the proportion:45% in dollars, 45% in euros, and 10% in pounds. He stressed that dollar deposits would earn 5% while euro rate would be a bit lower. As the fund is very sizeable, the government is continuing to search for optimal allocations in foreign bonds and potential investments in Russia\'s equity market, although these plans are unlikely to materialise in 2006 (Kudrin believes that this could happen in 2007). We believe that the proposed structure is very close to the international reserve composition. The conversion of the rouble fund into the stated currency composition is likely to be made outside the market and does not significantly affect the rouble. Nevertheless, we expect higher demand for dollars in Russia, which may help the CBR to ease their aggressive support of the dollar. Investment implications: We welcome the idea of currency diversification of the stabilisation fund as it is positive in the long-term. Although we do not expect any significant impact on the Russian FX market, the government’s demand for dollars will increase. Julia Tsepliaeva, Moscow (7 495) 755 5489
VTB Capital MNB Daily Market Comment
May 24, 2006
ING Wholesale Banking Russia TMK - Industry leader revealed
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y in consolidation: downside risk
- MosReg-6 - one of the cheapest long papers
- RusAl borrowing USD1.5b to refinance debt...
Description
FX and money market Following the very volatile euro/dollar exchange rate, fluctuations of the rouble increased at the beginning of the week. While on Tuesday the rouble strengthened by ten kopecks appreciating to RBL/USD27.98, this morning it has fallen to RBL/USD27.03 as the dollar rebounded to USD/EUR1.2773 from yesterday’s USD/EUR1.283. Market players are having difficulty finding any clear trading ideas in the current market conditions, and as a result, choosing to build their positions very cautiously. It is likely that today’s scheduled US New home sales figures and Thursday’s US GDP releases could affect the euro/dollar performance, and in the coming days volatility in the markets will probably remain high. Today we see the rouble in the wide range of RBL/USD26.95–27.05. Despite the tax payment period (Excises on 25 May, Profit tax on 28 May) the situation in the money market does not look so dramatic. This morning, overnight interest rates have risen to 3% from yesterday’s level of 2% and some rouble liquidity squeeze in the coming two weeks is possible. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market On Tuesday, domestic bonds were in a corrective stance, which can be naturally explained by the recent strong weakness of the Russian equity market, as well as some yield increase in US Treasuries. On the other hand, the actual decline of prices of liquid rouble bonds was very modest at 5–20bp on average, which looked very impressive considering the much weaker parallel performance of Russian Eurobonds. The spread of Russia’30 over US10Y is currently 128(+6)bp (very wide, with a compression potential of 35bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 51(-7)bp (wide in a medium-term perspective, our target for the spread is 0bp). US10Y in consolidation Ten-year Treasury notes are currently consolidating their gains of last week. Right now, US10Y is at 5.03%, down from 5.08% at yesterday’s intraday high. We have mentioned before in our updates that the range of 5–5.2% currently represents the most probable area to look for US10Y in the nearest future. Today the benchmark rate is at the lower border of this range, implying that the prospects of US10Y are largely on the downside. On the other hand, this downside is also limited, as until the Fed target rate is raised once more to 5.25%, 5.2% in 10-year notes represents the point at which significant buying activity emerges. However, the question of another rate hike on 29 June has still not been settled by the market—consensus expectations are somewhere between 5 and 5.25% based both on Fed funds futures and straight Bloomberg economists’ poll. A possible point at which some clarity on the topic may appear is the publication of the minutes of the 10 May FOMC meeting on 31 May. Primary market day today Today five primary placements are scheduled on MICEX for a total amount of RBL5.05bn. The majority of these placements are relatively small, although the auction for SibTel-7 is likely to draw significant attention. The paper has a size of RBL2bn, three years to bullet maturity and semi-annual coupons. In our recent weekly update we estimated the fair YTM of SibTel-7 in the range of 8.7–8.85%. Sibirtelecom is rated B+ by Fitch. Secondary trading Price changes of high-grade rouble bonds: OFZ 46020 -13bp, Moscow-39 -9bp, Moscow-44 +0bp, FSK UES-2 -18bp, Gazprom-4 -6bp, Lukoil +2bp, RZhD-6 -3bp. Second-tier papers: MosReg-6 -4bp, CenTel-4 -6bp, Megafon-3 -5bp, TMK-3 +7bp, VolgaTel-3 -13bp, WBD-2 +7bp. RusAl-3 was quoted on Tuesday at 7.73% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006–2007 that Russian Aluminium promised investors in 2005. The company recently announced it was planning to borrow as much as USD1.5bn from a syndicate of Western banks in tranches of 5–7 years, but as the new funds will be used to refinance existing debt this should not cause a significant debt burden increase. MosReg-6, a bond of the Moscow region that we previously recommended for buying, was stationary on Tuesday and is now trading at 7.46% to maturity in five years. We continue to estimate the fair YTM of MosReg-6 at 7.25%, which makes this paper one of the most undervalued long rouble bonds. Moscow region is rated BB/Ba3 by S&P/Moody’s. TMK-2, which we have frequently recommended for buying, recently shifted up in price reducing its yield to 7.65% for 10 months against 7.9–8% previously. In our special research piece dedicated to TMK, we estimated the fair range for the YTP of TMK-2 at 7.5–7.75%, so currently the paper is already there. As a result, we advise to stop accumulating it, but to continue holding on position. On the other hand, yields of the other two TMK bonds are still above our expectations: TMK-1 is trading at 7.51% for five months (our assessment of the fair range is 7.25–7.5%), TMK-3 is at 8.19% (our view is 7.75–8%). Therefore, we continue to recommend buyers to pay attention to these issues. RZhD-6, one of the longest bonds of Russian Railways (RR), retains attractiveness relative to other papers on the RR curve. Currently RZhD-6 is at 7.35% to maturity in 54 months, while the fair yield of RZhD-6 can be estimated at 7.2–7.25%. As a result, the speculative upside of the paper is limited within 50bp, but if exposure to quasi-sovereign risk is necessary, RZhD-6 is one of the best candidates. RR is rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. Impex-3, a bond of Impexbank recently acquired by Raiffeisen, was quoted at about 8% to put in 12 months. Due to the acquisition, the bank has been upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, so now it continues to be above its fair yield, which is located somewhere in the range of 7–7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios. Short-term market view The rouble bond market retains significant attractiveness relative to dollar Eurobonds due to the expected further appreciation of the rouble. We believe that the spread between OFZ 46018 and Russia’30 may shrink to zero by the end of 2006. In addition, the spread between Russia’30 and US10Y is currently extremely wide and does not incorporate the further expected Paris club debt prepayment. As a result, these two wide spreads create a good safety cushion for the rouble market, which should drive the yields of rouble bonds down, or at least leave them intact in case of a sharp fall of US Treasuries. In the nearest perspective, the local market will find itself between the potentially falling US10Y and excess rouble liquidity at the beginning of June, so for the moment our recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 495) 755 5480 April 2006 Macroeconomic performance – acceleration Economic performance was solid in January–April. As expected, economic growth accelerated in April Yesterday, the FSSS released its macroeconomic figures for April 2006, which were positive as expected. Consumer demand expansion remained solid, oil prices were very favourable, and investment demand spiked dramatically. We see potential for further acceleration and expect continuing positive figures in the coming months. According to the Economy Ministry, GDP growth accelerated to 6.5% in April upgrading the cumulative figure to 5.1% (YoY) in January–April. This strengthens our optimism regarding economic performance in 2006 as a whole – currently we maintain our forecast at 6.3% (YoY) in 2006. The sharpest spike in April was in fixed-capital investment growth, which amounted to 10.8% (YoY), resulting in 7.4% (YoY) in January–April vs. 10.5% (YoY) in 2005, a serious rebound after the slowdown in January–February. In the coming months, we expect investment growth to remain impressive with two-digit figures, and maintain our forecast at 9.5% for 2006 as a whole. Consumption demand also remained strong, as real disposable income growth remains sufficiently high at 6.4% (YoY) Apr2006 with real wage growth of 12.6% (YoY). Although the fight against poverty remains one of the primary targets of the government, the latter can be proud of a degree of success in this area for 2004–5. Extra oil revenues redistributed via the federal budget significantly helped to boost the incomes of the poor, with the average monthly wage reaching RBL9963, or USD370 – closer and closer to the average CEE level. As a result, retail trade turnover rose an impressive 10.6% (YoY) in April 2006, which is higher than expected. This trend confirms that domestic demand remains one of the main factors stimulating economic growth. It is also important to state that in April 2006 the unemployment rate remained relatively low and even declined by 0.2pp to 7.5%, and is likely to further drop seasonally in summer. PPI slowed down significantly to 0.6% (MoM), resulting in a slowdown of annual wholesale inflation to 13.2% (YoY), or 14.9% annual average. This slowdown was expected as the increase in natural monopoly tariffs at the beginning of the year had been fully priced in earlier. Nevertheless, wholesale inflation is rather volatile being pushed up by global commodity prices. We maintain our forecast for wholesale inflation at 17% for 2006 as a whole. YoY, % April 2006 Jan-Apr 2006 2006F GDP (YoY) 6.5 5.1 6.3 Industrial output 4.8 3.5 5.3 Fixed Capital Investment 10.8 7.4 9.5 Retail turnover 10.6 10.3 10.0 Real Disposable Income 6.4 7.7 9.0 Real wages 12.6 10.9 10.0 PPI (YoY)-average 13.2 14.9 17.0 CPI (YoY) 9.9 10.6 10.0 _ Sources: FSSS, MinEcon, ING Investment implications: April’s acceleration looks encouraging. Retail turnover performance and real wage growth were very supportive for consumer demand, which was essential for economic growth in January–April 2006. The spike in fixed capital investment growth is likely to be sustained and we remain optimistic regarding economic performance in 2006 and beyond. Julia Tsepliaeva, Moscow (7 495) 755 5489
VTB Capital MNB Daily Market Comment
May 23, 2006
KIT Finance Investment Bank FIXED INCOME WEEKLY 20, 2006 (Eng)
VTB Capital MNB Daily Market Comment
May 22, 2006
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Economics: foreign investments up
- MosReg-6 - still cheap
- RZhD-6 retains attractiveness...
