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Source Research
March 22, 2006
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y takes a step down on strong core PPI
- OFZ 46018 auction today
- Our general view for the market remains neutral...
Description
• US10Y takes a step down on strong core PPI • OFZ 46018 auction today • Our general view for the market remains neutral Rouble bond market Trading activity in the local debt market on Tuesday was close to its average level and price action was basically absent: close to the end of the day, some selling took place due to the fall of US Treasuries, but as it only had time to affect a few of the most liquid papers, overall the market simply remained stationary. US10Y takes a step down on strong core PPI Producer prices excluding food and energy grew in February by 0.3% - more than the market consensus of 0.1%. This data publication caused increased volatility on the bond market yesterday, and although the full PPI index actually turned out to be significantly weaker than had been expected (-1.4% versus consensus -0.2%), sellers prevailed over buyers of US Treasuries and the yield of US10Y shifted up from 4.66% last morning to the current 4.72%. This movement does not change the big picture: US10Y remains within the downward trend, which started in January 2006 and is currently targeting the 4.9% level. We believe that this important yield top, previously reached in May-June 2004, could be a reversal point, where the downward price movement of US10Y can stop. As a result, the immediate downside of US10Y is measured by the 20bp yield growth potential with a probability of an upward correction afterwards. Additional OFZ 46018 placement today The CBR announced yesterday that today it was going to offer the public additional RBL4.06bn of OFZ 46018. This 15-year paper (duration 8.3 years) was yesterday trading at 6.85% to maturity, but it is possible that in the current market situation the CBR on behalf of MinFin will be willing to offer the market a small premium. Therefore, we recommend placing orders for the paper at 6.89% and above. Also, in the government sector, we maintain our Buy recommendation for the 30-year OFZ 46020 that was on Tuesday seen at 6.98%. Our speculative target for the bond is set at 6.85%. Results of Uralsvyazinform placement UrSI (URSIRU) placed its effectively three-year, RBL3bn bond yesterday with a coupon rate 8.4% - exactly what was underwritten. The resulting yield to put in three years was 8.58%, above the 8.5% level, which we previously outlined as the fair one of this new bond. Demand at the auction was limited: the total amount of orders collected was RBL3.5bn, slightly above the issue size RBL3bn. This indicated that the interest of investors for long-term second-tier bonds is currently very selective, so the internal market sentiment should rather be viewed as neutral, than positive. Secondary trading in the corporate sector Price changes of high-grade bonds: Gazprom-4 -6bp, Lukoil +20bp, RZhD-6 -21bp, FSK UES-2 -15bp. Second-tier issues: VolgaTel-3 +4bp, Salavat-2 +11bp, CenTel-4 +22bp. RZhD-4 (Russian Railways) was yesterday seen with a YTM 6.64% for 15 months. We believe that this level is too high for this high-grade borrower and recommend accumulating this paper. In our opinion, the fair level of this relatively short bond is at YTM 6.25%, which promises limited speculative upside. Russian Railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. Also, among short papers the first bond of Rosselkhozbank, RSHBank-1, yesterday traded at 7.1% to put in nine months. In our view, together with TuranAlem (currently, 6.9% for 7 months) RSHBank-1 offers a very good risk-reward ratio. We recommend buying RSHBank-1 above 7% YTP. Rosselkhozbank is rated Baa2/BBB- by Moody’s/Fitch. Among long papers our picks are the same. Pyaterochka-2, duration 3.9 years, no trades yesterday, now at 8.7%YTM, our medium-term target is 8%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s. VolgaTel-3, duration 3 years, +4bp yesterday, now at 8.52% YTM, our target is 8.15%. VolgaTelecom is rated B+ by S&P. Short-term market view We believe that even if US Treasuries continue falling in the next days, it will be very hard for US10Y to cross the 4.9% border, at which a reversal of the recent downward movement is possible. On the other hand, currently rouble liquidity remains satisfactory in spite of the ongoing tax payments, which means that after they are finished, at the beginning of April the situation will be even better. Hoping for this, we maintain our general Hold recommendation for long rouble bonds, and recommend accumulating the cheapest papers. Dmitry Dudkin, Moscow (7 095) 755 5480
March 21, 2006
SPURT Bank Conundrum – reasons and policy implications.
Folowing the remarks by Chairman Ben S. Bernanke
Alfa Bank Alfa Bank\'s Weekly Report
VTB Capital MNB Daily Market Comment
KIT Finance Investment Bank Fixed Income Weekly, 11 2006 (Eng)
ING Wholesale Banking Russia Russian Fixed Income Daily
- LT OFZs look cheap
- Pyaterochka-2, VolgaTel-3 remain our top long picks
- General recom for long bonds remains a Hold...
