Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

2nd Eurobond Issue Is Slated for March

Russia's second Eurobond issue since the Bolshevik Revolution will be held in mid-March, with the planned $700 million tranche designated to pay off arrears to workers and pensioners who have suffered since Communism's collapse.


The Eurobond offering, denominated in deutsche marks, is aimed "mainly at investors in Germany, Switzerland, Austria and the Benelux countries," Deputy Finance Minister Mikhail Kasyanov told Reuters on Monday.


The Russian government has borrowed heavily in the international debt markets to finance its federal budget. More specifically, officials have earmarked the upcoming tranche to aid those most in need -- "the most pressing social problems, and notably wages and pensions," Finance Minister Alexander Livshits told Interfax.


The 1 billion deutsche mark offering will be managed by Deutsche Morgan Grenfell and CS First Boston, but officials would not divulge which firms would draw the underwriting business for the next issue, saying only that the syndicate should be announced in "a week or two."


But the selection of Deutsche Morgan Grenfell, dealers said, is a good indicator of Russia's resolve to target the European retail market in addition to institutional investors such as pension funds and insurance companies.


Russia's debut $1 billion Eurobond offering in November was highly oversubscribed by investors. The issue marked Russia's return to world capital markets for the first time since the 1917 Bolshevik Revolution, and was priced to yield 3.45 percentage points over U.S. Treasury bills, or 9.25 percent.


Since the initial euphoria, however, dealers said the Russian Eurobond's performance in international markets has been somewhat lackluster.


While yield spreads on other sovereign Eurobonds have narrowed dramatically, one London-based analyst said Russia's has "merely hung in there."


"Part of that was Yeltsin's health, and also people just acclimating to a basic comfort level with Russia with a credit risk," said Andrei Yashchenko of the United Financial Group.


To maintain interest and appeal to new buyers, the government plans to issue the bonds in different currencies.


Kasyanov said Russia hopes to offer a total of $3 billion in Eurobonds this year, with the third issue possibly denominated in Japanese yen.


Analysts have said foreigners are looking critically at Russia's economic restructuring rather than at political problems. Russia's ruble has stabilized over the last 18 months, and inflation has fallen to less than 22 percent annually.


Moreover, delays in negotiating Russia's London Club debt may put a damper on the second Eurobond. Kasyanov said Monday that Russia would finish the rescheduling talks by the end of March or early April, closing out four years of negotiations covering $35 billion in debts and interest arrears owed the club's 3,000 members.


In the marketplace, the demand for longer-term paper from Russia could shore up pricing in the second Eurobond offering. An official with Deutsche Morgan Grenfell said the maturity on the deutsche mark-denominated offering would likely be five to seven years, two years more than the November issue. "That will help build out a yield curve" and build confidence in Russia as a credit-worthy borrower, said one trader.


Still, many fixed-income dealers expect the second bond issue to be priced similarly to the levels at which the first Eurobond currently is trading. In London on Monday, yields hovered between 3.35 to 3.38 percent over Treasuries. "With all the new supply coming on, it's not likely to be much better than that," said one emerging debt trader.


Kasyanov, however, said he expected the spreads to pay close to the original spread for first issue, which was 345 basis points. News of the new bond was welcomed in the market for Russia's dollar-denominated MinFin bonds, where prices rose by up to one percentage point.