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. Last Updated: 07/27/2016

Moscow Plans Major Eurobond Issue

Hot on the heels of Russia's new sovereign credit ratings, the city of Moscow is preparing to tap international capital markets directly for up to $500 million as soon as December in what analysts said could be a highly attractive issue.

Mikhail Chernyshov, a spokesman for the city's municipal loan committee, said a planned Eurobond issue would be part of an effort to raise $1.5 billion total from domestic and foreign lenders for a variety of infrastructure projects.

"Investors will be attracted by the reputation of Moscow and Mayor Yury Luzhkov, but also by the fact that this money is for quality investment projects and not for filling a budget gap," Chernyshov said in an interview Monday.

Besides a Eurobond, the city would seek to place more than $1 billion worth of ruble bonds with domestic institutional investors in December and raise close to $200 million from individuals next year, Chernyshov said. The plan is expected to win full approval from the City Duma by the end of October, and an investment council headed by Luzhkov would then choose what projects to fund from a list of 3,500 options, he said.

Chernyshov would not give any details of what kind of investment projects were under consideration.

Moscow's plans, details of which have been filtering out for the last month, come as Russia's federal government prepares its own $300 million to $500 million Eurobond issue following last week's positive Ba2 and BB- ratings from international credit-rating agencies Moody's and Standard and Poor's. "I think that demand for the Moscow Eurobond will be great -- there will be a lot of unsatisfied demand after the federal bond placement," said Nicholas Jordan, head of fixed income with Deutsche Morgan Grenfell in Moscow.

Jordan emphasized the importance of the reputable Moody's and S&P credit ratings and noted that Russia had punctually fulfilled its Eurobond obligations in issues in the late Soviet era.

"Brazil and Argentina, with lower credit ratings than Russia, have raised much more in Eurobonds than Russia is planning for, and the city of Sao Paolo in Brazil has done an issue too," he said.

But Vladimir Dmitriyev, deputy head of the foreign credit and external debt department in the Russian government's Finance Ministry, was cautious about Moscow's plans.

"The federal Eurobond which we are organizing is partly intended to prepare the way for municipal and regional Eurobonds," Dmitriyev said. "But Moscow needs to be sure of what it is doing or it may do itself an injury," he added, referring to a risk of default.

Dmitriyev noted that a Moscow city representative had talked about raising several billion dollars through Eurobonds at a securities conference last month.

Konrad Reuss, a director of the sovereign credit rating department at the London office of Standard & Poor's, refused to say whether Moscow had applied for its own credit rating yet, and he noted that no non-sovereign borrower could hope for a higher rating than its government.

"The point is that the government has first call on foreign currency for repayment of its obligations," he said.

Reuss pointed out, however, that financial markets are now showing great interest in lending to Russia, and he foresaw a big demand over the next few months for rating of Russian municipalities and risk rating for project finance in Russia.

Japanese and American investment banks Nomura and CS First Boston were chosen to be lead banks for the Moscow Eurobond placement a few weeks ago in a fiercely fought tender. Russian banks Stolichny and Alfa-Bank will also help Moscow organize its borrowing plans.

Chernyshov of the Moscow city government said repayment schedules for the Eurobonds and the question of a coupon for domestic borrowing had not yet been decided.

There are historical precedents for Moscow municipal loans, which were raised on several occasions at the beginning of the century. St. Petersburg has also returned to the municipal loan tradition, and is organizing a Eurobond facility with assistance from Salomon Brothers.