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21.05.2008 - MDM Comment: Russia and CIS debt market

(for a pdf file pls see attachment)
Eurobonds: Russian Agricultural Bank (A3/NR/BBB+) is due to price its 5-year and 10-year USD tranches today. The price-talk suggests some premium over the curve, particularly in the longer dated tranche (7.75-8.00%, which translates into a pick-up of around 50bp). The new VTB ’18  issue is trading slightly above par.
Ruble bonds: The sentiment is generally neutral these days as mild money market conditions are offset by fears of further tightening by the Central Bank and new supply factor. Our client survey (due to be published later today) showed that investors expect another 25-50bp rise in CBR’s key rates before the end of 2008. We also have a good illustration of how new supply factor prevents tightening: Sberbank (A2/NR/BBB+), Russia’s largest financial institution, is offering 1.5 year promissory notes locally at 10%, which is almost 400bp over the benchmark OFZ curve.
Severstal (Ba2/BB) released its 1Q 2008 financial results and offered USD 1.24 billion for US-based steelmaker Esmark. We don’t expect to see any reaction in CHMFRU ’09 or ’14 Eurobonds in response to these news. Severstal maintains very conservative leverage (Net Debt/EBITDA around 0.3x), and the potential acquisition of Esmark won’t materially change the credit profile of the group. What the bonds may react to is the rumoured new USD 1.5 billion bond issue from Severstal.
TNK-BP (Baa2/BB+) had its offices searched again, while the Ministry of Interior mentioned there are new tax claims coming (Source: Reuters). We expect continued volatility in the TNK-BP bond spreads over Gazprom’s issues, as news about regulatory pressure will likely be again followed by speculation of the two companies consolidating. We think that it makes sense to buy TMENRU-GAZPRU spread at 120bp or above and take profits once it reaches 70-80bp.
HCFB (Ba3/B+) has received a EUR 500 million loan from PPF Group. We view this as yet another illustration of strong funding support from the parent and a comforting signal for the bondholders. We like the bank’s ruble bonds (10.5%) as a leveraged play.
MTS (Ba2/BB-/BB+) has released its 1Q 2008 results. Profitability has slightly declined, but the company continues to generate positive free cash flow. Debt cover ratios remain very solid (Net debt/EBITDA around 0.5x). We don’t expect to see any reaction in MOBTEL issues.



PDF MDM FI Morning Comment 21.05.2008
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21.05.2008 15:25
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