Description
FX and money market Last week, high volatility of the euro/dollar exchange rate caused fluctuations of the rouble with inter-day fluctuations of up to 14 kopecks. Over the period, the rouble lost six kopecks and finished the week at RBL/USD27.03 (tom). This morning the dollar has been continuing its appreciation which started on Friday, and is currently trading at USD/EUR1.272, pushing the rouble to RBL/USD27.08.The local currency remains linked to the bi-currency basket, and the market remains positive on further appreciation of the rouble. In the coming weeks, we see the rouble in the range of RBL/USD26.85–27.15 if the euro remains within USD1.27–1.30, and today we expect to see it around RBL/USD27.06–27.11. Last week was very favourable for the money market with overnight interest rate at 1.5–2%. The market is full of roubles on the back of recent dollar sales, although tax payments scheduled for coming weeks (VAT on 22 May, Excises on 25 May, Profit tax on 28 May) and the end-of-month effect could create squeeze liquidity. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market Friday was a relatively slow day for the end of the week: price movement in all three market sectors was only marginally positive, and trading activity was close to its average level. Overall, the domestic bond market did not move much, although the external conditions for it were positive – growth of US Treasuries on Thursday and relatively strong (for the second part of the month) rouble liquidity. Perhaps the general cautiousness of foreign investors with regard to emerging markets, which translated into extremely wide spread of Russia’30 over US10Y, was the primary reason the local market was stationary on Friday. The spread of Russia’30 over US10Y is currently 122(+3)bp (very wide, with a compression potential of 30bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 58(-1)bp (wide in a medium-term perspective, our target for the spread is 0bp). Secondary trading Price changes of high-grade rouble bonds: OFZ 46018 +5bp, OFZ 46020 +16bp, Moscow-39 +0bp, Moscow-44 -1bp, FSK UES-2 +6bp, Gazprom-4 +14bp, RZhD-6 +5bp. Second-tier papers: MosReg-6 +0bp, CenTel-4 +14bp, Megafon-3 -10bp, TMK-3 +13bp, VolgaTel-3 +7bp, WBD-2 +42bb. RZhD-6, one of the longest bonds of Russian Railways (RR), retains attractiveness relative to other papers on the RR curve. Currently RZhD-6 is quoted at 7.33% to maturity in 54 months, while the fair yield of RZhD-6 can be estimated at 7.2–7.25%. As a result, the speculative upside of the paper is limited within 50bp, but if exposure to quasi-sovereign risk is necessary, RZhD-6 is one of the best candidates. RR is rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. The improvement in TMK’s financials we discussed in the last update allows us to emphasise our positive view for the outstanding TMK bonds. Currently, RBL3b TMK-2 is trading at 7.84% for 10 months, while the longer RBL5b TMK-3 is at 8.16% for 21 months. In the current market situation, a fair YTP level for TMK-2 can be estimated at 7.5%, and for TMK-3 – in the range of 7.75-8%. Naturally, being shorter, TMK-2 is more suitable for passive portfolios, while TMK-3 is a better choice for those oriented towards capital gains. MosReg-6, a bond of the Moscow region that we previously recommended for buying, was stationary on Friday and is now trading at 7.41% to maturity in five years. Taking into account the recent growth of the neighbouring MosReg-5 (now at 7.1% for four years), MosReg-6 continues to look relatively cheap, as its fair level now appears to be 7.25%. As a result, for those who do not have the bond on position, we recommend acquiring it at its current level, while for those who followed our advice and bought it previously, we can only advise holding this paper, as it is very likely to provide further capital gains in the nearest future. Moscow region is rated BB/Ba3 by S&P/Moody’s. Among long-term papers a bond of Rosselkhozbank, a quasi-sovereign entity specifically created by the Russian government to finance the agricultural sector, RSHBank-2 continues trading far above its fair yield. Currently, RSHBank-2 is at 8% to maturity in five years, while its fair point is probably 7.75% and possibly lower in a long-term perspective. Even in adverse market conditions, this bond appears to be a relatively safe investment from the standpoint of interest-rate risk. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. RusAl-3 was quoted on Friday at 7.7% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005. Impex-3, a bond of Impexbank recently acquired by Raiffeisen, was on Friday quoted at about 8% to put in 12 months. Due to the acquisition, the bank was upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, so now it continues to be above its fair yield, which is located somewhere in the range of 7-7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios. Short-term market view The rouble bond market retains significant attractiveness relative to dollar Eurobonds due to the expected further appreciation of the rouble. We believe that the spread between OFZ 46018 and Russia’30 may shrink to zero by the end of 2006. In addition, the spread between Russia’30 and US10Y is currently too wide and does not incorporate the further expected Paris club debt prepayment. As a result, these two wide spreads create a good safety cushion for the rouble market, which coupled with excess rouble liquidity should drive the yields of rouble bonds down, or at least leave them intact in case of a deep fall of US Treasuries. For the moment, our recommendation for long rouble bonds remains a Hold in expectation of more capital gains in a short-term perspective due to anticipated liquidity accumulation in the first half of June. Dmitry Dudkin, Moscow (7 495) 755 5480 Foreign investments up In 1Q06, gross foreign investments rose 46% (gross FDI up by 100%) relative to 1Q05 Last week, the FSSS released its foreign investment figures for 1Q06, which were more than positive for Russia. Although the FSSS methodology differs from the more accurate approach of the CBR, their gross data is more detailed and updated and thus gives us some important insights. Usually, the lion’s share of gross foreign investment is accounted to the so-called “others” – which are mainly trade credits and repatriation of Russian capital (it is not surprising that the Cyprus remains the number one on the list of the main investors into Russia). In 1Q06, other investment rose by 17.2% (1Q06/1Q05) and reached US$4.7bn while gross FDI spiked to US$3.8bn and showed a more than impressive 100% growth rate. We believe this trend is very healthy for Russia. The investment climate in general is improving as political risks are declining, and investors have less concerns regarding potential redistribution of assets of a Yukos type than a year ago. Macroeconomic stability and further developments are also encouraging for foreign investors. FDI structure was quite diversified in 1Q06. Previously, in 2002-04 there were usually several big deals in oil sector – now the larger share of FDI is accounted to relatively small projects of about US$0.1bn. In 1Q06, foreign investors began to invest into the Russian real estate. We remain optimistic on FDI flows and forecast gross FDI at US$18-20bn in 2006 while net FDI could reach US$7-9bn (still below 1% of GDP) and significantly below the CEE average level of 3-5% of GDP. In 1Q06, portfolio investment rose by 190% (a real boom!) but in absolute terms remained a modest US$0.23bn. Nevertheless, with the full liberalisation of capital account operations scheduled for 1 July 2006 and consequent abolishment of all barriers for domestic debt market access, portfolio investment could become much more substantial already in 2H06. We forecast