VTB buyback offer peeks into fears for Russian growth
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VTB buyback offer peeks into fears for Russian growth

VTB's huge multi-tranche tender offer makes financial sense, but also demonstrates the pessimistic outlook for Russian growth at one of Russia’s biggest corporate lenders, despite this year’s rally in the country’s bonds.

Barclays and Citi are arranging the deal, which in essence, makes sense. The World Bank is projecting a negative growth outlook for Russia in 2015-2016, with the economy expected to contract by 3.8% in 2015 and by 0.3% in 2016. The Russian government is delaying some large infrastructure projects and private investors are cutting back on investment programs, while capital remains expensive and demand uncertain.

VTB is offering to buyback up to $750m across a selection of its dollar bonds, and any or all of its A$500m 2017s, Sfr600m 2016s, Sfr300m 2018s and $1bn 2035s, of which only $31.4m are outstanding. 

It is doing so to rid itself of a negative carry borne of excessive liquidity, despite still being subject to European and US sanctions that prevent the bank from raising new international bonds. 

It is right to do so — after all, for Russia's growth outlook to improve, the sanctions would need to be lifted, and if the sanctions are lifted VTB will also have regained access to the markets. In the meantime, by launching a tender offer, VTB is offering liquidity to investors in a market where it is unavailable and reducing its debt load while helping remaining bondholders by making VTB paper more scarce.

It is only a shame that the bank’s timing was not better. Had its conviction about the poor Russian outlook been solidified sooner, VTB could have repurchased the bonds for a much cheaper price at the start of this year. Its 9.5% 2049s are this month trading around a cash price of 92, having started the year close to 60.

But that's with the benefit of 20:20 hindsight. VTB's decision to wait to tender shows how the majority state-owned bank’s views for a fairly quick resolution of the Ukraine crisis have changed in the last few months, despite investors’ new enthusiasm for the debt and the disappearance of the crisis from international front pages. 

The tender offer is a financially sensible one for VTB, but it is also a timely reminder to investors that have been riding the rally that the Russia trade could still be a bucking bronco rather than a racehorse.

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