Description
• Long-term OFZs appear cheap: buy OFZ 46020 with YTM target of 6.85% • Pyaterochka-2, VolgaTel-3 remain our top long-term picks • General recommendation for long rouble bonds remains a Hold Rouble bond market Monday was a relatively slow day, with basically all markets remaining in consolidation: US Treasuries and the euro-dollar currency pair were stationary, and correspondingly, the local debt market did not move much. Trading activity was modest with notable turnover in the government sector, but slow trading in municipal bonds and corporate papers. The shape of the OFZ curve suggests long-term papers are cheap If we look at the OFZ curve, it is hard not to notice a jump in yield between OFZ 46002 and 26198: OFZ 46002 has a duration of 4.3 years and a YTM of 6.5%, while OFZ 26198 has a YTM 6.75% at a duration of 5.3 years. Such a difference in yield produces a sort of a ledge on the yield chart that continues further towards longer durations. We believe that this phenomenon is simply a result of the market’s segmentation, as up to OFZ 46002, the government papers still can be considered ‘short’, and thus, be used in the passively managed portfolio, while starting from OFZ 26198 and onwards, market participants consider papers ‘long’ and trade them mainly for speculative purposes, therefore demanding a premium in order to secure capital gains. As a result, the long end of the OFZ curve currently appears 15-25bp higher than it should be, and this situation will persist until the next leg of general market growth. Since we believe that such may take place in the first half of April due to high rouble liquidity and also simply because the market has been recently cautious in buying due to the fall of US Treasuries, we recommend accumulating long-term OFZs in order to capture the most of the possible growth. Tight spreads of long-term OFZs over Russia’30 and of Russia’30 over US Treasuries do not give us enough ground to expect a large rally in the nearest future, but still the liquidation of the 15-25bp premium mentioned above is quite possible. Therefore, we continue to recommend buying OFZ 46020 with a speculative YTM goal of 6.85% providing a price upside of at least 150bp from current the level. Secondary trading in the corporate sector Price changes of high-grade bonds: Gazprom-4 -7bp, Lukoil -15bp, RZhD-6 -8bp, FSK UES-2 -7bp. Second-tier issues: Megafon-3 -5bp, Pyaterochka-2 -4bp, Salavat-2 -14bp, CenTel-4 -28bp. Our top picks have changed little from our prior update. Pyaterochka-2, duration 3.9 years, -4bp yesterday, now at 8.7%YTM, our medium-term target is 8%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s. VolgaTel-3, duration 3 years, -2bp yesterday, now at 8.54% YTM, our target is 8.15%. VolgaTelecom is rated B+ by S&P. TuranAlem, duration six months, attractive for passively managed portfolios above 7% YTP. Short-term market view US Treasuries remain the major threat to the local market, as the long end of the OFZ curve currently appears to be closely tied to US10Y. On the other hand, the worst danger we can see is US10Y testing the 4.9% level, which will not cause any dramatic selling. In addition, rouble liquidity remains high and the RBL/USD rate is expected to appreciate, which increases the attractiveness of rouble assets in the eyes of foreigners. As a result, we believe that there’s no need to sell long-term rouble bonds now, when the odds of further market growth are increasing. Our general recommendation for long rouble bonds remains a Hold, which does not preclude accumulation of the cheap papers mentioned above. Dmitry Dudkin, Moscow (7 095) 755 5480
ING Wholesale Banking Russia Russian Fixed Income Weekly
- Economics: inflation, the rouble and industrial growth
- This week\'s major placements: UrSI-7, Dixy...
March 20, 2006
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Pipeline not a threat so far
- OFZ 46020, MosReg-5, Pyaterochka-2, VolgaTel-3 our top picks
- TuranAlem attractive above YTP 7%...
Description
• Primary pipeline gradually filling, but not a threat so far • OFZ 46020, MosReg-5, Pyaterochka-2, VolgaTel-3 - our top picks among long bonds • TuranAlem offers good value above 7% Rouble bond market Friday was a rather strong day, when prices of long-term rouble bonds were supported by the traditional end-of-week effect, together with sufficient rouble liquidity and rising rouble. Growth was most notable on the OFZ curve, as well as among high-grade corporate papers, while the municipal sector largely remained stationary. US Treasuries consolidated gains on Tuesday and Thursday. Primary pipeline not a threat so far Although the managers of new rouble issues resumed their activity somewhat after the problematic period following the downward correction in mid-March, so far the aggregate volume of scheduled auctions is not posing a significant threat to prices of long-term rouble bonds. The total sum of sizes of new corporate bonds until the end of March is RBL13bn, which is not a heavy burden for the rapidly expanding local bond market. It is probable that in addition to this quantity, we will see additional placements of OFZ bonds, but so far the next OFZ auction is scheduled only for 19 April, when RBL20bn of long-term government bonds will be offered to the public. The two key corporate placements this week are UrSI (Uralsvyazinform), and Dixi (a large Russian retail chain), both having a size of RBL3bn, which will be further discussed in our weekly update tomorrow. Secondary trading Price changes of high-grade bonds: OFZ 46018 +49bp, Moscow-39 +0bp, MosReg-5 +3bp, Gazprom-4 +20bp, Lukoil +38bp, RZhD-6 -1bp, FSK UES-3 +9bp. Second-tier issues: Megafon-3 -5bp, Pyaterochka-2 +4bp, Salavat-2 +9bp, CenTel-4 +14bp. Our top picks have not changed much from our prior update. OFZ 46020, duration 12.1 years, +31bp on Friday, now at 6.98% YTM, our target 6.85%. MosReg-5, duration 2.9 years, +3bp on Friday, now at 6.99% YTM, our target 6.75%. Moscow region is rated BB-/Ba3 by S&P/Moody’s. Pyaterochka-2, duration 3.9 years, +4bp on Friday, now at 8.69%YTM, our medium-term target 8%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s. VolgaTel-3, duration 3 years, +1bp on Friday, now at 8.53% YTM, our target 8.15%. VolgaTelecom is rated B+ by S&P. Among shorter issues, Bank TuranAlem appears quite attractive. Currently located at 7.06% YTP for seven months, the bond is trading in line with bonds of B+ and BB- rated businesses, such as UrSI-3, Megafon-2, Vimpelcom, etc., being rated BB/Baa2/BB+ by S&P/Moody’s/Fitch. Such a situation appears to be the result of a general dislike of investors towards banks on the local market, but the key fact is that TuranAlem represents not the Russian, but the Kazakh banking system, which is renowned for being strong and well-developed compared to the majority of the banking systems of the former Soviet Union. We believe that above the 7% level, the bond of TuranAlem provides a very good risk-reward tradeoff. As the bank recently cancelled placements of two new bond issues, the existing TuranAlem rouble bond remains the only chance to gain exposure to this bank on the rouble bond market. Short-term market view US Treasuries recently showed market participants that demand for them is still high enough to defend against sharp falls, as even minor yield tops continue being regarded by investors as good buying opportunities. As a result, a large fall on the American market is now very unlikely. Meanwhile, the rouble is growing and liquidity in the Russian financial system remains high. This ensures stable demand for rouble instruments in the nearest future, promising modest price appreciation that is most likely to materialise in the first half of April. Our general recommendation for long rouble bonds remains a Hold, which does not preclude accumulation of the cheap papers mentioned above. Dmitry Dudkin, Moscow (7 095) 755 5480
March 17, 2006
B&N Bank MDM Bank: Russia\'s International Reserves Break the USD200 bn Mark
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y continues rising