it to reach some US$2bn in 2006 as a whole. Investment implications: Steady increase in foreign investment is positive for Russia as it signals an improvement in the investment climate in general and secondly will lead to a quicker upgrade in technologies and business practices. The structural changes are even more important than just high growth rates. We expect net FDI boom to continue although it is unlikely to exceed 1% of GDP in 2006. We also optimistic on portfolio investment inflow, in particular in 2H06 Investment fund 46 projects were submitted to the government tender for the investment fund’s money Last Saturday was the deadline for the submission of projects for the government’s tender for the investment fund in 2006. The Economy Ministry had expected 15 projects while 46 projects were submitted. The investment fund is RBL70bn for 2006 and some RBL200bn in 2007-08 – the projects estimated at RBL1400bn of which RBL453bn is a potential share of investment fund. However, not all projects are detailed and look fully “ready” to be practically implemented. So we do not expect any serious competition among projects on one hand and any problems how to spend the investment fund on the other hand. The Economy Ministry will announce the “winners” on 14 June 2006, at the Economic Forum in St Petersburg. Investment implications: Although more than expected applications were submitted for the investment fund money, the favourites remained the same (Angara river projects, a speedway in St Petersburg and some other projects). We expect their financing already in 2H06 although there are some concerns on efficiency of government investments as well as inflationary consequences. Julia Tsepliaeva Moscow (7 495) 755 5489
May 19, 2006
B&N Bank Russian CLN Market Data (19/05/2006)
Baku Stock Exchange Special_Comments.Analytical note on statement of Minister of Finance of Azerbaijan Republic about intention to issue mid-term and long-term bonds_eng
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Largest US10Y growth since March
- TMK publishes IFRs financials: very positive
- Market promises more capital gains...
Description
FX and money market On Thursday morning, the rouble dropped to RBL/USD27.08 following Wednesday’s dollar rally. However, during the day the dollar lost its gains against the euro and as a result, the rouble rose to RBL/USD27.02. Sentiment for the dollar weakened after a speech by US Treasury Secretary John Snow before the Senate Banking Committee in which he expressed dissatisfaction about the pace of China’s efforts to increase the flexibility of the yuan. Consequently, the dollar also fell against the euro and this morning traded at USD/EUR1.2823, pushing the rouble up to RBL/USD26.98. We cannot rule out more volatility in the coming days and expect to see the rouble today in the range of RBL/USD26.98–27.04. In the money market, interbank overnight interest rates remain stable at around 2%, although some liquidity squeeze is possible in coming days due to large tax payments scheduled for next week (VAT on 22 May, Excises on 25 May). . Olga Golub, Moscow (7 495) 755 5176 Rouble bond market On Thursday, the domestic bond market consolidated Wednesday gains as market participants were not sure if the previous fall of US Treasuries would not continue. As a result, prices of long bonds in all market sectors were basically stationary and trading activity rather modest. The spread of Russia’30 over US10Y is currently 119(+2)bp (very wide, with a compression potential of 25bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 59(+9)bp (historical minimum, wide in a medium-term perspective, our target for the spread is 0bp). A large step up in US10Y As we mentioned, traders on the local market were concerned yesterday about the possibility of a continuation of the fall of US10Y that took place on Wednesday. Nevertheless, after trading began in America, buyers definitely dominated the Treasuries market, and as a result, the yield of 10-year notes fell from 5.15% to the current 5.06%, which was the largest step up in price since 16 March. We believe that there’s a high probability that the growth we saw yesterday marks the end of the large downward trend in US10Y that has been dominating the market since January 2006. On the other hand, the Fed funds rate is at 5% now, so this barrier will be hard to cross. As a result, we believe that yesterday’s behaviour of US10Y outlines the range 5-5.2% as the location for the benchmark rate for the nearest future. TMK publishes IFRS financials for 2004-2005 – preview General impression – very good. The company clearly decided to start at a good point: Dollar sales growth in 2005 of roughly 50% to USD2.8bn EBITDA margin 19.3% versus 12.1% in 2004 Debt/EBITDA level 1.1, down form 3.3 in 2004 Debt/Assets ratio of 27% compared to 33% in 2004 Significantly positive free cash flow. The table below summarises what was said above. Key financials of TMK Reported items (US$m) 2004 2005 Ratios 2004 2005 Sales 1861.2 2812.0 Gross Mgn 17.9% 25.9% GP 333.4 727.6 EBITDA Mgn 12.1% 19.3% EBITDA 225.7 541.9 EBIT Mgn 7.7% 15.7% EBIT 143.8 442.4 Net Mgn 1.5% 9.6% NI 28.1 269.8 Debt/EBITDA 3.31 1.11 Assets 2282.9 2278.2 Debt/EBIT 5.20 1.36 ST Debt 630.9 439.0 EBIT/Int 1.5 5.9 LT Debt 117.2 164.8 Equity 937.9 1159.1 LT Debt/Cap 0.11 0.12 Capital 1055.1 1323.9 Debt/Assets 0.33 0.27 CFO 116.1 441.5 ST Debt/Debt 84.3% 72.7% CFI -60.6 -159.0 CFF -56.2 -248.8 ROC 2.7% 20.4% ROA 1.2% 11.8% CapEx 62.1 116.9 ROE 3.0% 23.3% Depreciation 91.8 99.5 Curr Ratio 0.83 1.14 FCFE 55.5 282.5 Quick Ratio 0.22 0.27 FCFF 114.5 339.2 CFO/Debt 0.16 0.73 FCFF/Debt 0.15 0.56 CFO/CapEx 1.87 3.78 Source: Company data It should be also taken into account that 2005’s financials do not take into account the issue of TMK-3, which was launched explicitly to refinance short-term loans of TMK, driving the share of LT debt in the total debt up to 60% in March 2006 from the 72.7% we see in the table. Overall: very impressive results at first sight. TMK is definitely the leader of the pipe industry in Russia, being the first pipe group to publish audited financials, so its increased transparency to investors ahead of the planned IPO promises bondholders more future capital gains. Secondary trading Price changes of high-grade rouble bonds: OFZ 46018 -5bp, OFZ 46020 +8bp, Moscow-39 +9bp, Moscow-44 +9bp, FSK UES-2 +7bp, Gazprom-4 -8bp, RZhD-6 +10bp. Second-tier papers: MosReg-6 +6bp, CenTel-4 -3bp, Magnit +2bp, Megafon-3 +15bp, TMK-3 -1bp, VolgaTel-3 -6bp, UTK-4 +4bp. The improvement in TMK’s financials allows us to emphasise our positive view for the outstanding TMK bonds. Currently, RBL3b TMK-2 is trading at 7.96% for 10 months, while the longer RBL5b TMK-3 is at 8.24% for 21 months. In the current market situation, the fair YTP level of TMK-2 can be estimated at 7.5%, and for TMK-3 – in the range of 7.75-8%. Naturally, being shorter, TMK-2 is more suitable for passive portfolios, while TMK-3 is a better choice for those oriented towards capital gains. MosReg-6, a bond of the Moscow region that we previously recommended for buying, moved up 6bp yesterday and is now trading at 7.41% to maturity in five years. Taking into account the recent growth of the neighbouring MosReg-5 (now at 7.11% for four years), MosReg-6 continues to look relatively cheap, as its fair level now appears to be 7.25%. As a result, for those who do not have the bond on position, we recommend acquiring it at its current level, while for those who followed our advice and bought it previously, we can only advise holding this paper, as it is very likely to provide further capital gains in the nearest future. Moscow region is rated BB/Ba3 by S&P/Moody’s. Among long-term papers a bond of Rosselkhozbank, a quasi-sovereign entity specifically created by the Russian government to finance the agricultural sector, RSHBank-2 continues trading far above its fair yield. Currently, RSHBank-2 is at 8% to maturity in five years, while its fair point is probably 7.75% and possibly lower in a long-term perspective. Even in adverse market conditions, this bond appears to be a relatively safe investment from the standpoint of interest-rate risk. