At the first stage, up to $6 billion of new bonds may enter the replacement bond market
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The Central Bank estimated the volume of issue of replacement bonds for sovereign Russian Eurobonds at the first stage at $4.2 billion. Market participants consider this forecast to be underestimated, expecting a replacement of $6 billion. Taking into account other issues, two local liquid sovereign yield curves will be formed in dollars and euros. Over time, bonds will move from banks to other investors, primarily retail.
In the “Review of Financial Instruments” released on March 4, the Central Bank reported that at the first stage, the volume of issues of replacement bonds for Russian Eurobonds could reach $4.2 billion. This is the first official estimate from the regulator. According to the Central Bank, a total of sovereign Eurobonds with a nominal value of $32.9 billion are in circulation. At the first stage, four issues registered in foreign infrastructure (with the code XS) with a nominal volume of $7.8 billion will be replaced. These are dollar bonds with maturities in 2028–2043 years.
The market is more optimistic. According to the head of the debt market analytics department at Renaissance Capital, Alexei Bulgakov, “the real replacement rate will probably be 75–80% (about $6 billion— “Kommersant”)”. However, the share will depend “on the implementation or non-exchange of the “assignment of rights” exchange, which the Central Bank does not speak about.”
The opportunity to issue replacement bonds to replace Eurobonds became available to Russian issuers in the summer of 2022. Initially, replacement was voluntary; from the spring of 2023 it became mandatory, but the right to exception appeared with the permission of a government commission. Since August 2022, companies have exchanged Eurobonds worth $22.3 billion.
In the third quarter of 2023, the government gave the Ministry of Finance the right to issue securities replacing sovereign Eurobonds. The first release was planned for the fourth quarter. But in December, at the Russian Bond Congress, Denis Mamonov, director of the government debt department of the Ministry of Finance, explained that the placement was postponed to 2024 due to the “enormous burden on both the organizers and the infrastructure from the corporate segment.”
IVA Partners notes that the amount of the first stage of replacement of sovereign Eurobonds is “not critically large,” but their total volume is large. In addition, according to Alexei Bulgakov, by the end of the first half of the year, replacement corporate bonds with a nominal value of $4–6 billion will be placed. At the same time, there will still be nine issues of sovereign Eurobonds denominated in dollars and euros with maturities of 2025–2047. Therefore, market participants are awaiting the next stages. As Alexey Bulgakov notes, upon completion of the exchange, “two local liquid sovereign curves will appear – in dollars and euros.”
At the same time, replacement government bonds will become “a good protective instrument that minimizes currency risks,” market participants note. According to Digital Broker analyst Vladimir Kornev, “their popularity will grow, in no small part due to growing demand from investors.” So far, banks remain the main holders of replacement bonds, but “the share of individuals and investment funds in the market is growing.”
According to Mr. Bulgakov, by analogy with the behavior of this segment in 2023, one can expect that for some time there will be a certain rotation of replacement bonds “from banks to other categories of investors, mainly retail.”
The yields of replacement government bonds will be lower than those of corporate securities. BCS World of Investments analyst Anton Kulikov estimates their fair yield by analogy with Eurobonds actively traded on the local market with maturity in 2028 – 4.7% per annum. At the same time, in his opinion, at the beginning of the circulation of new issues, their profitability may be 1–2 percentage points higher, since those “who were in the securities will exit, which will push down the entire market.” IVA Partners believes that “with a smooth supply of issues and increased demand for currency hedging, the market has a reserve of “capacity”.
At the same time, investors still have an alternative in the form of investing in ruble securities. Vladimir Kornev believes that, given the prospect of a reduction in the key rate in Russia in the second half of 2024, long-term ruble issues look more attractive among government securities at the moment.
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