If Russians print it, investors will come, whatever the cost
Two Russian corporate deals in as many weeks have been stuffed down investors’ throats. Both were deemed tight, but Rusal, the first, sold off and is yet to recover to par. Russian issuers are famously price-driven, and the deals prompted complaints — but market dynamics mean that tight pricing is here to stay.
Aluminium producer Rusal (—/Ba3/B+) was the first Russian issuer to print this year. With all the exuberance of a market reopener, it raised $600m with a 5.215% five year bond, having tightened 25bp from initial price thoughts.
Analysts say it offered no premium to Evraz’s 2022s — and as Rusal is a debut issuer, this was the nearest comparable. Flat to Evraz was deemed far too aggressive. Otkritie analysts said Rusal should have come 20bp-40bp over.
The leads did not disclose the exact book size but said the deal was twice subscribed. But there was not enough demand to support the deal in the secondary market, and it was still underperforming at 99.375/99.625 on Friday.
Then came Polyus Gold. Syndicate bankers argued that Polyus Gold played a more sympathetic hand to investors last week when it printed its $800m deal at the wide end of final guidance (5.10%-5.25%). The decision to print at 5.25% raised a few eyebrows, as in most cases an issuer will print at the tight end of the range.
Printing at the wide end was never about leaving a few basis points on the table. Polyus wanted size and when the $1.7bn book fell to $1.3bn, it was clear that some accounts had had enough. If Polyus hadn’t opted for pricing at the wide end, it probably wouldn’t have been able to take $800m. Alternatively, it could have chosen to take the money anyway, and the market would have grumbled that the book was not well covered, indicating a duff deal.
But market dynamics are such that Russian borrowers can come with tight pricing, ride out the under-performance of bonds, and get away with it time and time again.
Russian corporates borrow infrequently, with only a handful coming to market more than once in a year. Investors have short memories and, according to bankers, are more than willing to return to issuers that have burned them in the past.
Net issuance of Russian corporate bonds is projected to be negative again this year, meaning that there is plenty of money already invested in Russian assets that will try to get straight back to work there. Liquidity in Russian corporate bonds is low, so if funds have money to invest in Russia, they are far more likely to get involved in new issues than to try to buy small clips in the secondary market.
The wider universe of emerging markets corporate is also small, meaning that any corporate bond with a decent credit profile and a decent yield will attract plenty of attention from EM corporate bond funds.
Another key support for Russian corporates is strong demand from local investors, who have plenty of dollars to invest and few places to put their money.
But the argument that Russian investors are less price-sensitive than international accounts — and therefore somehow to blame for tightly priced deals — is undermined by the fact that Rusal (deemed to have come tighter than Polyus in relative terms) allocated less than 20% of its bond to local buyers, compared with 57% for Polyus.
Russia is the upside story of 2017 in emerging markets. Developed market fundamentals look increasingly unstable and, with asset prices looking very tight, sensible investors are looking elsewhere. Europe is being torn apart by the rise of populist, nationalist governments, and US foreign policy under Trump is unpredictable.
But Russia seems the clear winner. Even without the Trump administration’s comments about the easing of sanctions, Russia is offering relative stability, and small but resuming economic growth. In short, Russian debt is in high demand. Last week Russian bond funds posted a new record inflow of $140m, according to EPFR.
Tight pricing, it seems, is here — and there’s little point griping about it.