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. We continue to recommend bonds of Russian Standard bank. Market participants should take a look at the RBL3bn RSB-4 located at around 8.5% to maturity in 23 months. We believe that this paper is at least 25bp above its fair point. Russian Standard bank is rated B+/Ba2 by S&P/Moody’s. RusAl-3 was quoted yesterday at 7.75% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005. Impex-3, a bond of Impexbank recently acquired by Raiffeisen, finally drew attention of buyers and jumped up in price 20bp driving its one-year YTP to 7.89%. Due to the acquisition, the bank was upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, so now it continues to be above its fair yield, which is located somewhere in the range of 7-7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios. Short-term market view Yesterday’s impressive growth of US Treasuries makes room for more purchases on the local bond market, both in the government sector and non-government bonds. In addition, in spite of the continuing period of tax payments, the money market remains in a good shape, keeping short-term rouble rates low and fostering purchases of long-term instruments. In addition, at the beginning of June the liquidity situation will be even better, so from this point of view the outlook is very bright. Our longer-term view for the rouble bond market until the end of the year is definitely positive based on the expectation of the compression of the spread between the long end of the OFZ curve and US10Y to roughly 100bp. As a result, our recommendation for long rouble bonds remains a Hold in expectation of more capital gains in a short-term perspective. Dmitry Dudkin, Moscow (7 495) 755 5480 Industrial growth accelerates In April 2006, industrial output rose by 4.8% (YoY), resulting as expected in an acceleration from 3% (YoY) in 1Q06 to 3.5% in January–April Yesterday, the FSSS released its industrial production figures for April, which were encouraging. Last month, industrial production growth accelerated to 4.8% (YoY), which is a positive result. As expected, we saw strong acceleration in raw material figures (3.8% (YoY) in April after 1.3% in1Q06), in particular in oil production. The sector is gradually accelerating after the negative impact of a dramatic increase in its taxation in 2004 and shortfalls related to the Yukos saga and the Sibneft transition. Manufacturing branches showed 5.6% growth (YoY) in April—almost repeating March’s positive result. Production and distribution of electricity, water and gas rose 3.5% (YoY) in April, which is above the average 1.5-2.5% monthly growth. Certainly, industrial growth results in one month cannot be indicative of a real trend, but look encouraging. We maintain our forecast of 5.3% for 2006 as a whole. Investment implications: Usually in Russia, statistical data releases do not significantly impact the market itself. April’s positive results strengthen our optimism about further industrial growth. We expect acceleration in the coming months and maintain our forecast of 5.3% growth for 2006 as a whole. Seeing significant progress in curbing inflation and the revival of industrial growth on the other hand, the CBR is unlikely to change its FX policy in the coming months. Reserves up Last week, reserves jumped by US$5.0bn (!) to US$236.1bn International reserves gained an impressive USD5.0bn rising to USD236.1bn the week ending 12 May 2006—after the more than impressive result of the previous couple of weeks, when reserves jumped by USD14bn. In that week, the dollar continued being volatile against other global currencies, which supported negative sentiment for it in the Russian FX market. Exporters and speculators preferred to dramatically increase their dollar sales and the CBR had to absorb this money from the market to prevent stronger appreciation of the rouble. The CBR is very likely to continue its FX policy and keep the rouble stable relative to the trade-weighted basket, and consequently, we expect reserve accumulation to continue in the coming weeks. Investment implications: Reserves are very sizeable, which will help to protect the economy from any external shocks. Market sentiment regarding the dollar remains negative and appreciation pressure on the rouble is high. The CBR will continue to limit its appreciation. We forecast reserves to grow further and reach USD240bn by 2006-end, which is however, a very conservative forecast at the moment. Julia Tsepliaeva Moscow (7 495) 755 5489
May 18, 2006
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Strong CPI fosters euro correction
- Impressive OFZ auctions
- MosReg-6 still looking attractive...
Description
FX and money market On Wednesday, high volatility of the euro/dollar exchange rate caused fluctuations of the rouble. During the day, the euro gradually rose and touched USD/EUR1.29, which pushed the rouble up to RBL/USD26.92. In the evening, the dollar got some support as higher than expected inflation figures (US April core CPI climbed to 0.3%, while the market had expected 0.2%), could mean that the US refinancing interest rate will be raised next month. Later, the dollar was boosted further to USD/EUR1.2750, after French Finance Minister Thierry Breton said that “everything must be done to stop the euro gaining against the dollar”. Following the euro, this morning the rouble lost 14 kopecks and fell to RBL/USD27.06, and we cannot rule out more volatility in the coming days. Today we expect to see it in the range of RBL/USD27.03-27.08. Today, the market will focus on the speech of US Treasury Secretary John Snow before the Senate Banking Committee and Fed chairman Ben Bernanke’s appearance at the Chicago Fed conference, both of which may impact the FX market. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market Wednesday was a strong day on the local bond market for two main reasons: the growth of US Treasuries the day before and the impressive result of the OFZ auctions. Over the day prices of long rouble bonds moved up in all three market sectors, having gained on average 10-30bp. The spread of Russia’30 over US10Y is currently 117(+1)bp (very wide, with a compression potential of 25bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 50(-9)bp (historical minimum, wide in a medium-term perspective, our target for the spread is 0bp). CPI release fosters euro correction, drops US10Y The US April CPI release, which turned out to be stronger than expected both in the full index and its core version, pushed the euro further down against the US dollar making it continue the downward correction that started on 15 May. As a result, in intraday trading the single currency fell from USD/EUR1.29 as low as USD/EUR1.27 and is now at USD/EUR1.2740. This move definitely finishes the first leg of the current upward trend of the euro, which recently took it from around USD/EUR1.21 to the local top of USD/EUR1.2975. However, in our opinion the downward correction we are seeing now is unlikely to substantially erase the results of the previous growth, and we continue to believe that the odds are for the euro testing the USD/EUR1.3 level within a month from now, rather than going below USD/EUR1.25. The strong CPI release also pushed US10Y lower, so now the benchmark rate is at 5.16% having yesterday reached as high as 5.18% in yield. Here things are more or less clear: the market is split in