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22.07.2008 - MDM Comment: Russia and CIS debt market




ALROSA (Ba2/BB) released its 2007 IFRS financials, which are, in our view, neutral for the company. Sales were 4% down y-o-y (RUB91 bn), which we believe was due to USD weakness (the company generates over half of sales from exports). Operating and EBITDA margins were somewhat higher on lower royalty payments to the Republic of Yakutia. Net debt remained almost unchanged at RUB59 bn, and the Net debt/EBITDA ratio also remained unchanged (1.8X). At the same time, gross debt reached RUB82 bn vs. only RUB62 bn at YE2006.
We do not like the ALROSA 14 Eurobond issue (7.9%) at the moment, because we believe there is little upside and rather sizeable potential downside in the bond. We believe that the positive “federalization” news has been largely priced in. The IFRS report states that the final step of the government takeover of the company (via a new share issuance) is due to be completed in 3Q08. On the negative side, we highlight quite aggressive investment needs related to a move into expensive underground mining and M&A-appetite, as well as the uncertain outlook on sales as the US (key diamond market) is facing a recession and the USD continues to weaken. Finally, there is a material risk of new issuance from ALROSA. Market talk is that the company may come to the market later this year. In our view, if and when it happens, there will be a very substantial premium offered over secondary market levels.
Eurobonds: Severstal’s placement pushed the secondary market a touch lower yesterday, particularly in CHMFRU 14 and longer-dated EVRAZ issues. Trading activity is restricted essentially to new bonds. The new CHMFRU 13 bond is trading at 100.75, while the TRUBRU 11 is at 101.625. On the primary market, Alfa Bank Ukraine announced a new USD deal, which will have a 3-year tenor and a 1-year put.
Ruble bonds: All eyes on new deals in local bonds, where almost every day we have one or two new issues with relatively attractive levels offered. Activity in the secondary market is minimal as we are moving into the peak of the vacation season. The few moves that we see are actually also related to the primary market, e.g. long-dated AHML (Federal Mortgage Agency, A3 by Moody’s) issues keep declining despite having principal guaranteed by the government, as the company said that more deals will be brought to the market later this year.

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22.07.2008 13:23
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