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September 30, 2005
ING Wholesale Banking Russia Russian Fixed Income Daily
- Recom. for long bonds changed to Buy
- We expect long OFZs and Moscow to lead in October
- FSK UES-2, Fazprom-4, RZhD-3, Salavat-2 added to buy list..
Description
FX and money market On Thursday, as expected, the rouble continued to appreciate rising to RBL/US$28.506 (+ some 3 kopecks) on the back of the euro’s appreciation. Despite the end-of-month effect, rouble liquidity remains strong: NOSTRO balances spiked to RBL368.1bn, which is the highest level this year, while interbank overnight rates remained relatively low. Today we do not expect any significant changes in either the FX or money market and forecast the rouble to trade at RBL/US$28.51-28.56. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Thursday turned out to be quite a strong day, when for the first time in a week we saw a significant upward movement in long OFZs and long Moscow bonds. Price changes in the corporate sector were also positive, but smaller in scale. A very notable event took place yesterday on the Russian Eurobond market: in spite of a drop in US10Y, which moved in yield from 4.25 to 4.29%, Russia’30 actually succeeded in staying above a price of 115, reducing its spread over US10Y to another historical minimum of 95bp. This is a confirmed break of the 100bp barrier signalling the outstandingly positive outlook investors have for Russian debt. The spread of Russia’30 to the Mexican yield curve is now also at a record low of about -40bp. Government sector The longest OFZ on the government curve – OFZ 46018 (16 years to maturity) –yesterday gained 42bp reducing its yield to 6.79%. Now the yield curve is again practically flat at the long end as the yield of a significantly shorter bond, OFZ 46014 (13 years to maturity), is also close to 6.8%. Right now, the spread of OFZ 46018 to Russia’30 is about 150bp, while we believe that a fair level for this would be at most 120bp. As a result, our medium-term target for long OFZs is 6.5%, so we recommend buying OFZ 46018, 46017 and 46014 in order to capture the capital gains that should follow in October-November. If it is necessary to dilute the portfolio with somewhat shorter securities, we continue to favour 5-year papers OFZ 25057 and 46003. Municipal bonds Yesterday the main events took place on the Moscow curve, where on large trading volumes traders lifted the longest Moscow issues: Moscow-39 +36bp, Moscow-38 +16bp. We already have an active Buy recommendation for long Moscow bonds Moscow-38 and Moscow-41, to which we would like to add the same recommendation for the longest paper Moscow-39. If, as we expect, the long end of the OFZ curve shifts downwards to 6.5%, Moscow-39 will be trading at 6.6-6.7, which corresponds to a price upside of 150-175bp. In addition, it would be a good idea to buy the recently placed SamaraReg-2, as currently trading at 6.94%, the bond should also fall in yield to 6.6-6.7%, promising a price growth of 125bp. Corporate sector Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 +7bp, Lukoil -22bp, RZhD-3 +17bp, FSK UES-2 +9bp. Second-tier issues: Baltika -21bp, Megafon-3 -5bp, Salavat-2 -11bp, UrSI-4 +40bp. As our short-term outlook is becoming more positive, we believe it is time now to buy liquid, value bonds of substantial duration that are likely to enhance the portfolio performance over the rest of the year. Among such issues we can mention FSK UES-2 (7.25% for 5 years), RZhD-3 (6.99% for 5 years), Gazprom-4 (6.96% for 5 years). All of these bonds have the potential to drop in yield by 25-30bp within 1 month. In the second-tier segment we already have Buy recommendations for ChTPZ (now at 8.39% for 3 years, interim target 8.25%) and SibTel-4 (7.76% for 2 years, target 7.6%). To this list we would like to add Salavat-2, which is trading at 8.39% to maturity in 4 years, but still has a yield of almost 7% to a put option in 2 years, which provides a good downside protection for this bond in case of a large adverse movement of long-term interest rates. In the short segment of the corporate sector, bonds of the Home Credit and Finance Bank (HCFB, rated Ba3/B-) HCFB-2 appear very attractive: the paper is yielding 8.55% for 7.5 months, which we believe is enough to compensate for the fact that HCFB produced quite poor results in 1H2005. These weak results appear to be temporary and are a result of the bank’s struggling to gain market share in competition with RSB. We maintain a Buy recommendation for HCFB-2. Short term market view Our short-term outlook for the money market is quite positive, especially considering the fact that there are no large tax payments scheduled until mid-October. Relative to Russian Eurobonds, the domestic bond market still has some room for growth and we believe that market participants will exploit this opportunity in October-November. As a result, our general recommendation for long rouble bonds has changed from Hold to Buy. Dmitry Dudkin, Moscow (7 095) 755 5480 Reserves reach new high International reserves have reached a record US$156.2bn, demonstrating an increase of US$1.2bn over the last two weeks. Without any significant debt payments scheduled for September, reserve growth is likely to accelerate in the coming weeks. In addition, strong market expectations regarding the rouble’s appreciation are stimulating exporters to increase the dollar supply to the market. To avoid excessive appreciation of the rouble, the CBR is likely to continue purchasing US$2-3bn a week into its reserves. As a result, international reserve accumulation will continue and we maintain our forecast for international reserves at US$170bn by 2005-end. Investment implications: Reserves are very sizeable, which will help to protect the economy from any external shocks. Their volume has already surpassed that of Russia’s foreign sovereign debt by around 50% and is likely to continue to grow this year on the back of high oil prices. We forecast reserves to grow further and reach US$170bn by 2005-end 2005 budget amendments As expected, the government has approved amendments to the 2005 budget Yesterday, as expected, the government approved amendments to the 2005 budget, increasing expenditures by RBL124.7bn (US$4.4bn) to RBL491.5bn (US$17.5bn) (please see also our comment of 29/09/05). At the same time, the government upgraded its budget revenue target (adjusted for the stabilisation fund accumulation and unified social tax collection) for 2005 to RBL3473.4bn, or RBL801.6bn (US$28bn) above the initial plan. Taking this into account, the budget surplus in 2005 is very unlikely to be les than 5% of GDP. Investment implications: The new spending increase in 2H05 had been expected with high budget revenues stimulating expenditure appetite. Nevertheless, we expect inflationary consequence of this decision to add 0.5pp to 2005’s inflation. The budget surplus is likely to remain impressive and we foresee no fiscal problems in 2005 and beyond. Julia Tsepliaeva, Moscow (7 095) 755 5489
September 29, 2005
Fitch Ratings Russian Insurance Sector: Key Challenges
Raiffeisen Bank Russian Daily Monitor
Description
Gazprom pays $13.6 bn for control of Sibneft Gazprom announced Wednesday that it had acquired 72% of Sibneft for USD 3.8 per share from Millhouse Capital. Gazprom also confirmed it had bought another 3% on the market, and has thus accumulated a &supermajority 8 in Sibneft. The price brings Gazprom ,s total spending on the deal to estimated USD 13.6 bn. The price is in line both with previous hints and our own expectations, and the development should be fundamentally neutral for Gazprom shareholders. However, it is 5% below Sibneft\'s Tuesday close (USD 4.0), proving that that day ,s frenzy in Sibneft shares (+14.3%) was a shot in the dark. In particular, hopes of a generous buyout offer for minorities have evaporated. Importantly, the market could now look again at the past week\'s gains, recognizing that there are too few convincing investment ideas and too much speculative steam. Thus, the news could trigger a shift from the current highly bullish sentiment to a more neutral outlook. A long overdue correction could ensue. In related news, Gazprom ,s Board of Directors met Wednesday evening, and, among other things, finally approved the gas monopoly ,s investment programme for the year. The fact that the programme was approved after the vast majority of the investments had already been made reminds us of Gazprom ,s lack of strategic focus as well as its weak corporate governance practices. Money market As the short term risk of a renewed surge in the global oil price remains high, the dollar ,s positions remains vulnerable. Meanwhile, a possible resolution of the current political uncertainty in Germany could provide some support for the euro. In the coming months, however, the dollar looks set to stay strong, backed by expectations of a widening interest rate differential between the United States and European Union. On the Russian FX market, the rouble continues to track euro-dollar dynamics, a trend that looks unlikely to change significantly in the short-term. A dollar value of RUR 28.4-28.5 is probable in the coming days. Rouble bonds The last week of the quarter on the rouble bond market seems destined to end as it began, with temperate ups and downs superseding each other in generally directionless trading. Meanwhile, we see similarities to what is going on in equities: few sensible investment ideas, but still lots of money and an escalating &herd effect 8. Should the global houses decide that they have earned enough in Russia (the start of the final quarter is the date to watch here), the country ,s relatively small market could suffer: at current highs, even a slight rebalancing in foreign fund portfolios in favour of other emerging markets could trigger a correction. Moscow-39 and Moscow Region-5 are currently wide ahead of other issues in terms of turnover, attracting over RUB 1 bn each; the City bond rose 14 bps while the Region bond remained flat. Eurobonds Stronger-than-expected data on durable goods orders for August, released on Wednesday, proved that U.S. economic expansion was solid prior to the recent hurricanes, a fact that might have led to increasing investment by the end of the year. The data actually has little value in the current circumstances, however, as investors wait for data that reflects the economic damage done by Katrina and Rita. Meanwhile, the latest readings on U.S. consumer confidence for September released Tuesday showed a two-year low on the back of surging energy prices, which will likely cause expectations that a further surge in the oil price would prompt an even more significant slowdown. That said, the benchmarks should remain sensitive to changes in the oil price, although the general trend toward higher interest rates seems likely to find support from comments by Federal Reserve policymakers. On Wednesday the yield of Russia ,30 slipped 3 bps to 5.28% mirroring the fall in benchmarks. The 10-year UST lost 4 bps in its yield, clocking in at 4.26%. The sovereign credit spread widened marginally to 98 bps. Equity market Russia ,s benchmark RTS index managed to break through the 1,000 mark on Wednesday, but closed well below the milestone at 988.28, posting a gain of a mere 0.38%. The reason for the rollercoaster trading was the excitement around Gazprom ,s acquisition of Sibneft, officially announced in the afternoon (see story above). In the end, Sibneft lost 8.75%, while Gazprom locals and ADSs closed in black, adding 0.82% and 1.06%, respectively. Elsewhere, trading was mixed: investors sold oil papers to buy metals and telecoms, which had both lagged in the market ,s recent rally. ADR trading in New York mirrored trade in Russia, bringing no surprises. We think the equity market may see some growth Thursday on rising oil (Brent climbed 1.26% to USD 62.84/bbl on renewed concerns about refinery damage in the Gulf of Mexico). However, our view is that the market needs to find a convincing trade idea to maintain its growth from these levels; otherwise, some foreign investors could leave the Russian market to join rallies in Brazil and Argentina.
