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27.08.2008 - MDM Comment: Sentiment in Russian bonds further weakening...

Investors in Russian bonds were yesterday presented with more causes for concern. Fears of political risks sent the RTS equity index plummeting 4% and forced the ruble into a 0.3% decline against the bi-currency basket. Capital flight is apparently still taking place.
Even more important, however, was the failure of another issuer to execute a put option on its ruble-denominated bond. This time it was ALPI (Bloomberg ticker ALPIIN), a mid-sized food retailer based in Siberia. Earlier media reports suggested that the company had sold some of its real estate and was in decent shape to meet its liabilities under the put option. However, it seems that ALPI had also hoped that at least a third of the issue would not be put (new coupons were set at 18%). Overall to date, four companies are not current on their bonds (Minnesko, Marta, Derzhava and ALPI).
Alarm bells have been ringing for some time regarding the credit profile of mid-sized and small Russian retailers. The most recent include Marta Holding’s failure to sell its food retail business and subsequent bond default; comments from X5 CEO Lev Khasis that there are few attractive acquisition targets and expectations of more people loosing money in retail; and Fitch’s comment of August 22 on the liquidity challenges facing retailers.
The Airlines sector is another troubled part of the market making bondholders sweat. There is as yet no clarity on whether the government will rescue the beleaguered AirUnion alliance, with very controversial news and comments being released. On top of that, Interfax yesterday published an interview with the CEO and key beneficiary of Sibir Airlines, in which a gloomy sector outlook was presented.
We believe that liquidity and credit concerns regarding Russian high-high yield issuers are reaching a critical point, beyond which a chain reaction of defaults triggered by investor panic is definitely not impossible.
The most realistic way of avoiding that, in our view, would be a set of supportive regulatory actions, which would help restore investor confidence. We believe that the government and the Central Bank are able (and likely will) channel more short-term liquidity and longer term capital into the financial system. Some of that money is actually on its way, e.g. the multi-billion (in USD terms) capital injections into development institutions are being moved from the Central Bank's accounts into high grade local bonds and banks’ deposits.

27.08.2008 15:00
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