Russian Corps. On Hold For Now.(corporate bond issuance slows)(Brief Article)

After issuing a whopping $1.85 billion in eurobonds since last November, Russian corporates with deals in the pipeline have been forced to take a break, as tumultuous conditions within the broader emerging markets have sent investors fleeing to the relative safety of the Russian sovereign.

Some experts say the delay is not disastrous.

"While it makes sense for the Russian corporates to access the eurobond market if they can, the majority are able to adopt a pretty relaxed attitude with regards to timing. Most companies are not hard pressed for borrowed funds while the rest can exercise alternative options such as bank loans, local bonds or syndications," said Sergei Zhiltsov, director of syndicated debt for Eastern Europe at ABN Amro.

In fact, syndicated loans have proved extremely popular with Russian corporates as an easy and relatively inexpensive way of raising funds. But these have their limitations, most notably the shorter tenors available and smaller amounts that can be raised this way.

Another option, the domestic corporate bond market, has grown significantly over the past year, but it is still small by international standards and relatively illiquid, said Ursula Beyreuther, global credit research/East European emerging markets at Deutsche Bank, and it remains for the most part restricted to all but the blue chip companies.

Local currency-denominated loans from Russian banks are also very expensive. Furthermore, "Russian legislation and legal regulations in favor of the creditor are also weak," she said.

In Search of Long-Term Debt

This inability to finance locally at cheaper rates and over the longer term has driven corporates to the eurobond market.

Oil companies and banks have significant amounts of short-term debt on their books that they want to restructure into long-term debt. Most of the proposed eurobonds are likely to have three- to seven-year tenors (as opposed to the two- or three-year maturities the local debt market offers), ample time for a company to match its assets and liabilities, lengthen the maturity profile of its debt and diversify its currency exposure.

"In terms of cost savings, it's generally advantageous for Russian corporates to raise funds in US dollars and then use those funds to pay back ruble debt," said Chris Tuffey, managing director, fixed income at Credit Suisse First Boston. In fact, one potential eurobond issuer, Tymen Oil Company (TNK) intends to use the proceeds from its pending issue to repay both local bank loans bonds, which are yielding 16.90% in the domestic markets.

But TNK, like the other Russian corporates in the pipeline may have to wait some time before being able to access the eurobond market again.

"Unless market conditions improve dramatically, I would be very surprised if we see anything from a Russian corporate before September," Tuffey said. Volatility has pushed corporate spreads over the Russian sovereign way out - Gazprom, a benchmark corporate credit, has widened to 200 basis points over the sovereign from around 60 to 70 after the launch of its eurobond.

"More than anything, market conditions have made it too expensive for the corporates to issue now," said a Russian analyst at a US bank.

That the secondary market in Eastern Europe is also relatively small and illiquid is another factor restricting eurobond issuance, Beyreuther said. Further, Russian corporate issues are the smallest and the most illiquid of all. "At times like this, when markets are very distressed, liquidity is the main issue for us," said one European portfolio manager. "There is enough yield in the much more liquid Russian sovereign to enable us to by-pass the corporates."

Demand Base Needs to Develop

But even when the market is friendlier, demand for Russian corporate issues is never heavy, despite the solid fundamentals and low leverage most companies offer.

The lack of demand is in part due to the absence of a dedicated investor base for corporates from the EEMEA region.

Appetite from the high yield investor base is also negligible, especially in the case of Russia, given that the sovereign has abandoned plans to issue its own EURO2 billion eurobond this year, said the Russian analyst.

There are 12 Russian companies waiting to tap the eurobond market, a pipeline that is "more of a worry than a positive factor, and could overwhelm the market," said one origination official.

"There is a key risk of over-supply in a market where the demand structure is unstable and immature. The market will need to be disciplined and will be strict in what it will allow to issue bonds."

But there is healthy demand for the Russian sovereign, and in better times, Russian sovereign investors make up 80% of the core buyer base for corporate issues, particularly those from oil and gas companies. Companies such as TNK, Sibneft and Slavneft - which are already rich in cash and reserves, and can raise up to $0.5 billion a year through trading alone - will benefit from increased demand when market conditions improve.

"Russia is essentially an oil story, given the dominance of oil in the Russian economy and much of the corporate paper from the oil and gas companies is taken by sovereign investors who are looking for a yield pick up," the Russian analyst said.