expectations between another rate hike to 5.25% at the next FOMC meeting on 29 June, and a pause in rate hikes, which will leave the target rate at 5% at least until August. Therefore, the position of US10Y now entirely depends on where the consensus shifts to before the meeting. If sentiment shifts towards a pause, then US10Y is currently positioned neutrally. If, on the other hand, the probability increases of another hike, then US10Y will have to reposition upwards in yield, perhaps to the 5.35-5.5% area. An event that could help to clarify the situation will be the publication of the minutes of the 10 May FOMC meeting scheduled for 31 May. Strong results of OFZ auctions The CBR sold RBL9.97bn of 10-year OFZ 46017 yesterday out of RBL10bn originally offered. The average YTM was 6.83%, cutoff yield – 6.85%. We expected that the cutoff would be at 8.86% and above, so those who followed our advice did not buy the paper. Also, the CBR placed RBL4.98bn of 30-year OFZ 46020 yesterday with an average YTM of 7.06% and a cutoff yield of 7.06%. We recommended placing orders for the bond at 7.05% and above, so in this case, our expectations were met. Overall, demand at both OFZ auctions was very high: tranches were 2.5-3 times oversubscribed and the premium offered to investors was minimal, if any. This confirms our view that the outlook of the market for long-term rouble bonds in general is currently positive and that the market participants expect the long end of the OFZ curve to outperform dollar debt in 2006. Secondary trading Price changes of high-grade rouble bonds: OFZ 46018 +27bp, OFZ 46020 +13bp, Moscow-39 +8bp, Moscow-44 +9bp, FSK UES-2 +2bp, Gazprom-4 +14bp, Lukoil -1bp. Second-tier papers: MosReg-6 +27bp, CenTel-4 +2bp, Magnit +42bp, Megafon-3 -8bp, RSHBank-2 -5bp, TMK-3 -12bp, VolgaTel-3 -8bp, UTK-4 +2bp. MosReg-6, a bond of Moscow region, which we previously recommended for buying, moved up 66bp over last week and is now trading at 7.42% to maturity in five years. Taking into account the recent growth of the neighbouring MosReg-5 (now at 7.14% for four years), MosReg-6 continues to look relatively cheap, as its fair level now appears to be 7.25%. As a result, for those who do not have the bond on position, we recommend acquiring it at its current level, while for those who followed our advice and bought it previously, we can only advise holding this paper, as it is very likely to provide further capital gains in the nearest future. Moscow region is rated BB/Ba3 by S&P/Moody’s. Among long-term papers a bond of Rosselkhozbank, a quasi-sovereign entity specifically created by the Russian government to finance the agricultural sector, RSHBank-2 continues trading far above its fair yield. Currently, RSHBank-2 is at 8% to maturity in five years, while its fair point is probably 7.75% and possibly lower in a long-term perspective. Even in adverse market conditions, this bond appears to be a relatively safe investment from the standpoint of interest-rate risk. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. We continue to recommend bonds of Russian Standard bank. Market participants should take a look at the RBL3bn RSB-4 located at around 8.5% to maturity in 23 months. We believe that this paper is at least 25bp above its fair point. Russian Standard bank is rated B+/Ba2 by S&P/Moody’s. RusAl-3 traded yesterday at 7.69% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005. TMK-3, a bond of the Russian tube industry leader TMK, was yesterday quoted at 8.25% to put in 22 months. We believe that this bond is attractive as far as it pays a premium to the outstanding paper of its direct competitor, OMK-1 (located at 8.15% for 25 months). In our opinion, the medium-term fair value of TMK-3 is 8% YTP, so we continue to recommend accumulating this paper. Impex-3, a bond of Impexbank recently acquired by Raiffeisen, re-entered secondary trading after coupon payment with a YTP of 8.12% for 12 months and was yesterday trading at 8%. Due to the acquisition, the bank was upgraded by Fitch and Moody’s to investment grade rating BBB-/Baa2, so it is now obviously above its fair yield, which is located somewhere in the range of 7-7.5%. We definitely recommend accumulating Impex-3 for passively managed portfolios. Short-term market view Yesterday’s jump in yield of US10Y will be reflected in the local market dynamics today, limiting demand for long rouble bonds. On the other hand, in spite of the continuing period of tax payments, the money market remains in a good shape keeping short-term rouble rates low and fostering purchases of long-term instruments. In addition, at the beginning of June the liquidity situation will be even better, so from this point of view the outlook is very bright. Our longer-term view for the rouble bond market until the end of the year is definitely positive based on the expectation of the compression of the spread between the long end of the OFZ curve and US10Y to roughly 100bp. As a result, our recommendation for long rouble bonds remains a Hold in expectation of more capital gains in a short-term perspective. Dmitry Dudkin, Moscow (7 495) 755 5480 Inflation remains modest In the first half of May, consumer prices rose by a modest 0.2%, pushing annual CPI to 9.5% (YoY) According to preliminary data from the FSSS, May’s inflation remains modest so far. In the first 15 days of the month, prices rose by just 0.2%, which means that in May CPI could drop to 9.5% (YoY)—a very pleasant fact for the government. Although salaries of government employees increased by 20% from 1 May 2006, appreciation of the rouble and frozen tariffs on communal and housing services are helping to restrain inflationary acceleration. Nevertheless, even a substantial slowdown in CPI in 2Q06 cannot help the government to achieve its inflationary target of 7.0-8.5% and we maintain our forecast of 10% for 2006-end. At the same time, favourable inflationary results in April-May create more incentives to slow down the appreciation of the rouble. In May-June, the CBR is likely to keep it stable against the bi-currency basket. In the coming weeks, the rouble is likely to stay in the range of RBL/US$26.85-27.1 if the euro remains around US$/EUR1.28-1.3. The slowdown in rouble appreciation should calm the cash dollars market in Russia. We estimated cash dollar savings at some US$30bn at the beginning of 2006—in the first weeks of May there were queues in street exchanges as people wanted to sell their dollars and buy roubles. Consequently, currently the exchange rate in street exchanges has deviated from the market rate or the CBR rate (for example, exchanges sell dollars at RBL/US$26.7-26.8 while they buy dollars at RBL/US$26.3-26.5, and sometimes in distant districts of Moscow, at RBL/US$25.5). With a slowdown in rouble appreciation, the situation on the cash dollar market should normalise—the bid-ask spread will narrow to the usual 10-15 kopecks, and the CBR rate will again be in the middle. Investment implications: The inflationary slowdown and the recent dramatic appreciation against the dollar reduce the incentive to allow rouble appreciation against the basket in 2006. We do not expect any dramatic change in FX policy in the coming weeks, while the market sentiment for further appreciation of the rouble remains strong. We maintain our forecast of CPI at 10% by 2006-end. The situation in the cash dollar market and street exchanges is likely to normalise in the coming weeks. Julia Tsepliaeva Moscow (7 495) 755 5489
May 17, 2006
VTB Capital MNB Daily Market Comment
May 16, 2006
KIT Finance Investment Bank Fixed Income Weekly 19, 2006 (Eng)
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Economics: fiscal performance solid
- OFZ 46018 – Russia’30 spread target hit
- NsMMZ put option: good signal for Maxi-Group...
