Lukoil: firm in funding, bashful in bonds
Rumours in the weeks leading up to the summer break that Lukoil was considering launching a Eurobond have intensified among syndicate desks following release of strong financial results at the end of August.
But the strength of the company lies not in its credit profile but in its government support because of its strategic importance. Doubt remains over whether the levels that Lukoil can achieve in the primary market are attractive enough to tempt it to issue.
"There were rumours that a roadshow for a bond were going on before the summer, but they decided that the levels they could get then were unattractive," said one London-based emerging markets syndicate official. "Everyones waiting for them to announce a deal."
Lukoils second quarter 2009 results were stronger than expectations. Revenues for the quarter were $20bn, up 36% quarter on quarter, while Ebitda rose 71% to $4.1bn.
But the results are unlikely to affect Lukoils attractiveness to investors.
"The levels Lukoil will pay in any new bond issue will be more about the perception of the sovereign than anything else Lukoils own credit plays a very small part," says Petr Grishin, a credit analyst at Renaissance Capital in Moscow.
Between July 2008 and February 2009 the Russian equity market crashed and foreign exchange reserves fell by over one-third ($210bn) as the central bank intervened to smooth the impact on the exchange rate of portfolio outflows, capital flight and external debt refinancing. The rouble weakened 37% against the dollar basket. The decline in oil prices from $150 a barrel in July 2008 to nearer $40 sparked a fall in Russian exports from $35.7bn in 2008 to a predicted $19.3bn this year.
But since then the oil price has risen to $70 a barrel and a global equity rally, especially in emerging markets, has led investors to look more positively at Russia. But the federal budget ran a deficit of Rb202.1bn ($6.4 bn) in July as the central bank continued to combat excessive rouble liquidity. This has, unsurprisingly, reduced the amount of credit available. This may put pressure on Lukoil to raise debt, but the company stresses that it is in no hurry to issue a Eurobond.
"Were not commenting on market rumours, or on our plans for debt refinancing, but we can say that Lukoil may issue opportunistically over the next few months," says an investor relations officer at Lukoil.
Although the yields of top tier companies and banks in Russia such as Lukoil, Transneft, Gazprom and Sberbank have tightened so that they can issue at punitive but not prohibitive levels, there is still a big gap between them and the second tier names still unable to issue in the international debt markets at attractive levels.
Lukoil gets strong government support which has helped it regain access to international markets. It received two one year loans from state-owned Sberbank in February for $500m and Rb17bn, as part of the states efforts to help strategically important companies after credit markets froze for Russian companies last year.
But Lukoil has shown that it is among an elite pool of Russian corporates that can fund themselves again.
In August, it signed a $1.2bn pre-export financing a three year facility, paying 400bp over Libor. It is one of only seven Russian borrowers to raise a loan from overseas banks this year.
The 12 lenders, all bookrunners, were Bank of Tokyo-Mitsubishi UFJ, Barclays Capital, BNP Paribas, Calyon, Citi, Deutsche Bank, ING, Natixis, Orgresbank, Royal Bank of Scotland, Société Générale and WestLB.
The company also sold a Rb25bn ($805.4m) three year bond issue with a coupon of 13.3% in the same month.
Analysts are unsure about Lukoils refinancing needs but research reports say that during 2009, its total debt repayment needs were $3.2bn, mostly relating to short term debt.
"Lukoil only reports short term debt movements on a net basis, making it difficult to track its progress with refinancing," says Grishin. "But given its recent raising of Rb25bn in a one day Micex placement and a $1.2bn syndication, even the size of its total repayment needs for the year is a non-issue now. With below a one times gross leverage (total debt of $10.8bn), Lukoil remains one of the strongest borrowers in Russia."
Investors see a potential primary issue from Lukoil as an opportunity to gain exposure to the company when it may pay an attractive new issue premium.
"We like Lukoil but see no value in the secondary cash market where its paper trades through Gazprom in z-spread by 100bp in the 2017s and by 130bp in the 2022s. We recommend waiting to see if more attractive levels are offered from primary issuance, which is expected before year end, according to management," says Serge Lioutyi, a research analyst at Barclays Capital in London.