Replacement debts – Finance – Kommersant
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The domestic market for foreign currency bonds received a second life with the launch of replacement bonds. Such securities do not have infrastructure risks and are traded in smaller lots than the Eurobonds they replace. Taking into account the fact that the yield of such securities can reach up to 7-8% per annum in foreign currency, which significantly exceeds the rates on bank deposits, local players are showing high interest in them. At the same time, when working with such securities, it is necessary to take into account not only credit, but also the currency risk associated with determining the exchange rate of unfriendly currencies.
Bond variety
Despite the isolation of the Russian stock market, local investors still have the opportunity to buy instruments denominated in dollars, euros or pounds sterling. These include Eurobonds of Russian issuers “locked” in NSD after March 2022, local currency bonds (issued not only in yuan, but also in dollars and euros), as well as recently actively placed replacement bonds.
The latter, as Aleksey Bulgakov, head of the debt market analytics department at Renaissance Capital, notes, are the same local bonds pegged to foreign currency, but placed on the primary market when exchanging Eurobonds.
The most numerous group of Eurobonds remains, which includes sovereign Eurobonds (14 issues) and corporate bonds (about 70 issues). According to Alexander Bulgakov, Eurobonds were issued for about $50 billion at face value. In addition, to date, five issuers have placed 14 issues of replacement bonds worth about $5 billion at par. Four more issues are in the process of placement. “The issuers of replacement bonds already circulating on the local market are PIK Corporation, Gazprom, LUKOIL, Sovcomflot, and Metalloinvest,” lists Alexander Shurakov, a leading debt market analyst at Otkritie Investments.
Another large group of foreign currency bonds are securities issued under Russian law, but pegged to foreign exchange rates. According to Alexei Bulgakov, there are about $20 billion of such securities (excluding $5.6 billion of bonds in CNY), but three-quarters of them are non-marketable (for example, bonds issued by SIBUR during the acquisition of TAIF, or Yamal LNG bonds).
exchange fund
The active issuance of replacement bonds (CB) has a beneficial effect on the local market of foreign currency bonds. At the beginning of the summer, as Ilya Golubov, portfolio manager at Pervaya, notes, it was not clear how Russian Eurobond issuers would service their debt through Russian infrastructure. After the start of issuance of replacement bonds, they began to appear on exchange auctions.
In addition, the minimum lots for such securities are $1,000, not $100,000, as for replaceable Eurobonds, which has simplified their purchase for a number of investors. This had a positive effect on the liquidity of securities, although not for all issues. “High liquidity in replacement bonds of Gazprom. The bonds of Sovcomflot, HC Metalloinvest, and individual issues of LUKOIL have good liquidity,” notes Alexander Shurakov.
The high popularity of such securities favorably affects their value, which puts pressure on profitability.
For example, the Gazprom Capital CZ in British pounds maturing in October 2024 started trading with a yield of about 9% per annum, currently the figure has dropped to 5% per annum. The yield on the longest dollar issue maturing in October 2034 dropped from 9.25% to 7.8% per annum. “LUKOIL bonds maturing in April 2023 offer a yield of 5.11% per annum. The yield on other foreign currency bonds of LUKOIL, Sovcomflot, HC Metalloinvest ranges from 4.9–6.8% per annum,” notes Alexander Shurakov. The decrease in rates, says Alexei Bulgakov, is connected with the market’s awareness of the new instrument, understanding of its advantages (high liquidity, small lots, quality of issuers).
Looking at courses
Despite the decline in yields, Russian foreign currency bonds remain attractive compared to foreign currency deposits. According to Sravni.ru, the rates on the bulk of deposits in dollars do not exceed 1% per annum, although there are offers on the market that reach up to 5%, but for a short period. “Currency bonds are of interest to a fairly wide range of Russian investors as a tool for diversifying currency risks,” says Alexander Shurakov.
Due to the fact that all substituted securities are issued in Russia, there are no infrastructure risks associated with them. These bonds, as Alexander Shurakov notes, are characterized by the same traditional set of risks as ordinary corporate ruble-denominated securities, only currency risk is added to them due to the par value of loans in dollars, euros, and pounds sterling. The latter must be taken into account, since issuers pay coupons and redemptions on such securities in rubles at the rate of the Central Bank. “The risk lies in the area of determining the exchange rate of the ruble in the event of sanctions against the NCC and the Moscow Exchange and the impossibility of trading the ruble-dollar pair there. At the same time, nothing threatens the payments themselves in rubles,” notes Ilya Golubov.
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