Russia’s new Eurobond: what’s the fair price?
Russia’s upcoming dollar bond, the first in two years, should fly off the shelves. It’s good timing — elections are past, the world economy seems to be recovering and crucially for Russia, oil prices are over $125 a barrel. And the rise in core yields has massively tightened emerging markets’ yield premium to U.S. Treasuries, offering an attractive window to raise cash. Russia’s spread premium over Treasuries hit the narrowest levels in 7 months recently and despite some widening this week it is still some 75 basis points below end-2011 levels.
Initial indications from the ongoing roadshow are for a two-tranche bond with 10- and 20-year maturities, possibly raising a total of $3.5 billion.
But market bullishness notwithstanding, investors say Moscow should resist temptation to price the bond too high, a mistake it made during its last foray into global capital markets in April 2010. Fund managers have unpleasant memories of that deal, recalling that Russia unexpectedly tightened the yield offered by 25-28 bps, making the bond an expensive one for investors who had already placed bids. The bond price fell sharply once trading kicked off and yields across the Russian curve rose around 25-30 basis points. Jeremy Brewin, a fund manager at Aviva said:
Russia has a slightly disappointing reputation.. We all ended up paying a tighter spread than we expected. Everyone is concerned they will get pulled in too tight again.
James Croft, head of emerging debt trading at Mitsubishi-UFJ agrees:
The demand for Russian risk is such that getting this bond away should be no problem. The only impediment that could make the transaction harder is investors’ wariness, based on the negative experience of the last deal back in 2010.
So what would be a fair price? Russia’s current 2020 bond is yielding around 4 percent (click on graphic above to enlarge) and most investors are eyeing a 10-30 basis point premium over that. This would also ensure a decent premium to Mexico/Brazil, emerging oil-rich peers but with more diversified economies. Mexico’s 2022 bond sold earlier this year is yielding just under 4 percent while Brazil’s 10-year bond yields 3.15 percent.
A 20-year Russian deal could price around 5 percent or slightly tighter, investors calculate.
Any lower and the sovereign bond may not withstand competition from Russia’s own quasi-soverereigns. Bonds from state-run bank VEB are included in the JPMorgan EMBI bond index and the 2020 bond is yielding around 5.3 percent while another state-controlled bank, Sberbank, yields 5.70 percent. That’s a good 130-170 bps yield pickup over the sovereign. A reasonably-priced deal now will make investors more enthusiastic for a potential 30-year bond later this year, Aviva’s Brewin argues.
A new issue needs to be fairly priced, they can always come back later this year and bring another issue to market.