Description
FX and money market On Monday in the Russian FX market, the rouble also depreciated following to the euro’s drop against the dollar, exceeding RBL/USD27.00. Nevertheless, in spite of this correction, market sentiment regarding the weak dollar in international markets remains strong and consequently, appreciation pressure on the rouble is high. The rouble continues to chase the very volatile euro/dollar exchange rate and today we expect to see the local currency in the range of RBL/USD27.00-27.05. In the money market, yesterday some squeeze of rouble liquidity was seen on the back of advance social tax payments – overnight interest rates rose to 2% from Friday’s 0.75% level. Today we expect the situation in the market to remain stable. Olga Golub, Moscow (7 495) 755 5176 Rouble bond market On Monday the domestic bond market reacted to Friday’s strong fall in US Treasuries, and profit taking activity was seen in all three market sectors on the background of modest turnovers. As a result, prices of liquid long rouble bonds declined on average by 10-20bp. On the other hand, later on Monday US Treasuries reversed their movement and almost erased Friday’s losses, while rouble liquidity remained plentiful. The spread of Russia’30 over US10Y is currently 117(+3)bp (very wide, with a compression potential of 25bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 55(+4)bp (fair for now, wide in a medium-term perspective). OFZ 46018 – Russia’30 spread target hit yesterday The spread between the long end of the OFZ curve and the Russian sovereign dollar curve, which we measure between OFZ 46018 and Russia’30, was yesterday seen at 51bp, i.e. it basically hit our target for it which we set at 50bp at the beginning of 2006. This was an intermediate target, as we believe that in the medium-term (up to the end of 2006) this spread has the potential to drop to zero on the positive outlook for the Russian rouble and the removal of capital controls promised by the government from 1 July. Therefore, our new target for the OFZ 46018–Russia’30 spread is 0bp. NsMMZ put option: good signal for Maxi-Group Outstanding bonds of NsMMZ – Nizhneserginsky Metizno-Metallurgichesky Plant – will have a put option exercise on 22 May, so the issuer yesterday announced the coupon rate for the remaining two years of the bond’s floatation. The rate has been set at 1%, which leaves investors no choice but to exercise the current put option and sell the bond back to the issuer at par. The fact that NsMMZ is basically buying back its debt is very likely to improve the attitude of investors towards the bond of Maxi-Group (the group that NsMMZ is a part of). Maxi-Group is now trading at 12% to put in 16 months and its price is approximately 50bp below par value. As a result of the successful put option exercise of NsMMZ, the yield of Maxi-Group could go down to the original 11.5% and the price return to 100. Secondary trading Price changes of high grade rouble bonds: OFZ 46018 -30bp, OFZ 46020 -27bp, Moscow-39 -28bp, Moscow-44 -16bp, Gazprom-4 -11bp, Lukoil -5bp, RZhD-6 -14bp. Second-tier papers: MosReg-6 -28bp, CenTel-4 -20bp, Kopeika-2 -10bp, Magnit -6bp, Megafon-3 +3bp, Mosenergo-2 +5bp, UTK-4 +4bp. Among long-term papers a bond of Rosselkhozbank, a quasi-sovereign entity specifically created by the Russian government to finance the agricultural sector, RSHBank-2 appears to be trading far above its fair yield. Currently, RSHBank-2 is at 8% to maturity in five years, while its fair point is probably 7.75% and possibly lower in a long-term perspective. Even in adverse market conditions, this bond appears to be quite a relatively safe investment from the standpoint of interest-rate risk. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. On the curve of Russian Railways, RZhD-6 is currently the most undervalued paper. This bond was yesterday trading at 7.37% to maturity in 4.5 years, but its fair YTM based on the credit spread of its neighbours, RZhD-3 and RZhD-5, is most probably in the range of 7.2-7.25%. Russian Railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. Among somewhat shorter papers, SibTel-6 and UrSi-6 are currently among the highest-yielding telecoms bonds in the corporate sector, being located at approximately 8.5% for 29 months. We can not say that these papers would offer immediate upside, but they are definitely very well positioned to compensate holders for their credit risk. Sibirtelecom is rated B+ by Fitch, Uralssvyazinform – B+/B+ by S&P/Fitch. We continue to recommend bonds of Russian Standard bank. Market participants should take a look at the RBL3bn RSB-4 located at around 8.5% to maturity in 23 months. We believe that this paper is at least 25bp above its fair point. Russian Standard bank is rated B+/Ba2 by S&P/Moody’s. RusAl-3 was quoted yesterday at 7.75% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005. TMK-3, a bond of the Russian tube industry leader TMK, was yesterday quoted at 8.2% to put in 22 months. We believe that this bond is attractive as far as it pays a premium to the outstanding paper of its direct competitor, OMK-1 (located at 8.15% for 25 months). In our opinion, the medium-term fair value of TMK-3 is 8% YTP, so we continue to recommend accumulating this paper. Short-term market view Yesterday’s upward correction of US Treasuries should support prices of rouble bonds today and at least stop the selling. In spite of the fact that we have entered this month’s tax payment period, the situation on the money market is very stable thanks to the liquidity accumulated in the first half of May. In addition, our long-term view for the market is positive based on the expectation of further spread compression between Russia’30 and US Treasuries as well as between long-term OFZs and Russia’30 in the long run (until the end of 2006). The pending removal of restrictions on foreign ownership of rouble bonds only strengthens this outlook. As a result, our recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 495) 755 5480 Fiscal performance solid In January-April, the budget was almost balanced (after a 6.9% of GDP surplus in 1Q06), which is not alarming Yesterday, the MoF reported on the fiscal performance for January-April 2006, which as expected was good, with budget revenues spiking to RBL1877.5bn (USD70bn). At the same time, the budget surplus is reported to have been very modest (-0.03% of GDP in January – April, which is a big drop from 6.9% of GDP in January-March). This is not alarming as expenditures are not uniform, and in April transfers to regions rose dramatically. What is more alarming is that the gap between budget expenditures on an accounting basis and budget expenditures on a cash basis remains high at RBL657.9bn (USD24bn) - the MoF “postponed” RBL657.9bn of expenditures that were made in the accounting books but not spent in cash. This is quite a common method for additional sterilisation, although the MoF must make all of these expenditures in cash in 2006 and thus also add to the increase in inflation later. We remain very optimistic on the fiscal figures for 2006 as a whole and are upgrading our view for a fiscal surplus from 4.5% of GDP to 5.5% of GDP (RBL1400bn) following the ING upgrade of the oil price scenario from USD53/bbl to USD63/bbl. The MoF upgraded its view on 2006 from the RBL776bn set in the 2006 budget law to RBL1336bn. According to the ministry, additional budget revenues could reach RBL550bn, which looks to be quite a conservative estimate. In January-April, the additional budget revenues remain impressive at some RBL250-260bn (USD9.5bn) and are more than likely to be spent in the coming months. The Duma wants to consider the issue before its summer holiday, thus scheduling more expenditures for 2H06, which will increase inflationary pressure. High oil prices and the higher oil price threshold for contributions to the stabilisation fund will result in massive additional budget revenues, which could be spent domestically. With an increasingly optimistic consensus regarding the future trend of oil prices, further fiscal softening looks unavoidable. In April, the stabilisation fund accelerated accumulation continues and it reached RBL1800bn (USD67bn) by 1 May 2008 (+USD4.5bn in April). The government can easily afford more substantial pre-payments of the Paris Club debt (about USD22bn in 2006) and unofficial buy-backs of tradable debt. Fiscal eldorado: Jan-April – actual results 2006 budget law ING view on 2006 Revenues, RBLbn 1877,5 5046.1 6100 Expenditures (accounting basis), RBLbn 1879.5 4270.1 4700 Budget surplus (accounting basis), RBLbn -2.0 776 1400 Budget surplus (accounting basis), % GDP -0.03% 3.2% 5,5 Budget surplus (cash basis), RBLbn 657.9 - - Source: MinFin, ING Investment implications: Fiscal performance in January-April was sufficiently strong, although the budget surplus of January-March has disappeared. Additional budget revenues stimulate accelerated accumulation of the stabilisation fund and more budget expenditures, which makes further fiscal softening unavoidable. We are upgrading our forecast of a fiscal surplus from 4.5% to 5.5% of GDP as we have raised our expectations for the oil price trend in 2006. Julia Tsepliaeva Moscow (7 495) 755 5489
ING Wholesale Banking Russia Russian Fixed Income Weekly
- Economics: Putin\'s parliamentary address
- New placements: OFZ 46017...
May 15, 2006
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- New yield high in US10Y
- Euro still strong
- SibTel-6 now one of the cheapest regional telecoms...