- Euro threatens to develop an upward trend
- Rosbank upgraded to B by S&P
Description
• US10Y continues rising • Euro threatens to develop an upward trend • Rosbank upgraded to B by S&P Rouble bond market Thursday was a rather strong day on the local debt market: in spite of the lack of notable movement on the OFZ curve, prices of long-term municipal and corporate bonds on average moved up, supported by rising Treasuries and cheap rouble liquidity. Trading activity was at its average level for recent weeks. US10Y continues upward movement US Treasuries took another large step up yesterday on the weaker than expected February CPI release. In fact, the CPI figures were very close to consensus, but the core CPI growth of only +0.1% assured market participants that inflationary pressures remain well controlled and triggered active buying on the bond market. As a result, yesterday US10Y shifted from 4.74% to the current 4.65%. Yesterday’s step up clearly indicates the strength of the market, but still does not change the overall picture: there remains a possibility for a test of the 4.9% yield high established in May 2004. On the other had, if the correction continues, its target is likely to be close to the current levels: we believe that the 4.5-4.6% band may become the next consolidation area in the second half of April-May. Overall, the next months are unlikely to surprise us with new price levels: US10Y most probably will be close to where it is now, i.e. in the range of 4.5-4.9%. Euro threatens to develop a new uptrend Following yesterday’s CPI release, the US dollar notably suffered against the euro and is now at US$/EUR 1.2160 compared to yesterday morning’s US$/EUR1.2060. As a result, currently the currency pair is located next to the downward sloping trendline formed by the two recent price tops – US$/EUR1.2590 of September 2005 and US$/EUR1.2330 of January 2006. Basically, the euro should close above US$/EUR1.2250 today or tomorrow in order to break this trendline in the upward direction. If this happens, our view will become at least long-term neutral, while so far it has remained negative. The possible milestones on the euro’s way up after the break include the two tops mentioned above and after them - the US$/EUR1.29-1.3 consolidation band, where the single currency was seen from time to time from November 2004 to May 2005. The result of yesterday’s OFZ auctions OFZ 46019: size offered – RBL7bn, size sold – RBL3.73bn, average YTM – 6.99%, cut-off YTM – 6.99%. We recommended placing orders for this paper at 7.08% and above, so those who followed our advice did not get the paper. We believe this is absolutely justified as the bond is very illiquid, so obtaining it without any premium has no sense. OFZ 46011: size offered – RBL5bn, size sold – RBL0.94bn, average yield – 7.04%, cut-off yield – 7.07%. The comment here is basically the same as above. We recommended placing orders for this bond at 7.1%; the small size actually sold reflects the fact that MinFin was not willing to persuade the market to buy OFZ 46011. Rosbank upgraded by S&P to B Today the S&P rating agency announced it had raised its long-term rating of Rosbank from B- to B with a Stable outlook. Below is the short S&P comment on Rosbank. \"The rating upgrade reflects Rosbank\'s improved capitalization following the recent Tier 1 capital increase; completed legal and organizational integration of the OVK banking group; and expectations of higher sustained core profitability in the medium term… The ratings remain constrained by Rosbank\'s sizable concentration in loans and funding, low operating efficiency, challenges in managing an extensive distribution network, untested quality of the fast-growing retail portfolio, and Russia\'s high operating risks. With total assets of Russian rouble (RUR) 160 billion at June 30, 2005, Rosbank is a large private sector Russian bank owned and controlled by Interros - Russia\'s largest nonenergy Financial Industrial Group, whose largest asset is OJSC MMC Norilsk Nickel (BB+/Stable/--). In 2005, Rosbank completed the consolidation of its sister banking group, OVK, thereby adding retail operations to its traditional large corporate focus. The stable outlook reflects Standard & Poor\'s expectations that, in the beneficial macroeconomic environment, Rosbank will be able to reach a sustainable improvement in its core profitability due to a double effect of higher margin from retail lending, and cost-cutting initiatives. If the bank demonstrates its ability to withstand the competitive pressure on recurrent profitability better and maintains good asset quality, this could lead to an upgrade… The ratings could be lowered if the bank is unable to control the quality of its lending, which is growing quickly in the current favourable economic environment; to reap satisfactory financial benefits from its enlarged distribution base and infrastructure following the OVK integration; and if there is a discontinuation of financial support from the Interros group to support the bank\'s rapid growth in a financial or economic stress scenario\". As a result of the upgrade, now the bank is rated B/Ba3/B by S&P/Moody’s/Fitch. The currently floating RBL3bn Rosbank bond was yesterday seen at 7.6% to put in 11 months, trading basically in line with such higher-credit banks, as RSHBank (Baa2/BBB-, 7.45% for 9 months) and TuranAlem (BB/Baa2/BB+, 7.25% for 7 months), which means that this relatively illiquid bond does not have any notable upside. Results of the Maxi-Group debut bond placement Maxi-Group was able to place only RBL2bn of the originally offered RBL3bn of its debut bond. The coupon rate was exactly what the lead-managers were promising – 11.25%. Today the placement of the remaining RBL1bn should continue. The demand for the bond was definitely low in spite of some improvement in the market sentiment. The primary reason for this is probably the fact that the company failed to demonstrate how it was going to carry out its investment programme and at the same time reduce its high leverage (see the group’s projections for future years) in the current stagnant state of the steel market. Secondary trading Price changes of high-grade bonds: OFZ 46018 +9bp, Moscow-39 +17bp, MosReg-5 +16bp, Gazprom-4 +19bp, Lukoil -23bp, RZhD-6 +18bp, FSK UES-3 +10bp. Second-tier issues: Megafon-3 -5bp, Pyaterochka-2 -1bp, Salavat-2 +1bp, CenTel-4 +11bp. Our top picks have not changed much from our prior update. OFZ 46020, duration 12.1 years, now at 7.01%, our target 6.85%. MosReg-5, duration 2.9 years, now at 7%, our target 6.75%. Moscow region is rated BB-/Ba3 by S&P/Moody’s. RZhD-6, duration 3.9 years, now at 7.33%, our target 7.25%. The current level is now close to the target, so we are downgrading the paper from Buy to Hold. Russian Railways are rated BBB-/Baa2/BBB (S/M/F). FSK UES-3, duration 2.5 years, now at 7.27%, our target 7.25%. The current level is now close to the target, so we are downgrading the paper from Buy to Hold. The Federal Grid Company (FSK) is rated B+/(P)Baa2 by S&P/Moody’s. Pyaterochka-2, duration 3.9 years, now at 8.7%, our medium-term target 8%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s. VolgaTel-3, duration 3 years, now at 8.53%, our target 8.15%. VolgaTelecom is rated B+ by S&P. Short-term market view The threat of US Treasuries now looks more distant than a few days ago, while the money market remains in a relatively good shape. In spite of the possibility that closer to the end of March short-term rates are still likely to rise, some price appreciation, simply as a result of compensation of the previous selling, is possible in the short-term. Our general recommendation for long rouble bonds remains a Hold, which does not preclude accumulation of the cheap papers mentioned above. Dmitry Dudkin, Moscow (7 095) 755 5480
March 16, 2006
ING Wholesale Banking Russia Russian Fixed Income Daily
- OFZ 46018 placed with no premium
- OFZ 46019 and 46011 auctions today
- Maxi-Group to place its debut bond...
