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. Last Updated: 07/27/2016

LUKoil Issues Bonds to Fund Slavneft Bid

Top oil company LUKoil launched a five-year, $350 million convertible bond Tuesday to fund its bid for 75 percent stake in state-owned Slavneft, the biggest privatization project this year.

Lead managers Morgan Stanley and UBS Warburg said LUKoil was offering a bond of $270 million with an option to increase the issue by $30 million, but the company later said it increased the offer to $350 million.

"The demand was very high, and we decided to increase the offer," LUKoil vice president Leonid Fedun said. "The price for Slavneft, announced by the government Monday, was higher than we expected, and we decided to attract extra funds by offering bonds."

LUKoil on Monday joined oil majors Sibneft and Tyumen Oil Co., or TNK, in the battle for Slavneft, one of the last oil assets in state hands, and said it could team up with a powerful Western major.

It began to build its war chest a week before when it sold a 10 percent stake in a huge Azeri oil project led by BP to an unnamed Japanese firm for more than $1.25 billion, one of the biggest transactions in Russian corporate history.

The Financial Times reported Tuesday that Inpex, a government-affiliated Japanese oil company, is believed to be close to buying the stake.

On Monday, the government said the auction for the 75 percent stake in Slavneft would take place Dec. 18, and it increased the price to $1.7 billion from $1.3 billion.

Analysts consider Sibneft to be the front-runner in the auction for the 320,000 barrel-per-day Slavneft, especially after TNK said Monday it could team up with Sibneft.

Sibneft and TNK, the fourth-largest oil firm, already hold a joint 12 percent stake in Slavneft.

Analysts also believe that the country's third-largest oil firm, Surgutneftegaz, which has accumulated a $4 billion cash pile over the last few years, could also bid.

Analysts praised LUKoil's issue, saying the company was borrowing funds at the right time and more cheaply than its market peers. The last major to place was TNK, which issued a $400 million, five-year Eurobond with an 11 percent coupon.

The LUKoil bond will carry a 3.5 percent semi-annual coupon. The yield to maturity is 7 percent. The conversion premium for the bonds is 22 percent to 27 percent. LUKoil is borrowing through a special purpose vehicle, Lukinter Finance BV.

LUKoil's shares fell 2.5 percent after the announcement, but regained slightly to end the day down 2.28 percent on the day to $16.525.

"The [share price] drop is due to fears that the convertible bond could create a short-term extra supply of the company's shares on the market," Aton analyst Timurbulat Karimov said. "But under the present market conditions, the cheapest way for LUKoil to attract funds is to issue convertible bonds."

Vladislav Metnyov, a senior analyst at Trust and Investment Bank, attributed LUKoil's successful placement to market expectations of the company's upcoming healthy third-quarter financials and more restructuring and cost-cutting plans.