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Gazprom-Sibneft deal ST neutral, LT positive
- Buy recom. maintained for SibTel-4, ChTPZ
- HCFB-2 added to Buy list...
Description
FX and money market Yesterday, the rouble gained some 2 kopecks and reached RBL/US$28.537 (tom) following the appreciation of the euro. At the same time, rouble liquidity remained strong with low interbank rates. Trading activity was relatively high with daily turnover around US$2bn. Upward pressure on the rouble remains solid and market expectations regarding its appreciation are strong. The CBR is in full control of the market, restraining its bullish appetites. Today, we expect the rouble to appreciate a little further gaining some 3 kopecks and forecast trading range of RBL/US$28.48-28.53. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market Wednesday showed a clear tendency of increased trading activity in all market sectors, but this did not help prices: on average the market remained unmoved, with many bonds actually mildly correcting downwards. The main reason for this lack of enthusiasm was probably a moderate increase in money market rates that followed yesterday’s profit tax payment: 1-day MIBOR rose from 1.75 to 2.25% - the highest level in September. On the other hand, as there will be no more tax payments until mid-October, the situation on the money market should remain positive for the next couple of weeks. US Treasuries seem to be clueless about where to go: US10Y failed to break the 4.35% level again and retreated yesterday to its current 4.26%. As a result, Russia’30 is again trading slightly above 115, almost exactly 100bp above US10Y. Corporate sector The widely discussed acquisition of Sibneft by Gazprom is likely to have a very limited effect on the local debt market. The reaction of the stock market yesterday was very indicative with Gazprom shares basically stationary. Also, shortly after the acquisition news came out, Moody’s announced it was confirming its rating of Gazprom at Baa3/Positive. In short, from the local debt market’s perspective the news appears short-term neutral, but long-term positive for Gazprom. Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 -8bp, RZhD-3 +12bp, FSK UES-2 +10bp. Second-tier issues: Megafon-3 -1bp, Pyaterochka +50bp, Salavat-2 +5bp, UrSI-4 -42bp. In the second tier segment, SibTel-4, a medium-term bond of the Siberian regional fixed-line operator (B+ from Fitch), is now trading with a YTM of 7.75% for 22 months. Considering the slope of the yield curve between the corresponding terms, the bond is paying a premium of about 25bp over a longer bond of Sibir Teleom – SibTel-5. We believe that a fair YTM level of SibTel-4 is below 7.6% and maintain a Buy recommendation for the paper. Having lost 9bp yesterday, the bonds of the Chelyabinsky Tube Rolling Plant (ChTPZ) are now trading at 8.4% to maturity in 33 months, paying a 40bp premium to the bonds of ChTPZ’s direct competitor OMK, which are now yielding only 8%. As ChTPZ is actually larger than OMK by market share and similar to it by financial strength, we believe this premium is ungrounded from a credit standpoint, and continue to recommend buying ChTPZ with an interim goal of 8.25%. In the short segment of the corporate sector, bonds of the Home Credit and Finance Bank (HCFB, rated Ba3/B-) HCFB-2 appear very attractive: the paper is yielding 8.43% for 7.5 months, which is almost 75bp above the bonds of the Russian Standard Bank (Ba2/B+), specifically RSB-2. We believe that such a premium cannot be justified by the credit differences between the two banks, as they are direct competitors on the consumer lending market, and HCFB is simply smaller than RSB. The fact that HCFB produced a net loss in 1H2005 appears temporary and is a result of the bank’s financing its regional expansion program. We issue a Buy recommendation for HCFB-2. Short term market view The market remains well-supported, but is in a state of consolidation now as traders are getting used to low yield levels reached during the summer rally. We believe that the market has a chance to remain more or less flat until the end of this week, but afterwards, in the beginning of October, another step up is possible. Our current general recommendation regarding long bonds remains a Hold, but we will be reviewing this in the next few days. Dmitry Dudkin, Moscow (7 095) 755 5480
September 28, 2005
Raiffeisen Bank Russian Daily Monitor
VTB Capital MNB Daily Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- FSK UES downgraded to Hold on good performance
- RusAl-2 approached target 7%
- Buy recommendation maintained for ChTPZ, SibTel-4...
