Polyus assesses potential investor interest in convertible bonds

The first market bond convertible into shares may appear on the domestic debt market of the Russian Federation—gold mining company Polyus (MOEX: PLZL). For the issuer, this is an opportunity to quickly attract cheap financing using quasi-treasury shares. Investors will receive a new currency instrument, denominated in yuan, with potentially higher returns than classic bonds. However, market participants do not exclude the possibility that they will be able to influence the easing of placement conditions.

Sources to Kommersant on the stock market said that Polyus is “assessing the potential interest of investors in convertible bonds.” According to Kommersant’s interlocutors, we are talking about a three-year issue of yuan securities with an irrevocable offer to exchange them for shares of the company. It is assumed that the exchange will take place only if the value of the shares by the redemption date increases on the Moscow Exchange by more than 40–45%. The final contract execution price will be adjusted by the amount of dividends paid, said one of the portfolio managers. With less significant stock growth, investors will make money. A semi-annual coupon of 1.8–2.2% per annum is provided. Payments will be made in yuan, but upon repayment it is possible to fulfill obligations in rubles at the Central Bank exchange rate according to the decision of the issuer and the request of investors.

The date for collecting applications and the volume of placement have not been determined. “Based on the results of communication with investors and consultations with the organizers, the conditions for exercising the option may also change,” clarifies one of Kommersant’s interlocutors. He emphasizes that the issuer has no obligation to carry out the issue. Polyus declined to comment.

According to Alexey Bulgakov, head of the debt market analytics department at Renaissance Capital, there are currently no such convertible bonds on the local market. In 2000–2010, Russian issuers periodically issued convertible Eurobonds, in particular LUKOIL, Severstal, TMK, Yandex, VK and Ozon. In 2018, convertible Eurobonds worth $250 million were placed by Polyus itself; in May 2020, the securities were early converted into GDRs for the issuer’s shares.

The preference for the Eurobond format for issuing convertible bonds could be due to the presence of an established investor base for such instruments on the foreign market and, possibly, the peculiarities of Russian regulation and taxation, notes Mr. Bulgakov.

After the outbreak of hostilities in Ukraine, external capital markets were closed to Russian issuers, but the need for financing remained. “As a rule, companies have two fundraising goals: refinancing existing obligations or financing an investment program,” notes Alexander Afonin, head of bond analysis at the Sinara investment bank.

Convertible bonds allow you to attract cheaper financing than classic ones. Polyus’ yuan securities currently trading have a yield of 5.5–5.6% per annum. Also, the placement of convertible bonds, says Alexey Bulgakov, allows you to “quickly monetize your stake.” During last year’s buyback, Polyus bought back 40.8 million shares for 580 billion rubles. “Issuing convertible bonds may be easier than selling a large block of shares, and the price will be higher,” the expert notes.

Convertible bonds are a tool for qualified investors, say portfolio managers. Therefore, they will be available to a limited circle of people who want to reduce currency risks and also expect a strong increase in the price of Polyus shares. “Due to such securities, management results can be significantly improved if the stock takes off,” notes an interlocutor at a large management company. But, in his opinion, the current conditions “are too high and the strike price (the exercise price of the option) would be more justified.— “Kommersant”) at the level of 125–130% of the initial cost.” General Director of Arikapital Management Company Alexey Tretyakov considers the conditions to be market conditions: “For comparison, in November, the South African gold miner Sibanye Stillwater placed a convertible bond issue with a coupon rate of 4.25% with a yield on ordinary bonds of 9% in dollars and with the right of conversion at a price of 32.5 % above the market. But Polyus is a growing company, and a higher option premium looks justified.”

Vitaly Gaidaev