Description
• OFZ 46018 placed without any premium • OFZ 46019 and 46011 auctions today • Maxi-Group to sell its debut bond Rouble bond market After a modest rebound on Tuesday, yesterday the domestic bond market on average remained stationary, as US Treasuries put a downward pressure on international bond markets. On the other hand, the morning upward jump in the rouble exchange rate should have supported the buyers, while the rouble liquidity remained cheap throughout the day. OFZ 46018 placed without any premium The CBR yesterday succeeded in selling RBL6.94bn to the market at an average weighted yield 6.9%, while the cut-off yield was 6.92%. We recommended placing orders for the paper at 6.94% and above, as we believed there was no sense in obtaining this long paper without any premium. Apparently, MinFin was very lucky this time, as the auction took place exactly after a notable upward move of US Treasuries (which happened on Monday). In our opinion, in the current situation the market participants should be cautious in approaching the long duration, so there’s no need to rush: it is very possible that the nearest future (including today) will provide a better opportunity to by bonds at the long end of the OFZ curve. OFZ 46019 and 46011 to be placed today Yesterday the CBR announced it was planning to auction additional sizes of OFZ 46019 (RBL7bn) and 46011 (RBL5bn) today. OFZ 46019 matures in 2019, OFZ 46011 – in 2025. Both papers are relatively illiquid, so investors should consider demanding additional premium for the low liquidity of these papers. OFZ 46019 (mod duration 9.5 years) was yesterday seen at 7% to maturity, so we recommend placing orders for the paper at 7.08% and above. OFZ 46011 has a scarce trading history, but its duration is slightly above 13 years, so in this aspect it is very close to OFZ 46020, which was yesterday trading at 7.01%. Therefore, we recommend placing orders for OFZ 46011 at 7.10% and above. Maxi-Group to place its new bond Issue parameters. Size: RBL3bn, term to bullet maturity: three years, semi-annual coupons, 1.5-year put option, to which the paper will be initially trading The company is not rated by major rating agencies. Maxi-Group is entirely controlled by Nikolai Maksimov. The group consists of two main branches: scrap metal branch (whose primary business is collection and processing of scrap metal) and metallurgical branch (producing section steel, steel rod, etc). The scrap metal branch combines numerous (currently, 38) small legal entities collecting scrap metal around Russia. The metallurgical branch legally consists of seven relatively small steel works that use Maxi-Group’s own scrap metal as raw material. The largest one of these steel works and the only one actually working so far is NsMMZ, already known on the bond market for its rouble bond and a dollar CLN. By its market share, Maxi-Group produces about 6% of Russia’s scrap metal occupying the second position after Mair. By steel production, the group is naturally significantly smaller than the main Russian steel producers, having a different market share in different products, ranging from 10% in hardware to 1% in section steel. Maxi-Group’s metallurgical division currently consumes only roughly a half of the group’s scrap metal production. Therefore, the division is fully supplied with raw material, including its future needs. Regarding the financial info, the group is expecting net revenue of US$390m in 2005 compared to our estimate US$270 in 2004. We say ‘estimate’, because the revenue of the group for 2004 was not published. We also estimate that the EBITDA margin of the company should be close to 16% in 2005 (based on the 1H2005 estimate for NsMMZ) compared to 20% in 2H2004. The reduction of the margins is a natural result of the steel market deterioration in 2005. The Debt/EBITDA ratio of the group is expected in 2005 at 3.7, far from the original NsMMZ estimate of 2.2 stated in the summer 2005 CLN materials. The Debt/Equity ratio of Maxi-Group was in 1H2005 close to 2 with 52% of the debt being short-term in nature. The proceeds of the new, RBL3bn bond, will be used to refinance the bank loan portfolio of the group. As a result, the new bond will not increase the total debt level, but will make the debt duration somewhat longer. Overall, Maxi-Group appears to be a highly leveraged company with fast sales growth, but volatile financial ratios. A definite advantage of it is that it publishes IFRS financials. Regarding the pricing of the new bond, things are more or less clear: the lead managers of the issue were marketing the 11.25% coupon, which appears to be a fair compensation for the credit risk of the borrower. This level is in line with the current position of the floating RBL1bn NsMMZ rouble bond, which was recently seen at 10.75-10.9% to 2.5-months put option. As a result, we believe the 11.35-11.5% YTP to be the fair point for the Maxi-Group bond at the primary auction. Orders should be in this range depending on the desire to obtain the paper. Short-term market view US Treasuries currently remain the major threat to the domestic bond market: a possible test of the 4.9% yield high in US10Y will trigger more selling on the OFZ curve, consequently driving yields of non-government rouble bonds up. On the other hand, the rouble liquidity remains high and even if the short-term rates do jump on the tax payments in the end of March, the squeeze should not be significant. As a result, our general recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 095) 755 5480
March 15, 2006
Alfa Bank Alfa Bank\'s Weekly Report
Description
Our expectations: NEWS OF THE WEEK ь Inflation in the Russian Federation in January-February reaches 4.1%, expected to reach 5.0-5.2% in 1Q06 ь Exchange and money markets The international currency market is awaiting the publication of inflation data in the US and Europe on Thursday. On the Russian money market, growth in the cost of ruble resources is probable later in the week in connection with tax payments. ь Corporate ruble bonds market In the medium term we expect the ruble market?s negative price trend to continue. Volumes in the first half of the month were about one-third of those planned for March. Deteriorating market conditions for auctions are possible in the second half of the month. Meanwhile, upward price correction early in the week after several weeks of falling blue chips could be possible on the back of support by the monetary market and external debt. ь Eurobond market This week the important data for the US debt market will be net foreign securities purchases and inflation. A further Fed rate hike of 25 bpts on March 28 is already priced in, therefore the market will only show sensitivity to signs reducing the probability of this event. Emerging market debt will continue to show stability amid rising UST yields. We expect Russia-30 to 10-year UST spreads to return to the range of 100-105 bpts.
