25.10.2006 - MDM Comment: Russia and CIS debt market

(for a pdf version of the Comment pls see enclosed file)

NEWS AND COMMENTS

Brief: Russia and Ukraine have agreed that in 2007 Ukraine will receive at least 55bcm of natural gas originated in Central Asia at USD130 per 1000 cubic meters. We understand that this volume will cover essentially all of Ukraine’s import needs for gas. While this represents a 30-35% increase compared to the price set for this year, we consider USD130 as the best price that Ukraine could have negotiated, since it is still well below Russia’s average export selling price (USD250-300). For this reason we view the news as positive for Ukraine’s macroeconomic outlook and its sovereign bonds. At the same time, we think it is yet too early to expect Naftogaz 2009 issue to tighten, since the government hasn’t yet clearly articulated that it will be supporting the company. Naftogaz is currently accommodating a large part of the overall damage related to gas price increase. Industrials including Azovstal (B3/B-/NR), ISD (NR) and Stirol (B3/NR/B-) will suffer from another gas price increase.

Brief: General Director of Gallery Media Group (Caa1/B-/NR) says the company may pursue an alliance with a larger international outdoor advertising operator or opt for an IPO over the next couple of years (“Business” daily newspaper). We think that Gallery’s 7-year bond (YTM 10.25%) could be of interest once the company is closer to IPO or equity deal with a global major.

Brief: TMK (B2/B+/NR) is about to close books for its IPO, while S&P says may remove “Negative” outlook on TMK’s rating once the company repays debts raised to fund recent US$1.3bn buy-out of minority stakes.

East Line (Caa1/B-) has closed its long dispute with the state regarding the rights to operate Domodedovo airport. The bond has no price upside given put in November and uncertainty with regard to the next coupons.


MARKET COLOR

Eurobonds: Russian sovereign and corporate Eurobonds remained almost unchanged on Tuesday with very few trades, which is usually the case in anticipation of FOMC meeting. We highlight continued interest in the new KZOS 11 (traded at 100.125,YTM 9.22%), which offers inadequately high yield pick up over NKNK 15_10 (YTP 8.23%), while having a very similar credit profile. Our target price for KZOS 11 is 101.00 (YTM 9.00%).

Ruble bonds: the prices were again lower yesterday by another 5-15bp, primarily due to still high overnight and REPO rates, which in turn are explained by tight ruble liquidity conditions. Interestingly, the Central Bank has been almost completely avoiding currency interventions in FX market over the last two weeks. Its reserves have remained stable, as a result the CBR didn’t generate any fresh rouble injections into the banking system, which is quite unusual. Rouble rate has also remained stable against the basket during this period. We tend to explain this by a bet on stronger USD that Russian banks are currently making. Another reason for that could be capital outflow on the back of lower oil price and reduced expectations of rouble strengthening.

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20.02.2008 15:59