Description
FX and money market Yesterday, the rouble lost some 2 kopecks and reached RBL/US$28.5578 (tom) following a drop in the euro. At the same time, rouble liquidity remained strong with low interbank rates. Trading activity was relatively high with daily turnover around US$1.85bn. Upward pressure on the rouble remains solid and market expectations regarding its appreciation are strong. The CBR is in full control of the market, restraining its bullish appetites. Today, we expect the rouble to stay in the range RBL/US$28.52-28.57 although rouble volatility is likely to increase as the CBR could step back and allow some appreciation above the trade-weighted basket. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market Tuesday showed a resumption of buying activity on the local debt market. Prices of long rouble bonds edged up in all three market sectors, with trading activity at average for recent months. Today, Russian companies are due to pay their profit taxes, which will be the final test of the money market stability this month. We do not expect a significant liquidity squeeze following the payment, although overnight rates could rise a bit during the day. It was surprising that following the very soft consumer confidence release yesterday, US Treasuries failed to grow: after some swings, US10Y is now trading at 4.31% against 4.29% yesterday morning. Accordingly, Russia’30 is now lower than yesterday: at 114.375, 103bp over US10Y. The intraday minimum of the spread was 100bp, establishing a new historical low. Municipal bonds Price changes of the most liquid issues: Moscow-39 +14bp, MosReg-4 +21bp. Regarding apparent mispricings, we would like to note one thing here: due to the cheapness of corresponding OFZ 46003 and 25057, relatively long Moscow bonds Moscow-41 and Moscow-38 appear undervalued in comparison to Moscow-39. Both have durations of about 4 years and they are currently yielding 6.75-6.8% to maturity. We believe that already in the first half of October, the bonds could adjust their position downwards, to 6.5-6.6%. Corporate sector Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 +1bp, Lukoil +36bp, RZhD-3 -6bp, FSK UES-2 +0bp. Second-tier issues: Megafon-3 -2bp, Pyaterochka -38bp, Salavat-2 +9bp, UrSI-4 +8bp. FSK UES gained 33bp yesterday, having reduced its YTM from 6.8 to 6.64% for 27 months. This growth brought the paper significantly closer to our target for it of 6.5%. Therefore, we are downgrading FSK UES from Buy to Hold, leaving the target in place. RusAl-2 grew 15bp and is now yielding 7.06% to maturity in 20 months. Out goal for the bond is at 7%, so bond holders should prepare for profit fixing in this paper. So far, we are maintaining a Hold recommendation regarding RusAl-2. Also in the second tier segment, SibTel-4, a medium-term bond of the Siberian regional fixed-line operator (B+ from Fitch), is now trading with a YTM 7.78% for 22 months. Considering the slope of the yield curve between the corresponding terms, the bond is paying a premium of about 30bp to its peer UrSI-4, while a longer bond of SibirTelecom, SibTel-5, is trading only 5-10bp above UrSI-5. We believe that a fair YTM level of SibTel-4 is 7.6% and below and maintain a Buy recommendation for the paper. Having gained 22bp yesterday, the bonds of the Chelyabinsky Tube Rolling Plant (ChTPZ) are now trading at 8.36% to maturity in 33 months, paying a 40bp premium to the bonds of ChTPZ’s direct competitor OMK, which are now yielding only 8%. As ChTPZ is actually larger than OMK by market share, we believe this premium is ungrounded from a credit standpoint, and continue to recommend buying ChTPZ with an interim goal 8.25%. Short term market view The market is showing signs of wakening after several very slow days. On the other hand, US Treasuries and the falling rouble exchange rate pose a threat to prices of long rouble bonds. Until the end of the month we do not recommend market participants to increase the overall portfolio duration, so our general recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 095) 755 5480
September 27, 2005
BTA bank On assessment of monetary policy in Kazakhstan
B&N Bank MDM Fixed Income Daily
Raiffeisen Bank Russian Equities: Fortnightly Investment Insight
Alfa Bank Alfa Bank\'s Weekly Report
Description
Our expectations: ь Exchange and money markets The currency market will move according to pressure from two factors this week. On one side, predictions of Hurricane Rita?s destruction proved overblown, and as the storm subsided the dollar began to sharply appreciate. This dynamic may persist, which could force the euro rate through the level of resistance at $1.20/?. On the other side, data on the US economy to be released this week will incorporate the impact of Hurricane Katrina, and these figures could underperfom both previous indicators and forecasts. In that event, the dollar will correct downward. ь Ruble bonds market The corporate debt market will maintain its price growth trend over a period of 1.5-2 months. Meanwhile, Russian investors are being forced to actively switch to second and third tier bonds in an attempt to take advantage of these sectors? higher yields. Given the continuing influx of foreign funds, the dynamics of the Russian bond market are gradually falling under the influence of the currency rate. ь Eurobond market This week, the situation on the external debt market will be calm as oil prices stabilize. Investors? expectations of a significant slowdown in US economic growth have diminished, and gas prices continue to urge on inflation, promoting growth in bond yields. News about ongoing negotiations regarding early debt settlement in 2006 and generally high demand for Russian assets will support Russian bonds, which in turn will narrow spreads against US Treasuries.
Raiffeisen Bank Russian Daily Monitor
Description
Money market On Monday the dollar rate on the Russian FX market floated above RUR 28.5, as fluctuations remained firmly under the influence of euro-dollar movements. A push towards a stronger greenback still seems likely as expectations of a widening interest rate gap between the United States and the eurozone are increasingly supporting the dollar. At the same time, the Russian Central Bank ,s purchases of foreign currency are allowing the dollar to stay firm on local trade. Thus, short-term strengthening of the dollar looks very likely, although we would rule out the possibility of a deep fall by the European currency. As for Tuesday, upcoming September consumer confidence data from the United States will likely show some deterioration from the previous month. Nevertheless, as data remains distorted from the recent Hurricane damage the response to the news should be moderate. Rouble bonds We expect rouble bonds to remain firm this week as rouble liquidity does not seem to be suffering from the onset of tax payment deadlines. Although the rouble exchange rate has slipped, traders do not seem to see this as an established medium-term trend. Overall, the fixed income market seems confident, although the flattening of the yield curve of Moscow City bonds backtracked somewhat on Monday: long papers lost 10-45 bps, while 1.5-2 year duration issues advanced 15-54 bps. And while high levels of activity on this market have become the norm, the RUB 1.5 bn of turnover in Gazprom-2 bonds seen on Monday is outstanding by any measure. Eurobonds On the back of tumbling U.S. Treasuries, the sovereign sector of the Russian Eurobond market remains buoyant. Among the key supportive factors are the government ,s plans to keep up its program for early external debt redemption, and speculation of a two-notch sovereign credit rating upgrade from Moody ,s. The latter seems to have already been priced and we do not expect such a move to have a serious impact. At the same time, the fall in the benchmarks looks set to continue as comments from Federal Reserve policymakers increasingly point to continued monetary tightening. Fed chairman Alan Greenspan ,s report on the U.S. housing market indicates the significant role of speculative forces on growing real estate prices, which in turn appeals to the need for higher borrowing costs to calm the market. That said, we are likely to see further credit spread tightening on continuing yield expansion in U.S. Treasuries and strong demand for Russian Eurobonds. On Monday the yield of the 10-year U.S. Treasury note added 5 bps on the day to hit 4.29%, which on the back of almost flat Russian sovereign bonds created a record spread of 97 bps. Equity market The Russian equity market saw some profit-taking on Monday, pushing the benchmark RTS index down 1.09% to 954.79. Almost all oil & gas stocks declined: Lukoil lost 2.13%, Surgut dropped 2.86%, and Sibneft weakened by 2.78%. Only Gazprom shares and ADRs managed to climb, 0.74 and 1.96%, respectively, under the influence of the imminent removal of the company ,s share ownership restrictions. Some growth was also seen in several regional telecom and steel papers. In New York, investors seemed to sell more Russian papers than they bought. However, Gazprom ADRs gained 4.17%, Rostelecom added 1.9%, and Vimpelcom climbed 1.21%, as MTS slipped 0.33%. Some upward movement looks possible on Tuesday morning because of the positive dynamics of global equity markets and the increase in the oil price (the indicative Brent price grew 2.3% to USD 62.97/bbl because of the uncertainty about Hurricane Rita consequences). However, consolidation looks the most likely scenario at the end of the day as investor ,s look for their chance to take profits.
VTB Capital MNB Daily Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- General recommendation for long bonds upgraded from Sell to Hold
- ChTPZ appears cheap above 8.25%
- Buy recommendation maintained for FSK UES...