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y makes a definite step up
- The CBR to auction a new tranche of OFZ 46018 today
- Megafon upgraded to BB- by S&P...
Description
• US10Y makes a definite step up • The CBR to auction a new tranche of OFZ 46018 today • Megafon upgraded to BB- by S&P Rouble bond market On Tuesday, the trading activity on the domestic bond market was again modest, but this time, in contrast to last week, the liquid bonds experienced notable growth, which was a natural result of the corresponding movement of US Treasuries. US10Y makes a definite step up Apparently, it was the relatively weak February retail sales release in the US that caused US Treasuries to move up, but yesterday US10Y demonstrated strong growth and shifted down in yield from 4.76% last morning to the current 4.7%. Unfortunately, this move happened after the benchmark rate reached level 4.8% instead of 4.9% forecasted by us, which raises concerns, if the test of the 4.9% resistance level is still ahead or US Treasuries have already started an upward reversal. We have been specifically mentioning the 4.9% point, because the double top (in yield), which was formed by US10Y at this level in May-June 2004 market the end of the large downward movement and currently represents an important horizontal level to watch for. Overall, currently we can only say that US10Y is showing signals of strength, but the test of the 4.9% level remains possible. If the upward correction continues from current levels, US10Y is likely to get stuck not very far – most probably, in the 4.-5-4.6% consolidation band. The CBR to place and additional tranche of OFZ 46018 today Today the CBR on behalf of MinFin will conduct an auction for a primary placement of an additional RBL11bn tranche of OFZ 46018. This liquid paper was yesterday trading at YTM 6.89% to maturity in 15 years, having duration of 8.3 years. The recent positive change of the market sentiment casts doubt that MinFin will be ready to offer the market a large premium at this auction, but still we believe this placement to be a very good opportunity for speculatively-oriented traders. We recommend placing orders for OFZ 46018 at 6.94% YTM and above, having slightly moved our threshold down from the original 6.97% outlined in our prior update. Secondary trading in non-government bonds Price changes of high-grade papers: Moscow-39 +0bp, MosReg-5 +31bp, Gazprom-4 +27bp, Lukoil +9bp, RZhD-6 +26bp, FSK UES-2 +27bp. Second-tier papers: VolgaTel-3 +17bp, Megafon-3 +20bp, Pyaterochka-2 +16bp, CenTel-4 +21bp. As indicated, MosReg-5, which we have been recently recommending for buying, gained 31bp yesterday, and is now trading at 7.02% YTM, which is approximately 65-70bp over the OFZ curve. In January 2005 the paper was trading with a spread of 25-30bp, so it still retains the spread compression potential. We continue to recommend MosReg-5 as one ot he most attractive papers in the municipal sector. Moscow region is rated BB-/Ba3 by S&P/Moody’s. In the corporate sector, among high-grade papers, RZhD-6 was seen yesterday at 7.39% to maturity (+26bp to price), while our target for it is located at 7.25%. We continue to recommend buying this bond with speculative purposes. Russian Railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. FSK UES-3, currently quoted at 7.36% to maturity in 3 years (+20bp to price yesterday), still appears notably undervalued due to recent profit-taking. Our target for the paper is also set at 7.25%, so our Buy recommendation for it is maintained. FSK UES (the Federal Grid Company) is rated B+/(P)Baa2 by S&P/Moody’s. Among second-tier bonds, Pyaterochka-2 was yesterday trading at 8.7%, while our medium-term goal for it is set at 8%. We recommend accumulating this paper above 8.5%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s. Also, VolgaTel-3 currently represents a good buying opportunity trading at 8.53% to maturity in 5 years. Our target for the bond’s YTM is 8.15%. VolgaTelecom is rated B+ by S&P. Megafon upgraded by S&P Yesterday S&P announced it upgraded the long-term rating Megafon from B+ to BB-/Stable. Below is a part of the agency’s release on the subject. \"The rating action reflects the company\'s strengthening business profile, marked by its expanding scale, improving network quality and reach, resilient market share despite a tough competitive environment, positive operating performance, and improving profitability… In addition, MegaFon\'s financial risk exposure is stabilizing and is expected to improve in the short-to-medium term. The ratings are constrained by intensifying competition in the Russian market; the company\'s continuing aggressive growth and negative free cash flow generation; its considerable debt leverage; and the uncertainty regarding Russia\'s evolving regulatory, economic, and industry environment. S&P expects that MegaFon\'s improved business profile, marked by increasing economies of scale, resilient market share, and sound profitability, will support the company\'s credit quality in the short-to-medium term… The stable outlook also reflects MegaFon\'s manageable financial risk and our expectation that free cash flows will turn positive in the next 12 to 18 months. The outlook could be revised to positive or the ratings raised if, over the next 18 to 24 months, MegaFon is able to maintain and improve its business position in a maturing and increasingly competitive market, while prudently managing its financial risk. Conversely, an unforeseen deterioration in the company\'s market position or profitability, or increased aggressiveness of its financial policy leading to a notable reduction of credit protection measures, could have negative implications for the ratings”. We believe that the current position of Megafon’s bonds fully reflects the new rating level. Now the company is rated BB-/B1(Positive)/BB by S&P/Moody’s/Fitch and is already trading very close to the belt of the high-grade borrowers, having been seen yesterday at 7.5% for 26 months (Megafon-3). Some more spread compression is possible, but the latter is likely to be limited. We see the 7.25-7.5% band is the current downward limit for Megafon-3’s YTM. At the same time, the current Megafon’s position makes us even more certain about the prospects of other second-tier borrowers. Specifically, it ensures us that, taking into account the slope of the OFZ curve between the corresponding terms, the 5-year bonds of Pyaterochka (rated BB-/Ba3 by S&P/Moody’s) should trade close to 8% instead of the current 8.7%. Short-term market view Today’s quick appreciation of the rouble should support the market for the short-term perspective. Also, the effect of the recent Treasuries’ appreciation will continue to foster the buying activity. As a result, some more gains are possible today, although there’s no reason to expect a large rally. Our general recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 095) 755 5480
March 14, 2006
KIT Finance Investment Bank Fixed Income Weekly 10, 2006 (Eng)
VTB Capital MNB Daily Market Comment
March 13, 2006
ING Wholesale Banking Russia Russian Fixed Income Daily
- US payrolls data drives Treasuries down
- MosReg-5, RZhD-6, FSK UES-3, Payterochka-2, VolgaTel-3 remain our top picks...