Description
FX and money market Last Friday, the rouble jumped by some 16 kopecks and broke through the psychologically important level of RBL/USD27 (the tom rate reached RBL/USD26.9252) as the euro appreciated above USD/EUR1.29. Although the CBR and government have for the first time expressed concerns about the national currency’s quick appreciation, we do not expect any immediate reaction from them. The rouble remains linked to the bi-currency basket, so if the euro appreciates further, we will see more appreciation of the rouble. Market sentiment is positive regarding appreciation scenarios for both the euro and the rouble, which is reducing the inter-week volatility of their exchange rates. Nevertheless, the rouble is unlikely to be allowed to appreciate against the bi-currency basket for the rest of 2006. This week, we expect it in the range of RBL/USD26.85-27.05 and today it is likely to be around RBL/USD26.89-26.95. In the money market, the situation remains stable. Overnight rates have even dropped below 1% (they were at 1.5% throughout last week) and we do not expect any turbulence, although some liquidity squeeze is possible in the middle of the week due to big tax payments. Julia Tsepliaeva, Moscow (7 495) 755 5489 Rouble bond market Friday showed strong investor optimism in the government sector that was directly powered by the appreciating rouble and its excess liquidity. On the other hand, although the tendency in the corporate and municipal sectors was also positive, price gains there were much more modest. At the same time, trading activity was above average in all three market sectors. The spread of Russia’30 over US10Y is currently 114(+9)bp (very wide, with a compression potential of 25bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 51(-17)bp (a new historical low, fair in a medium-term perspective). New yield high in US10Y The story of the weak dollar, which has recently been grasping everybody’s minds, hurt US Treasuries on Friday with 10-year notes demonstrating a new yield high reaching 5.2% - a level not seen since May 2002. On the other hand, even without the currency motivation, such dynamics are quite natural as market participants are currently not sure if the Fed will raise its target rate one more time to 5.25% on 29 June. If another hike is made, the present level of US10Y will be even too low, so if the certainty about further policy tightening increases, we should see further losses in US Treasuries, perhaps to the 5.35-5.5% band for 10-year notes. Euro still very strong The single currency traded as high as USD/EUR1.2973 earlier today, which is exceptional taking into account that the euro managed to grow that high after the very good (for the dollar) March US trade balance release. This simply proves that the weak dollar story really is the dominant idea now, and that in these conditions even strong adverse factors cannot prevent the euro from strengthening. From a technical standpoint, we continue to believe that the euro should find, if not a reversal, at least a consolidation point in the area of USD/EUR1.3-1.3125, where 1.3 is simply an important figure and 1.3125 – the price top seen in April 2005. Secondary trading Price changes of high grade rouble bonds: OFZ 46018 +48bp, OFZ 46020 +39bp, Moscow-39 +14bp, Moscow-44 -2bp, FSK UES-2 +16bp, Gazprom-4 +7bp, RZhD-6 +9bp. Second-tier papers: MosReg-6 +11bp, CenTel-4 +12bp, Kopeika-2 +6bp, Magnit -12bp, Megafon-3 +4bp, Mosenergo-2 +24bp, UTK-4 -24bp, VolgaTel-3 -6bp, WBD-2 +2bp. Among the long-term papers a bond of Rosselkhozbank, a quasi-sovereign entity specifically created by the Russian government to finance the agricultural sector, RSHBank-2 appears to be trading far above its fair yield. Currently, RSHBank-2 is at 7.98% to maturity in five years, while its fair point in current market conditions is probably 7.75% and possibly lower in a long-term perspective. Even in adverse market conditions, this bond appears to be quite a relatively safe investment from the standpoint of interest-rate risk. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. On the curve of Russian Railways, RZhD-6 is currently the most undervalued paper. This bond was yesterday trading at 7.33% to maturity in 4.5 years, but its fair YTM based on the credit spread of its neighbours, RZhD-3 and RZhD-5, is most probably in the range of 7.2-7.25%. Russian Railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. Among somewhat shorter papers, SibTel-6 is currently one of the highest-yielding telecoms bonds in the corporate sector, being located at 8.5% for 29 months. We can not say that this paper would offer immediate upside, but it is definitely very well positioned to compensate holders for its credit risk. Sibirtelecom is rated B+ by Fitch. UrSI-6, which we previously recommended instead of SibTel-6, recently shifted 30bp up in price and is now located at 8.33% to put in 31 months. At this point, the immediate price upside of the bond is becoming less certain, so we advise to stop accumulating it, but continue holding the paper on position. Uralsvyazinform is rated B+/B+ by S&P/Fitch. We continue to recommend bonds of Russian Standard bank. Market participants should take a look at the RBL3bn RSB-4 located at around 8.35% to maturity in 23 months. We believe that this paper is at least 15bp above its fair point. Russian Standard bank is rated B+/Ba2 by S&P/Moody’s. RusAl-3 was quoted yesterday at 7.75% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005. TMK-3, a bond of the Russian tube industry leader TMK, was on Friday trading at 8.25% to put in 22 months. We believe that this bond is attractive as far as it pays a premium to the outstanding paper of its direct competitor, OMK-1 (located at 8.15% for 25 months). In our opinion, the medium-term fair value of TMK-3 is 8% YTP, so we continue to recommend accumulating this paper. Short-term market view Today the Friday fall of US Treasuries will put pressure on long-term government bonds, so taken together with the usual low Monday activity, the rouble bond market is unlikely to demonstrate a positive tendency. On the other hand, our long-term view for the market is positive based on the expectation of further spread compression between Russia’30 and US Treasuries as well as between long-term OFZs and Russia’30 in the long run (until the end of 2006). The pending removal of restrictions on foreign ownership of rouble bonds only strengthens this outlook. So far, our recommendation for long rouble bonds remains a Hold in expectation of further short-term capital gains due to excess rouble liquidity and the inflow of foreign funds in response to President Putin’s parliamentary address. Dmitry Dudkin, Moscow (7 495) 755 5480 Putin’s afterword Putin will announce his successor in 2008 to smooth that year’s transition of authority. Last Saturday, President Putin continued to comment on his Wednesday address to the Federal Council. As his announced programmes are estimated to take at least a decade, rumours on changes in the Constitution and Putin’s third term were immediately revived. Previously, the president said that he would not comment on such rumours as he has repeatedly stressed that he is going to leave the Kremlin in 2008. Nevertheless, taking into account his popularity (his public approval rating remains above 70%) and the potential disorganisation of the transition period, a third term scenario cannot be fully rule out - although we do not consider it the most likely scenario. Last Saturday, Putin said that he would propose just one candidate to be his successor in 2008, so resolving the current dualism between Medvedev and Ivanov, who are currently considered as the most likely contenders. Although Putin again stressed that the people and their votes would determine the new president, it is clear that Putin’s “recommendation” will provide strong support – absolutely sufficient to win the vote. We would not at all be surprised if the candidate were a virtual unknown within the present administrative power structures. Putin also commented on last week’s massive dismissals from the Federal Customs Service, which is one of the most corrupt government structures in Russia. He acknowledged this fact and said that he would continue to implement aggressive anti-corruption measures. Although we do not expect any immediate improvements or a dramatic reduction in corruption, any anti-corruption measures (in particular those eliciting a resonance with the public) will strengthen Putin’s popularity further, which in addition will ease the successor problem. Investment implications: We welcome efforts to ease the 2008-successor problem, but expect even more speculation on the issue in the near future. We believe that the most likely scenario is that Putin will not sit for a third term and will ‘appoint’ a friendly successor. Julia Tsepliaeva Moscow (7 495) 755 5489
May 12, 2006
ING Wholesale Banking Russia Russian Fixed Income Daily
- Treasuries still vulnerable
- MosReg-6 finally noticed by buyers
- RZhD-6 - the cheapest paper on the Russian Railways curve...
