Bonds Rare While Ruble Devaluation Continues

Russia's ruble bond market will resurrect itself only after the Central Bank has finished its slow-burn currency devaluation, and even then only top-tier issuers will stand much chance of raising new money.

The $60 billion market continues to contract as investors rush to execute put options and offload currency risk. Appetite is so low that even the city of Moscow, the country's top regional borrower, failed to find demand for a new bond issue this month.

The average yield to maturity for the 50 most liquid bond issues tripled to 30.42 percent on Jan. 19 from 10.34 percent last September, according to Reuters estimates, and 53 borrowers have already failed to meet their obligations.

The market — which was born just after the 1998 financial crisis and helped many firms survive the closure of global capital markets to Russian borrowers — is now unlikely to back anyone except the best names enjoying state support.

"The market is completely discouraged by the multiplying defaults," said Mikhail Galkin, analyst at MDM Bank.

Only quasi-sovereign names such as banks VTB, Sberbank and Gazprom look relatively safe to bond investors, in part thanks to the expectation that they will be bailed out by the state if needed.

"The ruble-denominated debt problem could be solved by printing money [in the worst case scenario]," said Pavel Pikulev, analyst at Trust Bank.

Investors are hedging their ruble bond exposure with nondeliverable ruble forwards, which currently see the ruble at 37.53 to the dollar in three months — a depreciation of 12 percent from current levels and thus a strong deterrent to ruble bond purchases.

"The market will continue shrinking. I expect new marketable placements are possible for top-tier borrowers in the middle of the year but not until the ruble devaluation is finished," MDM's Galkin said.

The currency has already lost almost 30 percent of its value against the dollar from its August peak, and the Central Bank has said further devaluation expectations are realistic.

"The market is in apathy now. Trading volumes are low, and the market has been devastated during the last three months," said Nikolai Podguzov, analyst at Renaissance Capital.

As the financial crisis wears on, even quasi-sovereign names should get used to higher yields and shorter maturities.

The state railway monopoly, Russian Railways, placed a three-year, 20 billion ruble bond last July at 8.5 percent, but yields for another bond in November rose to 13.5 percent and organizer Sberbank had to buy almost two-thirds of the issue.

That practice — of bonds being bought up by the organizers or those linked to them and then used as collateral for funding from the Central Bank — is becoming increasingly common. It has received the backing of Prime Minister Vladimir Putin while the global credit crunch keeps other sources of funding shut.

Podguzov estimates the potential size of such issues at 200 billion to 250 billion rubles this year and says some of these bonds may be sold on once the market wakes up.