Description
FX and money market Monday showed very calm trading activity after Friday’s impressive daily turnover. As the euro continued to fall against the dollar, the rouble lost 11 kopecks sliding to RBL/US$28.54. The money market did not suffer from yesterday’s rouble illiquidity despite mineral resources and excise taxes payments. Another important event this week occurs tomorrow, when Russian companies pay their profit taxes (some RBL160bn). However, taking into account recent huge dollar sales, we do not anticipate a significant liquidity squeeze. Today we see the rouble at RBL/US$28.55-28.61. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Following a very slow Friday, yesterday trading activity on the local debt market was quite low once more in all sectors. Following an almost 20 kopeck depreciation of the rouble against the US$ in the morning, prices of many long rouble bonds even began to correct downwards, although overall for the day we can say that the market simply remained still. Due to a large inflow of rouble funds from the forex market, where the CBR bought about US$5bn on Monday, yesterday’s payment of the mineral resource tax went without any problems: on the contrary, 1-day MIBOR fell from 2.04 to 1.83%. The financial system, therefore, has just one last short-term obstacle to overcome: tomorrow’s payment of the profit tax. After that, there will be no liquidity drains until mid-October. Corporate sector Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 -8bp, Lukoil -4bp, RZhD-3 +1bp. Second-tier issues: Baltika +0bp, Megafon-3 +33bp, Pyaterochka -36bp, Salavat-2 -11bp, UrSI-4 -14bp. We have already mentioned yesterday that, as soon as FSK UES-2 entered secondary trading, it became apparent that FSK UES is undervalued relative to it: the z-spread of FSK UES to the OFZ curve is now 90bp, while the spread of FSK UES-2 is only 63bp. Right now, FSK UES is trading with a yield 6.8% to maturity in 27 months, so we maintain a buy recommendation for FSK with a target YTM 6.5%. Also, bonds of the Chelyabinsky Tube Rolling Plant (ChTPZ) are now trading at 8.5% to maturity in 33 months, paying a 50bp premium to the bonds of ChTPZ’s direct competitor OMK, which are now yielding only 8%. As ChTPZ is actually larger than OMK by market share, we believe this premium is ungrounded from a credit standpoint, and recommend buying ChTPZ with an interim goal 8.25%. Short term market view We see the recent slowdown in market activity as a direct result of the recent long-lasting rally that took long-term interest rates to unprecedented lows. Market participants are now not eager to push prices higher, as further capital gains are becoming less certain. As a result, we believe that the current week will be used by traders to consolidate recent gains, reshuffle portfolios, and to get ready for the beginning of the new month. We believe we have given market participants enough time to fix profits in the best performing bonds, so now we are changing our general recommendation for long rouble bonds from Sell to Hold. Dmitry Dudkin, Moscow (7 095) 755 5480 Putin’s conference call Today Putin will answer questions from Russia’s population live to air Today, President Putin will spend two hours answering people’ questions on his already traditional conference call. Currently, 700,000 questions have been submitted to him, most of which are related to housing, communal services, education, and health care issues and so on. The Kremlin’s experts will select the most interesting/typical questions to be put to the president. People will also have the opportunity to call directly to the conference and ask their questions without censorship. Despite the PR shade of this event and it’s somewhat ritual nature, usually several statements and announcements of the president are related to common and global problems in the economic and political spheres. We believe that Putin will use this wide opportunity of communication to highlight and promote his political and economic course. We will attentively monitor the conference and believe it will have some interesting outcomes. Investment implications: We believe that President Putin will use the opportunity of direct contact with his people to highlight important policy choices (for example, further economic liberalisation, the problem of inflation, the potential third term and so on). Julia Tsepliaeva, Moscow (7 095) 755 5489
ING Wholesale Banking Russia Russian Fixed Income Weekly
Description
Rouble bond market Last week was significantly weaker than the several preceding, as the rally on the domestic bond market basically stopped. Nevertheless, the prices of long rouble bonds still did not correct downwards: on average, high-grade corporate bonds, municipal, and government issues were still edging up, while second-tier corporates were unchanged. Meanwhile, Russian Eurobonds were also very slow: due to a sideway movement of US Treasuries, Russia’30 began last week at 114.5, reached its all-time high of 115.25 on Thursday, but then again dropped to the current 114.375. We believe that until the end of this year, Russia’30 is likely not to leave the 111-117 range in which it has been fluctuating since July. A level of 111 could be reached if US10Y jumps in yield as far as 4.55% (strong technical yield resistance), while 117 will be approached if US10Y returns to 4%. As long as Russia’30 remains within these bounds, it should not significantly influence the rouble bond market. Government sector Not much happened here over the last week: long OFZs were slowly slid in yield, so the longest bonds were naturally the price leaders: OFZ 46018 +92, OFZ 46017 +77, OFZ 46002 +39bp. At the moment, the spread of OFZ 46014 over Russia’30 is about 140bp, although taking into account the excess rouble liquidity, this spread should logically in the long term not exceed 100bp. As OFZ 46014 currently has a YTM of 6.75%, our target range for the long end of the OFZ curve is 6.35-6.5%. Given the long duration, this still constitutes a significant price upside. In addition, we still consider undervalued two mid-term bonds that we have already mentioned many times: OFZ 46003 and 25057. Both issues have a duration of 3.5 years and both are yielding about 6.5% to maturity. In their current state, these bonds appear notably above the curve, so their yield reduction potential is about 15-20bp. Municipal bonds Two processes were noticeable here: long Moscow bonds followed the OFZ curve in its downward yield crawl, while spreads of lower-credit issues to the Moscow curve widened. Price leaders over the week in secondary trading: Moscow-39 +55bp, MosReg-3 +53bp, Moscow-36 +47bp, Moscow-29 +15bp. Leaders by exchange turnover: MosReg-5 RBL4.6bn, Moscow-39 RBL4.1bn, Moscow-28 RBL1.3bn. MosReg was heavily traded lately due to the close amortization of its principal. On October 4, 2005 25% of the face value of MosReg-5 will be redeemed according to its amortization schedule, and as a result, its duration will increase from the current 2.19 to approximately 2.95 years. After this, MosReg-5 will be trading very close to MosReg-4, so its recent 7% YTM, which appeared to be a signal for buying, is nothing but a result of the price adjustment that was taking place prior to the amortization. After the amortization, the price of MosReg-5 will jump to 109.75-110, but there will be no real money gain as the higher price will only be attributable to the reduced principal (75%). In summary, as a result of the recent adjustment, MosReg-5 is now fairly valued compared to MosReg-4 taking into account the future amortization. Regarding apparent mispricings, we would like to note one thing: due to the aforementioned cheapness of OFZ 46003 and 25057, relatively long Moscow bonds Moscow-41 and Moscow-38 also appear undervalued. They both have duration of about 4 years and they are currently yielding 6.75-6.8% to maturity. We believe that already in the first half of October the bonds could adjust their position downwards, to 6.5-6.7%. Corporate sector Corporate bonds merely consolidated their previous gains last week, and in addition some spread widening between high-grade issues and the OFZ curve was also notable. Price leaders in the sector: RusAl-2 +46bp, AvtoVAZ-2 +29bp, Akron +27bp, FSK UES +22bp, RSB-3 +16bp. Volume leaders: FSK UES-2 RBL9.7bn, Gazprom-4 RBL1.9bn, RZhD-3 RBL1.1bn. The leadership of the first two price leaders is directly connected to events on the primary market: our favourite pick RusAl-2 was lifted due to the auction of RusAl-3 – a new RBL 6bn bond of RusAl that was successfully placed on September 21. Also, traders’ attention was drawn to AvtoVAZ-2 due to the placement of another carmaker – KamAZ on September 23. Regarding RusAl-2, we still believe that the bond has growth potential: now yielding 7.17% to maturity in 20 months, the paper could reach 7% in the nearest future. We maintain a Hold recommendation for it. Among the volume leaders, an absolute champion was this time FSK UES-2, which entered secondary trading on Friday having been closed for registration of 2.5 months. The trading started quite aggressively: the price reached 104.5, corresponding to a yield 7.24% to maturity in 5 years. This YTM is approximately 50bp above the Moscow curve. On the other hand, the first issue of FSK UES is now trading at 6.82% to maturity in 27 months, which is about 75bp above the Moscow curve. Taking this into account, we today issued a Buy recommendation for FSK UES with a YTM target of 6.5%. In the second tier segment SibTel-4, a medium-term bond of the Siberian regional fixed-line operator (B+ from Fitch), is now trading with a YTM 7.75% for 22 months. The bond is paying a premium of about 50bp to its peer Megafon-2, while a longer bond of SibirTelecom – SibTel-5 is trading only 10bp above Megafon-3. Considering the slope of the yield curve between the corresponding terms, we believe that the fair YTM level of SibTel-4 is located at 7.6% and below. Short term market view We expect that this week will see consolidation continue on the local debt market. Traders are getting used to new yield levels after the recent rally and are not in a hurry to force another round of growth. In addition, today and on Wednesday the money market will experience the results of large tax payments (mineral resource and profit taxes accordingly), so market participants will not have proper access to cheap rouble funds. On the other hand, the beginning of October is likely to be more active and positive in price movement, so now we are changing our general recommendation for long rouble bonds from Sell to Hold, as we believe we have given enough time to reduce the overall portfolio duration and fix profits in the most performing long papers. Dmitry Dudkin, Moscow (7 095) 755 5480