Description
FX and money market Yesterday, the dollar strengthened somewhat in the first half of the day, and as a result, the rouble lost some five kopecks. However, this weakness was very short lived. With the euro appreciating above USD/EUR1.28 – currently it is trying to touch USD/EUR1.29 - the rouble strengthened again and broke through the psychologically important level of RBL/USD27. Today, we expect the rouble in the range RBL/USD26.92-26.97, and market sentiment on its further appreciation remains strong. Although the CBR and government expressed concerns for the first time on its quick appreciation (see our comments in the economic section), we do not expect any immediate reaction. In the money market, the situation remains stable. Overnight rates are low at 1.5% (as they have been throughout this week) and we do not expect any turbulence. Julia Tsepliaeva, Moscow (7 495) 755 5489 Rouble bond market Thursday was a strong day for domestic bonds: fuelled by excess rouble liquidity and expectations of further rouble appreciation, rouble papers rose in price in all three market sectors on the background of solid trading activity, which was above its average level for recent weeks. The spread of Russia’30 over US10Y is currently 105(-2)bp (relatively wide again, with a compression potential of 15bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 68(-4)bp (a new historical low, but wide in a medium-term perspective: our target for it is 50bp). US Treasuries still vulnerable US10Y managed to establish a new local yield top in intraday trading yesterday, having reached 5.175%. Traders were selling 10-year notes in a fear of possible further rate increases following the FOMC meeting decision the day before. Later yesterday an auction was conducted for a new issue of 10-year notes, which showed good demand and was about 2.5 times oversubscribed. The new paper was allotted at an average yield of 5.14%, so the benchmark 10-year rate immediately relocated to this level, where it is now. Such yield gaps have happened at previous auctions, so there’s nothing surprising here: usually the yield more or less restores itself within a couple of trading days, and after that on-the-run and off-the-run securities continue trading more or less at the same level. It should be stated explicitly that long-term US Treasuries currently appear to have larger downside than upside. The current position of US10Y is neutral given today’s Fed target rate (5%), as we don’t believe that the yield curve can be significantly inverted in the nearest future. Accordingly, since there exists a probability that the short-term rate will be raised to 5.25% on 29 June, there exists a probability that US10Y will have to shift upwards towards 5.35-5.5% level. Secondary trading Price changes of high grade rouble bonds: OFZ 46018 +24bp, OFZ 46020 +19bp, Moscow-39 +17bp, Moscow-44 +41bp, FSK UES-2 +1bp, Gazprom-4 +32bp, RZhD-6 +12bp. Second-tier papers: MosReg-6 +41bp, CenTel-4 +14bp, Kopeika-2 -5bp, Magnit -10bp, Megafon-3 -4bp, UTK-4 +11bp, VolgaTel-3 +8bp, WBD-2 +13bp. Finally, market participants have paid attention to the undervalued state of MosReg-6, which yesterday jumped up in price by 41bp. Now, the YTM of this paper is 7.49%, i.e. below 7.5%, above which we recommended accumulating MosReg-6. Due to this good performance we believe the position of the bond has now become more neutral, although some speculative upside is still present: the fair YTM of MosReg-6 is currently approximately 7.3%, so we recommend those who acquired the paper above 7.5% to keep the bond on position until our next target is reached. Moscow Region is rated BB/Ba3 by S&P/Moody’s. Also among long-term papers a bond of Rosselkhozbank, a quasi-sovereign entity specifically created by the Russian government to finance the agricultural sector, RSHBank-2 appears to be trading far above its fair yield. Currently, RSHBank-2 is at 8% to maturity in five years, while its fair point in current market conditions is probably 7.75% and possibly lower in a long-term perspective. Even in adverse market conditions, this bond appears quite a relatively safe investment from a standpoint of interest-rate risk. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. On the curve of Russian Railways, RZhD-6 is currently the most undervalued paper. This bond was yesterday trading at 7.36% to maturity in 4.5 years, but its fair YTM based on the credit spread of its neighbours RZhD-3 and RZhD-5 is most probably in the range of 7.2-7.25%. Russian Railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. Among somewhat shorter papers, UrSI-6 remains one of the highest-yielding telecoms bonds in the corporate sector, being located at 8.55% for 31 months. We would not say that this paper offers immediate upside, but it is definitely very well positioned to compensate holders for its credit risk. Uralsvyazinform is rated B+/B+ by S&P/Fitch. We continue to recommend bonds of Russian Standard bank. Market participants should take a look at the RBL3bn RSB-4 located at around 8.5% to maturity in 23 months. We believe that this paper is at least 25bp above its fair point. Russian Standard bank is rated B+/Ba2 by S&P/Moody’s. RusAl-3 was quoted yesterday at 7.75% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005. TMK-3, a bond of the Russian tube industry leader TMK, was yesterday trading at 8.25% to put in 22 months. We believe that this bond is attractive as far as it pays a premium to the outstanding paper of its direct competitor, OMK-1 (located at 8.15% for 25 months). In our opinion, the medium-term fair value of TMK-3 is 8% YTP, so we continue to recommend accumulating this paper. Short-term market view Our long-term view for the market is positive based on the expectation of further spread compression between the OFZ curve and US Treasuries. The pending removal of restrictions on foreign ownership of rouble bonds only strengthens this outlook. On the other hand, we should also not disregard the threat of further policy tightening in the United States and, correspondingly, higher yields of long-term US Treasuries – it is a very realistic scenario that US10Y reaches 5.5% before the end of 2006. So far, our recommendation for long rouble bonds remains a Hold in expectation of further short-term capital gains due to excess rouble liquidity and the inflow of foreign funds in response to President Putin’s parliamentary address. Dmitry Dudkin, Moscow (7 495) 755 5480 Economic commentary Paris Club deal of 2006 The Paris Club creditors will consider Russia’s proposals in June Yesterday, the Paris Club representatives confirmed that they had received Russia’s proposals concerning the almost-full pre-payment of its Paris Club debt. Previously, Russia had planned to pre-pay US$12.5bn in 2006 (not including its debt to Germany or any debt originating later than 1991), as the agreement between Russia and the Paris Club of May 2005 easily allowed Russia to offer the deal under the same conditions as the pre-payment at par of US$15bn in 2005. Later, however, Russia expressed an interest in pre-paying US$9.5bn to Germany, including the part which had been securitised into Aries (EUR5bn)). According to comments from the Paris Clubs headquarters, the idea of extended pre-payment was met very positively, which may ease the negotiation process. Russia expects to reach an agreement before the G8 meeting in St. Petersburg which is scheduled for mid-July 2006. We strongly believe that the extended pre-payment will be very beneficial for Russia as it will reduce the temptation to spend stabilisation fund resources domestically, help to optimise interest payments, and eliminate the non-tradable portion of sovereign foreign debt. Nevertheless, this part of the deal will only be possible if Russia offers Germany a premium, at least enough to cover Germany’s interest payments on Aries. Any further foreign debt reduction would indirectly imply buybacks of tradable debt, although the government is unlikely to openly acknowledge this intention. In any case, according to the finance minister, Russia will not directly buy back Aries as makes no sense in the framework of Russian foreign debt reduction. Investment implications: We welcome the idea of extended pre-payments of the Paris Club debt as this could help Russia to further reduce her foreign debt and avoid domestic spending of the Stabilisation fund. If the deal is successful (which is very likely), the probability of a further upgrade in Russia’s sovereign rating will increase. With the pre-payment, no Russian risk will be included into Aries. Reserves up Last week, reserves jumped by US$5.4bn (!) to US$231.1bn International reserves gained an impressive USD5.4bn rising to USD231.1bn the week ending 5 May 2006 – after the more than impressive result of the previous week, when reserves jumped by USD8.6bn. In that week, the dollar continued sliding against other global currencies, which immediately formed negative sentiment for it in the Russian FX market. Exporters and speculators preferred to dramatically increase their dollar sales and the CBR had to absorb this money from the market to prevent stronger appreciation of the rouble. In addition, the CBR has been recalculating the dollar value of its euro-nominated reserves (some 25-30% of total reserves), which results in USD0.7-0.8bn increase in dollar terms for each 1 cent of euro appreciation. Yesterday, the CBR announced that the rouble’s real effective exchange rate appreciated by 6.5% in January-April 2006. It expressed its concerns that such a rapid appreciation could negatively impact the competitiveness of domestically produced goods. Arkady Dvorkovich (head of the economic department of the President’s administration) stressed yesterday that the appreciation should not exceed the 2006-target of 10%. We have expected such concerns and strongly believe that the government and monetary authority cannot ignore interests of domestic producers. The CBR is very likely to continue its FX policy and keep the rouble stable relative to the trade-weighted basket, and consequently we expect reserve accumulation to continue in the coming weeks. Investment implications: Reserves are very sizeable, which will help to protect the economy from any external shocks. Market sentiment regarding the dollar remains negative and appreciation pressure on the rouble is high. The CBR will continue to limit its appreciation. We forecast reserves to grow further and reach USD240bn by 2006-end. Julia Tsepliaeva Moscow (7 495) 755 5489
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