Description
• US payrolls data drives Treasuries lower • RZhD-6, FSK UES-3, Pyaterochka-2, VolgaTel-3 are our top picks • General recommendation for long rouble bonds remains a Hold Rouble bond market Friday was a relatively active day from a standpoint of trading activity, but the price movements were very limited. The active selling we saw earlier last week was paused, so the market was simply consolidating at the new levels. Strong US data drives Treasuries lower The US February payrolls release on Friday turned out to be stronger than expected with non-farm payrolls figure rising by 243k compared to the consensus +210k (which was already quite a high level). This growth in employment indicates to the traders that policy tightening period may last longer than was previously expected: at least, the 5.5% figure for the Fed target rate does not look unreasonable now. Naturally, the picture should become clearer with the Fed comments following the March 28 rate decision, but so far the traders preferred to continue selling US Treasuries and as a result, US10Y shifted in yield from 4.73% on Friday morning to the current 4.77%. Overall, we continue to believe that the 4.9% previous yield high represents the next target for US10Y, but the latter is very likely to become the point of the next reversal, after which a move back towards the 4.6% level will be probable. This means that US Treasuries continue to have limited short-term downside, but in the medium-term perspective they are likely to remain around current levels and, perhaps, even a bit higher. Dollar fails to extend gains against the euro The strong payrolls release failed to move dollar further up versus the single currency: shortly following the data publication euro dropped as low as 1.1860 US$/euro, but apparently met considerable buying and started to climb upwards, gradually gaining momentum, which finally took euro to the current level 1.1960 US$/euro. The latest developments do not change the larger picture: we believe that euro remains in the wide downward channel, which is gradually taking the single currency to lower levels. In the coming days some consolidation around the 1.2 US$/euro level is probable, but the following dynamics is likely to be negative with euro reaching level 1.15 US$/euro in April 2006. Secondary trading in non-government bonds Price changes of high-grade papers: Moscow-44 -23bp, MosReg-5 -2bp, Gazprom-4 +2bp, Lukoil -2bp, RZhD-6 -15bp, FSK UES-2 -1bp. Second-tier papers: VolgaTel-3 -7bp, Salavat-2 -27bp, Pyaterochka-2 +12bp, CenTel-4 +3bp. We currently have only one pick in the municipal sector: MosReg-5. The paper was on Friday trading at YTM 7.15%, while out target for it is located at 6.75%. We maintain a Buy recommendation for this paper. Moscow region is rated BB-/Ba3 by S&P/Moody’s. In the corporate sector, there’s a number of bonds that we are currently recommending for buying. Among high-grade papers, RZhD-6 was seen on Friday at 7.52% to maturity, while our target for it is located at 7.25%. We recommend buying this bond with speculative purposes. Russian Railways are rated BBB-/Baa2/BBB by S&P/Moody’s/Fitch. FSK UES-3, currently quoted at 7.55% to maturity in 3 years, appears notably undervalued due to recent profit-taking. Our target for the paper is set at 7.25%, so our Buy recommendation for it is maintained. FSK UES (the Federal Grid Company) is rated B+/(P)Baa2 by S&P/Moody’s. Among second-tier bonds, Pyaterochka-2 is now quoted at 8.75%, while our medium-term goal for it is set at 8%. We recommend accumulating this paper above 8.5%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s. Also, VolgaTel-3 currently represents a good buying opportunity trading at 8.6% to maturity in 5 years. Our target for the bond’s YTM is 8.15%. VolgaTelecom is rated B+ by S&P. Short-term market view The situation on the money market is now quite positive with short-term rates close to their natural lows (1-2%). This is a definite factor supporting the prices of long-term rouble bonds. US Treasuries remain a threat to the local bonds, but, as mentioned earlier, we do not expect US10Y to reach 5% in the nearest future, so the downside of American papers looks limited. In addition, the pipeline of primary placements is not full, which should stimulate purchases on the secondary market. As a result, we would prefer to view the current situation as neutral, rather than negative, and recommend accumulating the cheapest papers. Our general recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 095) 755 5480
VTB Capital MNB Daily Market Comment
March 10, 2006
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- US payrolls today
- Kuibyshevazot YTM forecast at 9-9.25%
- General recom. for long rouble bonds remains a Hold...