September 26, 2005
B&N Bank MDM Fixed Income Daily
Raiffeisen Bank Russian Daily Monitor
Description
Money market The dollar has climbed to a two-month high against the euro on reports that the damage caused by Hurricane Rita was relatively minor, a move that pushed the dollar above RUR 28.5 on the Russian FX market. And further dollar strengthening still seems likely as Federal Reserve policy is set to introduce higher interest rates and, thus, a wider yield gap between dollar and euro-denominated assets. However we do not expect the greenback to appreciate much from its current levels of USD 1.20 to the euro, as growing U.S. budget and current account deficits preserve significant risks. Moreover the recent statement from Federal Reserve chairman, Alan Greenspan, that government has lost control of the budget deficit may signal that the mentioned U.S. imbalances are unlikely to start to improve in the near future. In the meantime, the likelihood of rouble appreciation remains high, with such a move depending on the Russian Central Bank ,s willingness to keep inflation below last year ,s levels. Rouble bonds Rouble bond investors will be keeping an eye on tax payments this week: excises and mineral extraction tax are scheduled for Monday, while profit payments are due Wednesday. On the other hand, this week (and most of next) will be spared any new placements, so we are unlikely to see any upward pressure on yields originating from scarce rouble liquidity. On Friday, activity was again concentrated on sub-federal issues, with the Moscow Region-5 bond price advancing 22 bps, stopping a notch above a 7% yield to maturity. Meanwhile, Moscow City bonds were not particularly inspiring, although the most liquid Moscow-39 and Moscow-29 posted single-digit gains. End-of-week placements were met with demand, with most issues being placed below their expected yields. Eurobonds As it became clear that the damage wreaked by Hurricane Rita ,s would prove less damaging than predicted, U.S. Treasuries backtracked on Friday to levels seen last Tuesday, with the market increasingly focusing on the bullish monetary policy of the U.S. Federal Reserve. However, this week ,s data may give some hint as to whether further tightening is really needed. Friday ,s releases are expected to show the impact of soaring oil prices on core inflation in August, currently one of the main concerns of Fed policy makers. The string of Friday releases will also include Chicago PMI for September, and despite the distortions caused by recent Hurricanes, strong business sentiment data should provide support for interest rate hikes. On Tuesday data releases on consumer confidence in September are expected to attract the most attention. Friday ,s benchmark slide - the 10-year note expanded to 4.25% -- prompted a similar move in the Russia ,30, which added 5 bps to 5.32%. The Russian sovereign credit spread contracted by 2 bps to 104. Equity market On Friday investors were torn between the desire to take profits after the several weeks of bullish movement in certain stocks, and the hunger to buy on the dips. As a result, Friday saw some rollercoaster trading on the Russian equity market. A decline in oil prices restrained investors , appetitive for Russian oils and gas stocks (the indicative Brent price dropped 3.39% as it became clear than Hurricane Rita would not prove too damaging for U.S. oil production). Lukoil gained only 0.27%, Surgut lost 0.47% and Gazprom ,s local shares added 0.21%, while the gas monopolist ,s ADSs dropped 2.83%. Fixed-line telecoms were in black because of coming Svyazinvest privatization, and Rostelecom climbed 1.78%. Overall, trading was mixed and RTS closed roughly unchanged at 965.3 (-0.07%). ADR trading was also mixed. The poor dynamics of Russian ADR prices and EMEA indexes, coupled with weakened oil prices, suggest that further consolidation will continue on Monday. The market currently lacks trading ideas, and attempts to launch a new rally could trigger profit taking. As a result, consolidation may last for several days.
ING Wholesale Banking Russia Russian Fixed Income Daily
- Falling US Treasuries cap domestic market growth
- FSK UES-2 enters secondary trading
- Buy recommendation issued for FSK UES...
Description
FX and money market On Friday, trading activity was high in the Russian FX market with an impressive daily turnover over US$4.8bn. The CBR was the most active participant, buying approximately US$4.5bn into its reserves to prevent appreciation of the rouble. At the same time, the euro dropped to US$/EUR1.206, leading the rouble to lose some 9 kopecks falling to RBL/US$28.47. This week we expect the market to remain volatile and very dependant on the euro/dollar trend, although expectations for potential rouble appreciation are strengthening. Looking at the behaviour of the euro, today we expect to see the rouble in the range of RBL/US$28.52-28.57. The cost of rouble funds is likely to increase, even though we do not anticipate severe rouble illiquidity in the money market. Today, Russian companies are to pay mineral resources and excise taxes totalling some RBL100bn, while on Wednesday, profit taxes (some RBL160bn) will be due. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market On Friday, the local debt market showed very low trading activity: low exchange turnovers were evident in all market sectors, which was a little odd, as the last day of the week is typically quite strong. If we look at price movements, daily changes were mostly positive though very small in scale, so on average we can say that the entire market remained unmoved. This lack of enthusiasm was probably connected with the fall in US Treasuries that continued falling after the weak Thursday: US10Y jumped in yield over the day from 4.18% to 4.26%, causing a corresponding drop of Russia’30, which is now trading at 114.5, 107bp above US10Y. The latter now appears ready to test the yield resistance level of 4.35%, which is followed by a large downward sloping trendline now located at 4.55%. If US10Y reaches this level, Russa’30 will be trading close to 112, and this is why we have been consistently saying that Russia’30 is now locked in the range of 112-117. We believe that its fluctuations within this range do not pose a considerable threat to the local bond market. On the money market, the situation has been so far quite calm, although overnight rates have risen a bit in anticipation of the mineral resource tax payment due today: 1-day MIBOR is now at 2.04%, up from 1.79% on Friday. As a result of the payment, today short-term rates are expected to increase a little more. Another important moment this week is Wednesday, September 28, when Russian companies will be paying the profit tax. Overall, we do not expect a significant liquidity squeeze to rock the market this month, but some slowdown in buying activity can be reasonably predicted. Municipal bonds Here we would just like to remind market participants that on October 4, 2005 25% of the principal of MosReg-5 will be redeemed according to its amortization schedule. Due to the 25% amortization, the duration of MosReg-5 will increase from current 2.19 to approximately 2.95 years. After that, MosReg-5 will be trading very close to MosReg-4, so its recent YTM level 7%, which appeared to be a signal for buying, is nothing but a result of the price adjustment that was taking place prior to the amortization. After the amortization, the price of MosReg-5 will jump to 109.75-110, but there will be no real money gain as the higher price will only be attributable to the reduced principal (75%). In summary, MosReg-5 is now fairly valued compared to MosReg-4 taking into account the future amortization of the principal. Corporate sector In spite of the lack of activity on the secondary market, results of the primary placements on Friday were quite strong. Ochakovo brewery successfully placed its second RBL1.5bn bond issue with a coupon rate 8.5%. Perhaps the auction’s delay, which had originally been planned for September 15 and appeared to be a bad sign, actually helped Ochakovo-2 as many domestic market participants had time to open limits for this borrower. As a result, the effective YTM of this bond for 3 years turned out to be 8.68%, which is significantly lower than the 9.25% level we forecast. We still believe that such a yield is simply a result of the general paper deficit and do not consider Ochakovo-2 a good buy below 9%. The Russian truck maker Kamaz also offered to the public its second RBL1.5bn bond on Friday, which originally will be trading to a 3-year put option. The coupon rate at the auction was set at 8.45%, which gives a YTP of 8.63% - also lower than our forecast level 9%, but in this case at least justifiable: the benchmark AvtoVAZ-2 bond, to which market participants were pricing KamAZ-2, also shifted yesterday downwards in yield, so in essence KamAZ-2 was placed in line with AvtoVAZ-2, although paying no premium over it. Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 +6bp, RZhD-3 +5bp, FSK UES +7bp. Second-tier issues: Megafon-3 -7bp, Pyaterochka +24bp, Salavat-2 -8bp, UrSI-4 +6bp. The main secondary market event in the corporate sector on Friday was the beginning of secondary trading for FSK UES-2. The bond was placed on June 28 and was closed for registration for over 2.5 months. The price at which the issue was trading on Friday, was 104.5, corresponding to a yield 7.24% to maturity in 5 years. This YTM is approximately 50bp above the Moscow curve. On the other hand, the first issue of FSK UES is now trading at 6.82% to maturity in 27 months, which is about 75bp above the Moscow curve. Taking this into account, we are issuing a Buy recommendation for FSK UES today with a YTM target of 6.5%. Short term market view We believe that this week is unlikely to demonstrate significant market growth due to the two large tax payments that are expected to reduce the liquidity level and inhibit the purchasing power of traders. Coupled with the possibility of a continuation of the downward movement of US Treasuries, this constitutes a threat to the prices of long rouble bonds, so we continue recommending caution and do not advise increasing portfolio duration. Dmitry Dudkin, Moscow (7 095) 755 5480 Further debt pre-payments Russia is ready to pre-pay another US$15-16bn of its sovereign foreign debt Yesterday, at the regular management meeting of the IMF and the World Bank in Washington, Finance Minister Alexei Kudrin announced that Russia was ready to continue pre-payment of its sovereign debt. According to the minister, in the remaining part of 2005 Russia is very likely to pre-pay US$5-6bn of its foreign debt to sovereign non-Paris Club creditors, and will offer a new portion of US$10bn for pre-payment to Paris Club creditors in 2006. Kudrin stressed that as previous pre-payment had showed, some Russian creditors would not agree on pre-payment and consider these debts as very reliable and solid assets. Nevertheless, we believe the negotiation on pre-payment to have been successful and forecast Russia to fully pre-pay its debt to sovereign creditors by 2008, reducing government foreign debt to 5-6% of GDP. Investment implications: We welcome the idea to accelerate pre-payments of foreign debt as an alternative to an increase in non-interest expenditures. Pre-payments will help to ease the pressure of the “Dutch disease” and limit inflation. The great improvements of debt structure (close to the MinFin’s desirable proportion of 50:50 between foreign and domestic debt) is also good. Reduction of debt burden and strong fiscal performance are positive for risk reduction. Julia Tsepliaeva, Moscow (7 095) 755 5489
September 23, 2005
B&N Bank MDM Fixed Income Daily
VTB Capital MNB Daily Market Comment
Raiffeisen Bank Russian Daily Monitor
Description
Budget passed in first reading The State Duma passed the federal budget draft for 2006 in its first reading on Thursday, leaving the key parameters unchanged from government\'s plan. Under the major assumptions of the 2006 budget * a $40/bbl average Urals oil price, 5.8% GDP growth and 7-8.5% inflation * revenue is expected to reach to RUB 5046 mn, with a surplus of RUB 776 mn. The underlying expenditures of RUB 4270 mn is about 1.5% GDP higher than this year. Ring fence to fall at last? A Gazprom manager and a government official both told Vedomosti that Gazprom and relevant ministries have already agreed on an action plan that envisages full and unconditional dismantlement of the gas monopolist\'s ring fence, including an immediate lift of any ownership quotas for foreigners and trading restrictions. The tentative deadline for the necessary amendments to the respective laws, some of which require Duma approval, is January 1, 2006. We believe that Gazprom locals and ADSs, which both showed double-digit weekly growth despite Thursday ,s correction, have already priced in the news, which was apparently leaked to the market a few days ago. The stock now seems overheated, and a technical correction seems likely in the short term. Meanwhile, we believe the deadline has a good chance of being met as all parties involved demonstrate the will to push the plan ahead (unlike the privatisation of Svyazinvest, for example). Center Telecom posts poor 2004 results Center Telecom, the incumbent fixed-line operator in the central federal district, posted poor 2004 results under IFRS on Thursday. We did not find any progress in the company\'s financials, and the management\'s presentation did not assure us that progress is possible at all. The company\'s sales grew 30% y-o-y to USD 904.2 mn, mostly because of tariff increases and changes in settlement procedures with Rostelecom. Whatever the company has said about the growth rates of new services, the progress was unimpressive. Center Telecom did not manage to control labour costs and total costs grew 37% to USD 872.5 mn. As a result, Center Telecom was the only Russian telecoms to demonstrate a decline in operating income in 2004, dropping 45%. EBITDA, meanwhile, improved by a tiny 1%. The company\'s interest expenses grew two-fold to USD 73.22 mn, and as a result, the bottom line was in the red: the company\'s net losses were roughly USD 32 mn. Center Telecom main problem, apart from poor operating activity, is its leverage. The debt to EBITDA ratio of the company is threatening 4.6 and we anticipate no improvement in it. The company\'s investment budget should be cut down by a factor of two in 2005, but it is insufficient to make the company\'s free cash flow positive. Besides, we see no growth points in company revenues, and we see very poor results from the company\'s extensive investment activity in 2003 and 2004. The problem is redoubled by the fact that it seems the company\'s management does not realize the scale of problems it faces, or how they could be resolved. Considering this, we confirm our Sell recommendation for the company\'s shares. Money market Russian FX dynamics remain under the influence of euro-dollar movements, although some local factors do have the potential to rock the boat. Nominal rouble appreciation seems probable as signs of speeding September inflation emerge, that, in turn, may force Russia\'s Central Bank to stop its aggressive buying of foreign currency or lower its dollar bids. In the meantime, the news of the fading strength of Hurricane Rita has allowed the dollar gain ground on the euro, the European currency\'s value dropping to 1.215 from 1.22. This move should send the dollar ,s up to 28.4 roubles on Friday, in accordance with the Central Bank\'s currency basket mechanism. Rouble bonds Long Moscow issues edged up Thursday, but corporate names were weak on the rouble bond market. Liquidity is above average, but massive tax payments (Mineral extraction tax and excises) are scheduled for Monday, so traders are likely to show some reserve on the bond market on Friday. Center Telecom\'s 2004 IFRS financials turned out alarming, especially on the debt side (see story above). The operator ,s CenterTelecom-3 bond matures in September 2006 while CenterTelecom-4 has a put option in November 2006, creating room for serious refinancing difficulties next autumn. We believe the spread of CenterTelecom-3 to more safe peers such as URSI-6 should be some 50-70bps wider than the 69bps currently. Eurobonds On Monday, Finance Minister Alexei Kudrin said the government may repay USD 3bn-5 bn of its Soviet-era debt by the end of the year, contradicting previous expectations of a redemption next year. Although no particular agreements or details of further redemption were announced, the news should be supportive of Russian sovereign eurobonds. In the meantime, the upward trend in U.S. Treasuries broke on Thursday as concerns over Hurricane Rita eased. At the same time, U.S. employment data for September appeared less weak than expected. We believe the benchmarks\' downward movement should be limited from current levels given the U.S. Federal Reserve\'s commitment to fight inflation even if it prompts a slowdown. Federal eurobonds edged up on Thursday with the Russia ,28 appreciating the most to a record low 5.735%, which pressed down the long end of the yield curve. Meanwhile, the EMBI+ Russia index hit 106 bps. Equity market The Russian equity market demonstrated volatile trading on Thursday, with growth in the first half of the day and a correction at the end following the announcement that Gazprom\'s ring-fence will be totally removed (see story above). Gazprom\'s local shares and ADSs dropped 3.06% and 3.13% on the news, after showing strong growth this week. The results of other oil names were also unimpressive although all managed to close in the black. In New York, meanwhile, investors preferred to take their profits in oil stocks. Telecoms ADRs showed some growth: Rostelecom gained 2.09%, and MTS and Vimpelcom grew 0.58% and 0.32%, respectively. This week allowed investors to gain good returns in a large number of papers and current valuations are seen by some as already very high. We expect somewhat profit-taking to continue on Friday, but its scale will not be serious for the market: there are plenty of investors who will treat a price decline not as the end of growth, but as a chance to enter the market cheaply.
