High-yield investors are beginning to take a closer look at Russian corporates, which for the first time in recent years will be added to a major speculative-grade benchmark, Merrill Lynch's, next month.
Dildora Yusupova, director in emerging market corporate bond strategy at Merrill in London, said she has recently fielded a flurry of calls from investors inquiring about Russian credits. Specifically, Gazprom, the world's largest gas producer with roughly $16 billion of debt outstanding, will have a big enough weighting in Merrill's indices that high-yield investors will be forced to consider the credit, she said. "[The index change] will prompt serious investors to learn about Russian corporates," she commented, noting Russian credit fundamentals have drastically improved in recent years.
The index shift comes at a time when the disputed Ukrainian presidential vote is exposing some rifts between Russia and the West and the Kremlin's crackdown on Yukos is weighing on the Russian equity markets. But Yusupova dismissed these issues and said a creditor to state-controlled, double-B Gazprom, for instance, could pick up extra spread in an otherwise tight market. Gazprom's 9% of '13s are currently trading 290 basis points over Treasuries, roughly 60bps over the sovereign.
Most of Russia's $10.8 billion and €1.4 billion in corporate credits will move into high-yield. The energy sector will incur the largest shift. Christopher Garman, head of high-yield strategy at Merrill in New York, noted the move will increase the energy sector's credit quality because the average Russian energy credit is double-B, versus the average U.S. energy credit at single-B plus.
Fitch Ratings recently upgraded the sovereign to investment grade, which in turn bumps Russian corporates from emerging markets to high-yield in Merrill's indices. They are starting to take Fitch's ratings into account beginning next month. No similar changes are planned to the Lehman Brothers and Citigroup indices as neither takes Fitch ratings into account.