Description
• US payrolls data to be published today • Kuibyshevazot YTM forecast at 9-9.25% • General recommendation for long rouble bonds remains a Hold Rouble bond market On Thursday, trading activity was still substantial, similar to Tuesday. This was especially evident in the government and municipal sectors, although the selling stopped following US Treasuries market entering consolidation. US payrolls data Today, the United States will publish its payrolls figures for February. Recently, US Treasuries and the euro-dollar exchange rate have been in consolidation and not moving much after the large swings of the beginning of this week. Naturally, the publication of the data will cause at least an intraday increase of price volatility on international markets. Just as a reminder, we are expecting from US10Y a continuation of its downward movement up to 4.9% with a probable reversal around this point. We anticipate the euro to reach 1.15 US$/euro in April 2006. Kuibyshevazot to place its second bond today Issue parameters. Size: RBL2bn, term to bullet maturity: five years, semi-annual coupons. The company is not rated by major rating agencies. Kuibyshevazot, located in Togliatti (Samara region), is one of Russia’s major chemical enterprises. Its business is basically split into two lines: firstly, production of caprolactam and secondly, ammonia and nitrogen fertilizers. Kuibyshevazot is 36% owned by its management and an additional 30% of the company is controlled by legal entities likely to be close to the management. Recently the company issued audited IFRS financials for 2003-2004, which was a major step in the development of its transparency. The key financial figures of Kuibyshevazot are presented in the table below. Financials of Kuibyshevazot Reported items (US$m) 2003 IFRS 2004 IFRS 2005E RAS Ratios 2003 IFRS 2004 IFRS 2005E RAS Sales 210.3 364.8 481.0 Gross Mgn 25.8% 35.0% 29.6% EBITDA 23.0 77.9 90.0 EBITDA Mgn 10.9% 21.4% 18.5% EBIT 10.0 61.1 80.9 EBIT Mgn 4.8% 16.7% 16.8% NI 8.5 45.0 56.7 Net Mgn 4.1% 12.3% 11.8% Assets 281.0 362.9 369.0 Debt/EBITDA 2.76 1.03 1.35 ST Debt 14.6 14.5 45.8 Debt/EBIT 6.34 1.31 1.49 LT Debt 48.9 65.6 75.0 EBIT/Int 5.0 14.7 11.6 Equity 171.0 221.2 207.0 Capital 219.9 286.8 282.0 LT Debt/Cap 0.22 0.23 0.27 Debt/Assets 0.23 0.22 0.33 CFO 14.2 34.1 CFI -32.0 -12.6 ST Debt/Debt 23.0% 18.1% 37.9% CFF 18.2 6.0 ROC 3.9% 15.7% 20.1% CapEx 28.0 18.4 ROA 3.0% 12.4% 15.4% Depreciation 13.0 16.9 ROE 5.0% 20.3% 27.4% FCFE -17.8 21.6 Curr Ratio 1.93 2.58 2.30 FCFF -16.2 24.7 Quick Ratio 0.99 1.57 0.86 CFO/Debt 0.22 0.43 FCFF/Debt -0.26 0.31 CFO/CapEx 0.51 1.85 2005 expectations are based on the RAS financials Source: Company data As can be seen, in 2004 the company demonstrated confirmed sales growth of 73%, which was partly a result of a large increase of the share of high value-added products in the company’s sales. For 2005, Kuibyshevazot is planning a 32% increase in sales, which appears to be a realistic figure as 2004’s growth is unlikely to be sustainable. Overall in 2004, the company significantly improved its financials, and in 2005 they are expected to remain more or less in good shape. Specifically, the EBITDA margin is expected to stay close to 20%, and the Debt/EBITDA ratio is anticipated not to exceed 1.5. Regarding liquidity, Kuibyshevazot’s current ratio is expected at 2.3, which indicates the high ability of the company to meet its short-term obligations. 2004 was so successful for Kuibyshevazot that its free cash flow was positive in that year. This was partly due to lower capex, but also because the CFO more than doubled in 2004. The problem of the presented data is naturally its high volatility. The financials of 2003 are dramatically worse than those of 2004 and we do not have sufficient historical IFRS data to establish the ‘natural’ level of financial ratios for the borrower. In summary, currently the company looks to be very strong financially, has a relatively low degree of financial leverage, and at the same time is demonstrating impressive margins. Kuibyshevazot already has one bond outstanding, the RBL600m Kuibyshevazot-1, which matures in June 2006, but has a put option in March 16. We believe that the issuer will prefer to set the last coupon of this bond to zero in order to buy the outstanding amount at the put option exercise. As a result, the new bond’s proceeds will be partly used to redeem the existing bond. Regarding the pricing of the new bond, its natural peer on the market is definitely Salavat-2, which is currently trading at 8.5% to maturity in 45 months. The equivalent yield of Salavatnefteorgsinez’s credit at the duration of Kuibyshevazot-2 can be thus estimated at 8.75%. In its current state, Kuibyshevazot appears better than Salavat according to its ratios, but almost three times smaller in scale, so still we believe that Kuibyshevazot-2 should pay a premium over Salavat-2. In addition, there’s Pyaterochka-2 traded at 8.75% for five years, which is rated BB-/Ba3, so the unrated paper should also pay a premium over it. As a result, we estimate the fair YTM of Kuibyshevazot-2 to lie in the range of 9-9.25%, most probably closer to the upper bound of it, considering the currently weak state of the rouble bond market. Short-term market view Short-term rouble rates are falling on the background of liquidity accumulation in the financial system. This should support the prices of rouble bonds, even if US Treasuries continue their slide. It is hard to expect a large fall on the bond market with the currency reserves of the Central bank quickly approaching US$200bn. In the current situation, the Russian monetary authorities will have to either allow the rouble to appreciate or the money market will be flooded with free roubles. Both scenarios will benefit domestic debt. Therefore, it is reasonable to expect a rebound on the market as soon as concerns about the immediate fall of US Treasuries are resolved. When this occurs is hard to say, but as we mentioned, US10Y is unlikely to easily pass the 4.9% level. As a result, we would prefer to view the current situation as neutral, rather than negative, and recommend accumulating the cheapest papers. Our general recommendation for long rouble bonds remains a Hold. Dmitry Dudkin, Moscow (7 095) 755 5480
March 09, 2006
VTB Capital MNB Daily Market Comment 09.03
VTB Capital MNB Daily Market Comment 08.03
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y consolidating losses
- MosReg-5 remains our top pick in muni sector
- General recom. for long bonds remains a Hold...