September 22, 2005
Raiffeisen Bank Russian Daily Monitor
Description
Money market Hurricane Rita, rising energy prices and political uncertainty in Germany are all weighing in on the euro-dollar rate, which in turn is setting the agenda for the Russian FX market. Dollar strengthening against the euro from current levels looks quite likely, with the euro likely hitting USD 1.20 * although the current surge in oil prices may temper such a move. Meanwhile, we would not be surprised to see further rouble strengthening in nominal terms, particularly if September inflation appear to be well above zero. On the whole, the likelihood of the dollar reaching RUR 28.5 remains high. Rouble bonds The rouble bond market remained relatively strong on Wednesday as the week began to reveal a pattern of consolidation, with sell-offs beginning in some issues, before meeting firm demand close to previous highs. It seems that a number of large investors are gradually unwinding their positions, raising the question of who is taking over * speculators or just bullish investors with longer horizons. Sub-federal issues such as Moscow Region 5, Leningrad Region 3, and Krasnoyarsk Region 1 attracted the most turnover Wednesday, slipping 0-25 bps. The RusalFinance-3 bond was successfully placed at 7.20% to maturity in three years. Home Credit Finance-3, SibirTelecom-4, Irkut-3 and TK-Finance-1 come to the market on Thursday and we do not expect any surprises. Eurobonds A new spike in energy prices and the prospect of a deeper slowdown in economic growth is buoying the bond market as Hurricane Rita threatens to exacerbate the damage to U.S. consumer confidence caused by Hurricane Katrina. Weakening confidence would raise the likelihood of a softening in Federal Reserve policy. At the same time, despite that the effect of hurricane damage would likely be temporary, it would bring upside risk to inflation and, thus, would require higher borrowing costs. In this respect the Fed ,s commitment to measured hikes in key interest rates does not look like changing significantly and we would expect some expansion of yields once hurricane concerns fade. The surge in benchmarks on Wednesday prompted a similar move in Russian Eurobonds almost across the board. As the yield of 10-year U.S. Treasury fell 5 bps to 4.19%, the yields of sovereign Russian Eurobonds maturing in 2030 lost 7 bps to 5.28%. Meanwhile, the EMBI+ Russia index tightened to 105 bps. Equity market On Wednesday, investors traded on rumours of an imminent removal of Gazprom ,s ring fence following the gas giant ,s expected acquisition Sibneft. Expectations of damage from Hurricane Rita also had their effect on the market. Gazprom local shares saw the most interest, adding 12.34% on reports that the company had secured a $12 billion loan to buy Sibneft, while Gazprom ADSs climbed 8.11%. The rally from the Russian gas monopolist whetted investors , appetite for other oil and gas names: Lukoil climbed 3.69%, Surgut gained 1.46%, and takeover target Sibneft finished 1.45% higher. The perception of progress in the reform of RAO UES triggered a revaluation of the company, whose share price climbed 7.51% on the day. As a result, the RTS grew 1.64% to hit a new high of 960.5. In New York, Russian stocks also finished in the black: Lukoil added 4.86%, Surgut climbed 4.75% and Norilsk Nickel grew 2.94%. Russian mobiles were sluggish compared to oils: Vimpelcom and MTS added only 0.53% and 1.47%, respectively. It looks like investors have not satisfied their hunger for Russian oil & gas stocks, and we thus anticipate growth in the equity market on Thursday. Gazprom locals are likely to lead again. We also see good demand for several undervalued consumer stocks, such as Lebedyanski.
VTB Capital MNB Daily Market Comment
September 21, 2005
B&N Bank MDM Fixed Income Daily
Baku Stock Exchange Baku International Capital Market Conference tied to 5th Anniversary of Baku Stock Exchange
Description
11 Октября с.г. в Баку пройдет международная конференция на тему \"Приватизация и ее влияние на развитие финансовых рынков\". Организаторы Бакинская фондовая биржа и Федерация Евразийских Фондовых Бирж
Raiffeisen Bank Russian Daily Monitor
Description
Petrol price rise continues As petroleum price spike, producer prices have surged 2% m-o-m (17.8% y-o-y) in August compared with a 0.5% m-o-m gain in July. The disturbing petroleum price growth may be halted by the end of the year through a likely agreement between the government and major petroleum producers and distributors. Meanwhile, the current momentum in producer prices threatens to spread to consumer prices, pushing 2005 inflation well above the government ,s target of 10%. Gazprom plans to acquire Sibneft by the end of 2005 Gazprom official said Tuesday that the company intends to finalize the acquisition of Sibneft by the end of 2005. While the Russian gas monopolist never explicitly denied it had been in negotiations with Sibneft shareholders about the acquisition, this was the first admission by Gazprom ,s management that the Sibneft deal was underway. We think the negotiations between Sibneft and Gazprom are close to completion, and Gazprom may indeed acquire the oil company by the end of 2005. LUKoil brilliant, as expected LUKoil released excellent 1H05 U.S. GAAP results on Tuesday, confirming market expectations and validating the oil giant ,s 15% rise on the RTS over the past week (triggering understandable profit taking). Consolidated sales soared to USD 24.25 bn, a 66% rise compared to 1H04, and roughly in line with total operating costs. The primary driver of sales was, obviously, the price environment along with an increase in trading activity on the lucrative oil products market. Costs were propelled by the higher tax take, above all. The antagonistic trends resulted in a gradually declining EBITDA margin in the quarterly perspective, which totalled 18.1% in 2Q05; still, with such a high level of revenues, EBITDA amounted to USD 4.4 bn (+49% y-o-y). Below the operating line, the effective profit tax rate of 28.8% in Q2 was even further above the statutory 24%, which convinces us that it is management ,s policy to be on the safe side in terms of tax payments. As a result, 1H05 net profit clocked in at USD 2.6 bn, a +53% y-o-y rise. Money market The U.S. Federal Reserve ,s predictable 25 bps rise in its target interest rate caused some weakening of the dollar on Tuesday, pushing the euro up to USD 1.22. The reaction reflects the fact that it was the first time since June 2003 that the decision was not approved by all members of the committee. More importantly, however, is the fact that the Federal Reserve is concerned about inflation not only in the wake of continuing economic expansion, but also as a result of disruptions caused by Hurricane Katrina. At the same time the Fed seems to perceive Katrina ,s economic effect as transitory. On the whole we expect the hikes to continue at a measured pace, which should lead to higher yields, supporting the dollar. At the same time, short-term uncertainty in Germany regarding the prospects of economic reform should continue to weigh the euro down against the dollar. That said, a level of 28.5 roubles per dollar looks likely in the near term, while the further trend looks likely to favour the rouble on the back of a evident push by the Russian monetary authorities for a stronger national currency. Rouble bonds Rouble liquidity, as measured by banks , correspondent balances with the Central Bank, dropped a heavy RUB 62 bn Tuesday ) to RUB 283 bn, despite the fact that the Central Bank pumped RUB 44 bn of liquidity into the financial system (mostly via FX operations). Interbank rates, meanwhile, stayed at comfortably low levels. We interpret the outflow as a transitory blip related to VAT payments, and balances should be restored on Wednesday. However, volatility of this crucial indicator could cause the release of mounting pressure and trigger an overdue short-term correction on the domestic bond market. On Tuesday, the benchmark Moscow bonds again traded strongly, with the whole curve now yielding below 7%. Divergent trends in neighbouring issues, Moscow ,41 and Moscow ,38, led to the longer Moscow ,38 closing to yield 2 basis points less than its shorter peer, an inefficiency to be likely corrected on Wednesday. Three days of massive placements start Wednesday with the release of the 3-year, RUB 6 billion RusalFinance-3 bond. Eurobonds On Tuesday, the sovereign sector of the Russian Eurobond market showed mixed dynamics, while benchmarks appreciated slightly after the Fed ,s expected hike of its key rate to 3.75%. However, the U.S. Treasuries , reaction to the news seems to be in line with daily volatility of the notes and it is unlikely that it indicates any softening of Federal Reserve policy in the coming months. What is more important is that inflationary pressures looks set to be stronger in the medium term, which should force the Fed to lift rates. Thus, we believe the move to lower yields from current levels will be quite limited. On Tuesday the yield of Russia ,30 added 2 bps to 5.35% on the back of flat benchmarks. In the corporate sector, Gazprom papers went up almost across the board as clarification appeared of the gas monopoly ,s plans to attract a USD 12 bn loan for the purchase of Sibneft (more than was initially expected). The sovereign credit spread widened to 107 bps, up 3 bps on the day. Equity market Tuesday saw some rollercoaster trading on the Russian equities market. The expectations of Lukoil ,s results caused a rally in almost all stocks and the RTS hit a new high of 963.69. However, right after the announcement, investors began taking profits in Lukoil and other papers, and the RTS lost 0.14% for the day. Meanwhile, the benchmark Brent price dropped 1.6% as OPEC assumed its obligations to increase oil production. The whole range of Russian oil and gas names lost out as a result: Lukoil slipped 0.55%, Surgut decreased 2.84%, Sibneft fell 1.43%, with only Gazprom local shares and ADSs in black, gaining 3.68% and 0.17%, respectively. Consumer and telecom sector investors were taking profits on Tuesday, while metal stocks proved to be the real growth story of the day. Mechel climbed 5.48%, NLMK grew 5.95%, while NTML added 2.13%, mostly because those stocks have lagged behind the growth in oil and gas and consumer stocks for the last month. On Wednesday, little movement is likely in Russian equities as investors need time to stand back and size up the market. Tuesday ,s volatility indicates there is no consensus view.
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Guidance for upcoming auctions
- Buy recommendation for Salavat-2 sustained despite growth
- Gazprom-3, TMK downgraded to Hold...
