Corporate Bonds Look For Their Own Niche

While lamenting the sad state of the Russian corporate bonds market, companies and banks expressed hope Tuesday that it would soon take off and become a major source of attracting investment.

The Expert rating agency wants to help the market evolve by publishing a corporate credit rating list in a few months, the agency said at a round-table discussion between companies and banks. Many participants said a rating would help, although they unanimously agreed that Russia is unlikely to see a full-fledged secondary market in corporate bonds for years.

Oleg Surkov, vice president of Tyumen Oil Co., said that although the company is one of the largest Russian corporate borrower abroad, it has had no difficulty borrowing about as much at home. Last year, TNK borrowed a record $1.5 billion overseas.

Alexander Meleshko, deputy head of RITEK oil company, said a 300 million-ruble ($10.16 million) bond issue in March paid for one-third of the exploration work at one project. RITEK on Tuesday applied for a 700 million-ruble issue, he said.

More than 100 corporate bond issues have been floated since 1998, but only a few of them are traded, often sporadically. Some floats came as part of gray schemes that allowed foreign investors, whose money was trapped in Russia after the crisis, to spirit it out. Other floats were made for the sole purpose of boosting the issuers' image and building a credit history. Paper actually designed as market instruments is mostly traded between underwriting banks.

While a total of $1 billion worth of corporate bonds have been issued, daily trading volumes are a mere 150 million rubles to 200 million rubles, according to MICEX data. Although thin, the volumes are five to six times more than at the start of the year. Some of the gains have been seen in recent months, notably after the Sept. 11 terror attacks and a decision by the Russian government to suspend a bond issue of its own.

Many experts say the environment is growing more favorable for placing ruble bond issues, but some companies are deciding to wait. Russian Aluminum last month put off its 2 billion-ruble issue, citing "a change in market demand."

Nikolai Kuznetsov, deputy general director of Aeroflot, said at Tuesday's gathering that the market was not ready to match Aeroflot's investment timeframe. Aeroflot needs to borrow for at least eight years to invest in its aircraft, and bonds with such maturities "simply do not exist" in Russia, Kuznetsov said.

These factors make short-term issues unprofitable. Thus, borrowers have begun to register long-term issues with a put option every several months, which in effect makes them short-term.

Sberbank remains a major rival for corporate bonds market-makers, said Sergei Belyayev, executive vice president of DIB bank, which has underwritten several corporate bond issues.

"Any borrower can go to Sberbank and take out a loan at a rate that would be the same for a quality borrower or anybody else," Belyayev said.

Still, Belyayev was hopeful Russian investors would prove to be "a more stable clientele" than foreigners, especially given the current setbacks on the Western market.