What yield was formed on replacement bonds

The number of Russian issuers issuing replacement bonds is growing. Now such investments, in addition to currency revaluation, also bring high coupon income. However, despite the current attractiveness of investments, it is worth considering market and issuer risks, as well as the limited liquidity of a number of issues.

Currency substitution

Friday 30 June Phosagro announced plans to place replacement bonds. From July 3, the issuer will collect applications for two issues of dollar Eurobonds maturing in 2025 and 2028. The volume of each of the placed issues can be up to $500 million. For a two-year issue, the collection of applications will be completed on July 19, for a five-year issue – on July 21.

Currently, three additional issues of replacement bonds are being placed – an issue of Sovcomflot for $55 million and two issues of Gazprom Capital for a total of $963 million. issuers (Gazprom Capital, LUKOIL, Metalloinvest, Sovcomflot, MMK and Borets). This includes 20 US dollar issues worth $11 billion, nine euro issues worth €3.56 billion, one pound issue worth £411 million and one Swiss franc issue worth CHF38 million.

“Issuers have replaced a little more than half of the total volume of the corresponding Eurobonds in US dollars, about 47% in euros, 48% and 35% in pounds sterling and Swiss francs, respectively,” said Mr. Yermak.

Currency alternative

Such securities may be of interest for investment as an alternative to cash or non-cash storage of funds in unfriendly currencies, the rate of which is growing rapidly in Russia. In particular, following the results of Friday’s trading, the dollar exchange rate exceeded 89.5 rubles/$, which is almost 5 rubles. higher than the previous week’s close.

At the same time, the almost continuous growth of the US currency has been going on since December last year. During this time, it has risen in price by more than 28 rubles.

Compared to other methods of saving in foreign currency, such as foreign currency accounts or investments in foreign securities, replacing bonds, whose par value is also denominated in currency, have a number of advantages. Unlike current bank accounts, they do not charge commission, unlike foreign securities, they are traded in the Russian infrastructure and therefore there are no blocking risks. Given the availability of replacement bonds in dollars, euros, British pounds and Swiss francs, it is possible to compile a diversified portfolio not only by issuers, but also by currencies. However, here it should be taken into account that all non-dollar securities were issued by one issuer – Gazprom Capital. In addition, coupon payments and redemption will take place in rubles at the exchange rate of the Central Bank.

In addition, these securities pay coupons, which, combined with prices below face value, will provide a high yield to maturity even without taking into account changes in the ruble exchange rate. According to Alexander Yermak, since the beginning of the year, the yield of dollar-denominated bonds has increased by 100-300 basis points. p., up to 6.6–9.1% per annum.

The yield of euro bonds maturing in 2023-2024 has changed in the range of 0-20 bps. p. and is 6.85–8.27% per annum, and with maturity in 2028 increased by 152 bp. p., up to 9.1% per annum.

On the shortest issue of Gazprom Capital due in November of this year, the yield on Friday amounted to almost 14% per annum. “Due to the existence of an overhang of Gazprom’s replacement issues, investing in such securities remains potentially attractive due to increased yields relative to both 2021 levels and current yields of similar issues of other issuers with similar credit quality,” said Yury, Trinfico portfolio manager. Grossman.

exchange rate risk

In addition, such investments are associated with credit risk. In addition, currency risk must be taken into account. “Now the main question is where the course will go next. When the ruble devalued, this reduces the likelihood of further movement in the same direction,” notes Evgeny Zhornist, portfolio manager at Alfa Capital.

Mr. Grossman draws attention to the fact that during the period of a strong fall in the ruble exchange rate and the dollar reaching psychological levels, many investors decide to fix the currency revaluation, while others temporarily stop buying securities due to the fact that the ruble price becomes too high for them.

With such investments, it is worth remembering the peculiarities of taxation: the taxable base is calculated as the difference between the ruble entry price and the ruble sale price.

“With the devaluation of the ruble, even if the investor has a loss in dollars, he may have to pay personal income tax on ruble profits,” notes Mr. Zhornist.

Vitaly Gaidaev