Description
FX and money market Yesterday the rouble traded in the narrow range of RBL/US$28.40-28.42 as movements of the euro/dollar exchange rate were insignificant on the threshold of FOMC meeting. Yesterday, Fed raised the benchmark interest rate a quarter point to 3.75% which was in line with market expectations. In addition, Fed said it still expects to lift up interest rates at a “measured” pace. As this event was priced-in the reaction of the market seemed negligible. The upward pressure on the rouble on the back of Tuesday’s VAT payments was not marked evidently: market was full of roubles and sales of export proceeds were inessential that day. At the same time, in the many market interest rates remained low while NOSTRO balances dropped to RBL283 bn (-61.9bn). However, next week will be full of large tax payments (26 September – mineral resources, excise taxes – RBL100bn and 28 September – profit tax – RBL160bn), so we expect the cost of rouble funds to gradually start increasing by the end of this week. Today we see the rouble around RBL/US$28.35-28.40 Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Tuesday demonstrated positive dynamics in long rouble bonds, which was, however, limited in scale: OFZs and long Moscow bonds had a clear upward tendency, while corporate papers were edging only marginally higher. Trading activity remained at lower level compared to the previous week. Yesterday’s VAT payment did no cause a notable funds shortage on the money market: in spite of a considerable fall of the balance in correspondent accounts, 1-day MIBOR slightly increased from 1.66 to 1.87%, but this was still below its threshold level 2%. In addition, in the US the FOMC decision to raise the target rate to 3.75% caused an opposite reaction on the US Treasuries market: after an attempt to sell US10Y faced a strong buyers’ support at 4.29%, yields started declining and now US10Y is trading close to 4.21%. This will provide additional support to Russian Eurobonds today. Corporate sector Starting from today, the main events will be happening on the primary market. Today Russian Aluminum (RusAl) is planning to auction its third rouble issue. The company is unrated by major rating agencies, but has over US$3bn of confirmed and over US$5bn of unconfirmed sales. RusAl is the third largest aluminium producer in the world. The new paper will have a size of RBL6bn, semiannual coupons and 3 years to bullet maturity. Currently, the issuer has another rouble bond outstanding – RusAl-2, which is trading at 7.28% to maturity in 20 months. Taking this into account, and also remembering the aggressive nature of buyers at all recent primary auctions, we can forecast that the yield of RusAl-3 will result in the range of 7.25-7.5%. Tomorrow, on September 22, three corporate issuers will be placing their bonds at once. SibirTelecom (B+ from Fitch) will offer to the public its fifth rouble bond with a size of RBL2bn. Sibir Telecom is a leading provider of fixed-line communication services (telephone, Internet access) in the Siberian region of Russia, including Altay, Hakassia, Buryatia, Irkutsk, Kemerovo, Krasnoyarsk, Novosibirsk, Omsk, Tomsk and Chita regions. SibTel also provides some mobile services. In its financial state SibTel is very similar to UralSvyazInform: Sibir Telecom possesses relatively strong margins (24% at EBITDA level in 2004), which is achieved through a significant usage of financial leverage (Debt/Assets ratio close to 30%). On the other hand, SibTel (sales in 2004 US$784m) is simply smaller than UrSI (US$934m of sales), at the same time surpassing in size North-West Telecom (US$534m). The new issue will have semiannual coupons, 5 years to maturity and a 3-year put option, to which the bond will originally be trading. The longest paper of SibirTelecom now floating is SibTel-4, which is yielding 7.63% to maturity in 21 months and appears to be fairly valued. With this in mind, we can forecast the YTP of SibTel-5 to result at the auction in the range of 7.7-7.9%. One of the leaders of the consumer lending segment of the banking sector in Russia – Home Credit and Finance Bank (HCFB) – will be placing its third rouble bond. The bank is a 100% Russian subsidiary of the Czech Home Credit Bank. On the consumer lending market in Russia the bank occupies the third position after the state-owned Sberbank and the Russian Standard Bank with a loan portfolio of US$450m in 2004. The paper will have a size of RBL3bn, quarterly coupons, 5 years to maturity and a 1.5-year put option. A very similar issue, though with a slightly higher credit quality, RSB-5, was placed last week at 7.74% for 5 years. Therefore, the yields in excess of 8% should look attractive for buyers of HCFB-3. Also, the leading Russian aircraft building company Irkut (producing the famous SU fighters) is planning to sell its third bond issue with a size of RBL3.25bn. We do not cover the company so far, but the issue managers believe that the YTM of this 5-year bond will be close to/possibly slightly exceeding 9%. Price changes of corporate benchmarks in secondary trading: Gazprom-4 +3bp, Lukoil +21bp, RZhD-3 -12bp. Second-tier bonds: Baltika +0bp, Pyaterochka -29bp, Salavat-2 +33bp, CenTel-4 +0bp. As indicated, Salavat-2 gained 33bp yesterday, having reduced its YTM to 8.36%. Nevertheless, the issue still offers a premium over its neighbour NKNH-4, which is trading close to 8.1%. Our target for Salavat-2 is located at 8.25%, so we maintain a Buy recommendation for this bond. Also, Gazprom-3 grew 10bp and is now trading at 6.02% for 16 months. We believe that his papers still retains upside potential, but as our target for it was located at 6%, we are downgrading Gazprom-3 from Buy to Hold and are relocating the target lower – to 5.75%. RusAl-3 gained 9bp in yesterday’s trading, now yielding 7.21% to maturity in 20 months. Our current recommendation for the bond is a Hold and our goal for it is set at 7%. We believe that this issue can significantly benefit from today’s placement of RusAl-3, so out Hold recommendation for RuslAl-2 is maintained. TMK bonds that were recently recommended by us for buying, grew 21bp yesterday reducing their YTM to 7.77% for 13 months. Now the bonds appear fairly valued, so we are downgrading them from Buy to Hold. Short term market view The local debt market appears well supported, but we do not expect a large upward movement on it until the beginning of next month. The primary reason is that the market participants will not have proper access to cheap rouble funds due to the large tax payments awaiting the money market ahead: the mineral tax on September 26 and the profit tax on September 28. In such conditions a large pipeline of primary placements starts posing a threat to the secondary market, so for the moment we would recommend caution. Our general recommendation regarding long bonds remains a Sell, as we believe the best tactics now are to fix profits in the most performing securities and pay more attention to the primary auctions. Dmitry Dudkin, Moscow (7 095) 755 5480 Macroeconomic performance solid In January-August, economic performance was strongly supported by high oil prices and domestic demand expansion Today, Reuters (with references to FSSS) released its macroeconomic figures for January-August, which were solid as expected. Despite a general economic slowdown in 2005 relative to 2004 and some slowdown in August relative to June-July, domestic demand expansion strongly supports economic performance. Investment demand remained strong in august, after a very solid result of June-July. Fixed capital investment growth amounted to 9.8% (YoY) in August, resulting in an impressively high growth of 9.7% (YoY) in January-August. Real disposable income expanded with real wage growth spited to 9.3% (YoY), which is positive for consumption. The current positive trends in trade and investments allow us to maintain our forecast of economic growth at 6.0% in 2005. Retail trade turnover rose an impressive 12.2% (YoY) in August showing that domestic demand remains one of the main factors stimulating economic growth. Unemployment dropped further from 6.8% of economically active population in July to 6.5% in August– which is not bad – although this can be attributed to the summertime seasonal increase in employment. PPI accelerated again to 2% (MoM), which however represents a slowdown in annual PPI to 17.8% (YoY) from 18.5% (YoY) in July. Relatively high producer inflation was natural due to increase in fuel prices, in particular oil. Although high international commodity prices are pushing domestic wholesale prices up, we do not expect the latter to spike in 2H05 and maintain our PPI forecast at 18.1%. YoY, % August 2005 2005F Industrial output 3.4 5.5 Fixed Capital Investment 9.8 8.5 Retail turnover 12.2 10.0 Real Disposable Income 7.5 8.0 Real wages 9.3 9.5 PPI (YoY) 17.8 18.1 CPI (year-end) 12.3 11.5 _ Sources: FSSS, Economy Ministry, ING estimate Investment implications: Russia continues to deliver strong figures despite the clear slowdown relative to 2004, with fixed capital investment growth looks high. Retail turnover performance and real disposable income growth also look encouraging, while domestic demand is becoming increasingly important for economic growth in Russia. We remain optimistic regarding economic performance in 2005 and beyond Julia Tsepliaeva, Moscow (7 095) 755 5489
September 20, 2005
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