Description
• US10Y consolidating losses • MosReg-5 remains our top pick in the municipal sector • General recommendation for long rouble bonds remains a Hold Rouble bond market Tuesday continued Monday’s tendency of falling prices for long-term rouble bonds, as investors cut their positions following the fall of US Treasuries. This time, in contrast, trading activity was high, and price changes very notable: on average, the quotes of liquid bonds shifted down 20-40bp. US10Y stabilizes after a break of the 4.7% level Yesterday US10Y traded very calmly in the 4.71-4.75% range, having tested 4.8% on Monday following the break of the key 4.69% level. We believe that the current setback is a temporary reaction by traders to relatively high yields, and within the next couple of weeks the benchmark rate should reach the 4.9% yield high seen previously in May 2004. At this point a reversal will be very probable, with a possible correction back to the 4.6% area. Euro is consolidating ahead of the trade balance data The euro-dollar exchange rate also stabilised recently above the 1.19 US$/euro level following the large downward move last Monday. Today, the US January trade balance data is to be released, which is likely to at least increase the volatility of the currency pair in question. Overall, we believe that the euro is currently developing a downward move, which may take it to the 1.15 US$/euro level in April 2006. In order to change the picture for the better, euro must cross the downward sloping trendline based on the two recent price tops: 1.2590 in September 2005 and 1.2320 in January 2006. Currently the line is located at 1.2240 US$/euro. MosReg-5 remains our pick among municipal papers Yesterday, the bond was trading at 7.15% YTM, which is 75bp above the OFZ curve. In January 2006, the paper was seen with a credit spread of 25-30bp. Such a spread widening is a result of purely speculative selling, so we continue to recommend buying MosReg-5 with a YTM target 6.75%. Secondary trading in the corporate sector Price changes of high-grade bonds: Gazprom-4 -36bp, Lukoil +18bp, RZhD-6 -25bp, FSK UES-2 -36bp. Second-tier issues: Magnit +11bp, CenTel-4 -70bp. Several bonds have become quite attractive due to the recent selling. Specifically, FSK UES-3 (-22bp on Tuesday) is now trading with a YTM of 7.56% for 34 months, which is 110bp above the OFZ curve. The paper started trading on MICEX in February with a spread of 75bp, so the spread now is 35-40bp wider. Naturally, this widening has only speculative causes and is not connected to any credit quality change, so we would recommend buying FSK UES-3 with a YTM goal of 7.25%. RZhD-6 was seen on Tuesday at 7.45% to maturity in 57 months, trading at also almost 100bp over the OFZ curve. This behaviour is completely ungrounded as this high-quality borrower has full investment-grade ratings. We believe that a fair YTM for RZhD-6 is 7.1% and recommend buying the bond for speculative purposes. Also, we continue to recommend Pyaterochka-2, whose medium-term YTM target we set at 8%. Right now, the paper is trading at 8.75%, so for the time being it is one of the most undervalued second-tier papers. Short-term market view US10Y will very likely face difficulties in passing the 4.9% barrier, so the potential for its decline is limited. At the same time, the cost of rouble funds remains low, which should support the prices of rouble bonds in the short-term. In addition, the spread between Russia’30 and US10Y widened recently from 100 to 113bp promising future relative upside for Russian Eurobonds and correspondingly, long-term OFZs. As a result, we would prefer to view the current situation as neutral, rather than negative, and recommend accumulating the cheapest papers. Dmitry Dudkin, Moscow (7 095) 755 5480
March 07, 2006
VTB Capital MNB Daily Market Comment
KIT Finance Investment Bank Fixed Income Weekly, 09 2006 (Eng)
UkrSibbank STRATEGY UKRAINE: annual macroeconomic and bond market review and outlook
ING Wholesale Banking Russia Russian Fixed Income Daily
- US10Y crosses important threshold
- FSK UES-3, RZhD-6 unreasonably cheap
- Payterochka-2 remains the most undervalued second-tier bond...
Description
• US10Y crosses important threshold • FSK UES-3, RZhD-6 unreasonably cheap • Pyaterochka-2 remains the most undervalued second-tier bond Rouble bond market Monday was a truly weak day, when the fall of US Treasuries caused notable selling of long-term rouble bonds. Trading activity was close to its average level, so the significance of the downward movement was supported by substantial turnover. On average, prices of the most liquid papers fell 15-20bp. US10Y breaks important threshold Yesterday, without significant informational causes, US10Y shifted from 4.69% to the current 4.74% breaking the important barrier 4.69%, which has been limiting US10Y from above since July 2004. As a result, the benchmark rate appears to be continuing the downward movement started in January 2006, which previously stalled around 4.6%. We believe that the current movement should soon take US10Y to the 4.9% level, which is the next local high of the rate reached in May 2004. It is also quite obvious that it will have difficulties in crossing this level, as a lot of market participants will be considering this point as attractive for buying US10Y. Secondary trading in the corporate sector Price changes of high-grade bonds: Gazprom-4 -23bp, Lukoil -28bp, RZhD-6 -39bp, FSK UES-2 -31bp. Second-tier issues: Magnit -33bp, VolgaTel-3 -20bp, Pyaterochka-2 -20bp. Several bonds have become quite attractive due to the recent selling. Specifically, FSK UES-3 is now trading with a YTM of 7.48% for 34 months, which is 100bp above the OFZ curve. The paper started trading on MICEX in February with a spread of 75bp, so the spread now is 25bp wider. Naturally, this widening has only speculative causes and is not connected with any credit quality change, so we would recommend buying FSK UES-3 with YTM goal 7.25%. RZhD-6 was seen yesterday at 7.4% to maturity in 57 months, trading also almost 100bp over the OFZ curve. This is completely ungrounded as this high-quality borrower has full investment-grade ratings. We believe that a fair YTM for RZhD-6 is 7.1% and recommend buying the bond for speculative purposes. Also, we continue to recommend Payterochka-2, whose medium-term YTM target we set at 8%. Right now, the paper is trading at 8.75%, so for the time being it is one of the most undervalued second-tier papers. Short-term market view The situation on the money market is so far quite stable, so we believe there’s no reason to expect a large downward correction in long rouble bonds on this positive background. It is also unlikely that having passed 4.7%, US10Y will continue moving downwards without any breaks, so as we mentioned earlier, 4.9% should serve as a strong yield resistance level limiting the downside of US Treasuries. As a result, we would prefer to view the current situation as neutral, rather than negative, and recommend accumulating the cheapest papers. Dmitry Dudkin, Moscow (7 095) 755 5480
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