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20.08.2008 - MDM Comment: Mechel, RenCap, Moscow, market color

Mechel (NR) received a soft, below-expectations punishment from Russia’s anti-monopoly watchdog. The company was ordered to pay a USD320 mn fine and lower its coking coal prices by 15%. Evraz and Raspadskaya, which were also accused of abusing their market positions by hiking prices, are reported as likely to receive similar punishments (Source: Reuters). While price regulation in coal and steel may not look like a healthy signal, we believe that the news is actually still rather positive for lenders into the above-mentioned companies, as well as for the broader market. Our view is based on the assumption that investors feared a far more severe regulatory action – almost a Yukos-like scenario – after Prime Minister Putin sharply criticized Mechel in a public speech.
Renaissance Capital Bank (B1/B-/B-), the consumer finance part of RenCap group, has set new coupons on its 1st ruble issue. The bond will accrue 14.5% interest until the next put in 1.5 years – a good illustration that the re-pricing process is continuing. We believe that RenCap’s proposal is excellent value, particularly given the fact that the bond is on the Central Bank’s repo list. It is actually now the highest yielding issue on that list.
At its forthcoming meeting, the City of Moscow government may decide to halt any new bond issuances until 2009 (Source: Interfax). We believe this is a logical step, given that Moscow is running a budget surplus. For investors this is good and bad news: On the positive side, the further price correction in the outstanding Moscow bonds will be insignificant, since new issuance risk has diminished. On the negative side, the once benchmark curve will further loosen liquidity and benchmark status.
Ruble bonds: Prices continue to slide lower where liquidity allows sellers to find bids. The longer-dated bonds of AHML, the federal mortgage agency (ticker AIZK), have been hit hardest in the recent days, loosing almost 2pp price wise and reaching 11.3% in terms of yield. The government-guaranteed issues now offer 300bp+ over the sovereign curve, and we expect support to be found for these bonds shortly.
Eurobonds: Sentiment is mostly negative. Russia 30 is trading at 183bp over UST. Liquidity in corporate issues is minimal with sellers seen in most longer-dated issues. For obvious reasons, no new deals are seen on the radar.

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21.08.2008 12:14
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