16.12.2008 - MDM Comment: Color, State bailout, Mosoblast, TNEFT, Eurokommerz

Russian financial markets are becoming ever increasingly illiquid and exciting as we move closer to the Christmas holidays. Crucial events are happening in the FX and money market: Banks are continuing to buy foreign currency (although it is our understanding that this is mainly on behalf of their clients). In response to this pressure, the Central Bank of Russia (CBR) weakened the ruble again yesterday by another 1% and simultaneously announced that it was cutting its lending limits to 34 banks (out of 136) which it believed had not followed its earlier requests and guidelines not to increase long FX positions. And of course the disappointing November industrial production data (-8.7% y-o-y) came out this morning, confirming that Russia is facing a hard landing scenario.

Below are our key news and comments for today:

1. Vladimir Putin, the Russian Prime Minister, yesterday said that by Wednesday this week ministries should prepare a list of approximately 1,500 companies which require direct financial support from the government. These companies will be the beneficiaries of a package totalling in excess of RUB300 bn, which includes state guarantees on loans, equity injections and interest expense subsidies. In order to qualify for the list, the company needs to meet the following criteria: Sales in excess of RUB15 bn and a headcount of 4,000 or more. The company may also be critical for a certain city or town by accounting for a large chunk of its gross product or employing more than 30% of its population.

While one may argue that in the long-run such an approach could lead to inefficiencies related to supporting unprofitable enterprises, what is certain is that in the short to medium term the pledge of state support will be beneficial for the corporates and their creditors.

Based on this logic, we believe that the bottom line is that this news is pretty positive for investors in Russian corporate bonds. However, we are afraid that it may be a case of ‘too little too late’. According to our estimates, RUB300 bn is something that could help bail out perhaps 40-60 companies of large size, but certainly not hundreds. Furthermore, the announced package needs to be approved by the Russian parliament and will take effect only in 2009. Meantime, some companies need help as soon as yesterday. The best example so far would be MiG, the state-owned producer of jet fighters, which last week defaulted on its RUB3 bn bond issue.

2. Moscow oblast (B1/B-) and its mortgage vehicle MOIA have apparently defaulted on MOIA’s RUB5 bn bond issue. Yesterday was a put date, but was also the date on which Moscow oblast had committed to buy back the bond if MOIA failed to execute the put itself. This news is unravelling amid rumours in the media that the Moscow oblast governor could be replaced. We tend to believe that the MOIA bond put will be executed after perhaps a brief delay. Otherwise this will be another blow of the kind that could threaten a collapse of the local bond market and a fully-fledged credit/confidence crisis.

3. Moody’s downgraded Transneft’s senior unsecured rating from A2 to A3. According to the rating agency, its action was driven solely by the recent revision of the outlook on the sovereign rating, while the baseline credit assessment of the company remains unchanged. We are neutral on Transneft’s long-dated Eurobonds (YTW 15-16%).

4. Moody’s downgraded factoring company Eurokommerz from B2 to Caa2 on news of a coupon non-payment. Unfortunately, Moody’s shed no light on why the believed-to-be quite liquid company tumbled on a small coupon repayment ahead of major redemptions and puts. We continue to suspect that this could well be an issue of governance/management, and not seen any comments from the company so far.

16.12.2008 14:16