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26.06.2008 - MDM Comment: Russia and CIS debt market

Eurobonds: Selling pressure still seen in Russia/CIS corporates, which appears to be a result of both “flight to quality” and “new supply” factors. Yesterday new bonds of KazMunaiGaz (Baa1/BBB-) were perhaps the only ones that advanced, with prices seen around 101.0. One has to bear in mind that KZOLKZ ’13 and ’18 were both placed below par. These bonds still offer some 40-50bp over the curve of Intergaz, an operating subsidiary of KMG. But the spread may well remain there as a reflection of structural subordination (holdco vs opco debt).
Ruble bonds: Ruble bond prices are also drifting lower despite very mild money market conditions. Key factors behind the pessimistic mood are the multiple new issues, each offering a premium over secondary market levels and a very recent series of defaults in the 3rd tier bonds. Some encouraging news on that front came yesterday: after a 1-day delay MOITK (S&P B) executed its commitment to buy Mostransavto bonds as part of the MOITK public offering, while the Siberian timber plant Minnesko said it is planning to repay its defaulted bond in the next few weeks. We hope that investors cool down a bit in order for the tensions in the market not to trigger panic and a domino effect.




Inflation in Russia during June 1-23 has been registered at 0.8%, which makes it 8.5% year-to-date (Source: Goskomstat). June CPI is slightly lower vs. May. Still, we think that the Central Bank perceives the current level of inflation as unacceptably high and therefore will continue raising benchmark interest rates as well as obligatory reserve requirements for banks. We believe that significant nominal ruble appreciation vs. the bi-currency basket is quite unlikely.
Kazakhstan’s National Bank has lowered obligatory reserve requirements for banks by 100bp. The new rules will be introduced July 29. We view this as a measure of support to troubled Kazakh banks. The regulatory action should free up approximately USD 700-800m of cash on a consolidated basis. We have not seen any reaction to that in the Kazakh banking bonds.
X5 (B1/BB-) finally signed an agreement to buy Karusel (NR) hypermarket chain for USD 940m. The news has already been factored into Karusel’s ruble bonds (trading flat to X5 at around 9.8%). We note that the deal will significantly increase the financial flexibility of Karusel’s core owner – Mr. A.Rogachev, who owns developer Macromir (NR), among other assets. However, we do not recommend rushing to buy Macromir’s bonds (14%) as the company will soon be coming to the market with a new issue.   

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26.06.2008 12:29
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