Russia’s issuers should be more reasonable
Russia’s domestic bond market is not deep enough to cover all issuers’ total refinancing needs, but getting it working again to show that issuers do have access to funding has its own value.
Actually printing a domestic deal could act as the trigger to a virtuous circle of showing access to funding and perhaps even eventually bringing rates down, both internationally as well as domestically.
The main challenge to a re-opening of the domestic bond market is not the outflows of foreign money or a lack of demand — it is issuers’ own egos and expectations of pricing. As VTB’s recent aborted attempt to price a Rb10bn five year put one bond showed, borrowers are trying to sell deals in the hope of getting yields not too far from those on offer early this year before Russia invaded Crimea.
Domestic investors are a loyal bunch, but they’re not stupid. They know risk has increased and expect to be paid for it.
VTB — widely considered one of Russia’s most sophisticated borrowers — offered a coupon of 8.5%-8.75%, having last printed before the invasion of Crimea at 8.25%. But the Central Bank of Russia has increased rates 150bp since then and investors also want a higher risk premium.
Bankers say that it is issuers, of which VTB is just one example, that are being unrealistic with their pricing expectations. The CBR’s indications that it will look to review rates this summer has not helped the situation, as issuers hope that if they can hold on and use cash balances in the meanwhile instead of the bond market, they will be in a better position to price tighter come the sunnier months.
The lack of supply does open up an issuance opportunity for those that want to print, though at elevated levels. The Russian domestic bond market is not shut. It would serve issuers well to demonstrate that and continue funding, just in case things get worse before they get better.