02.09.2008 - MDM Comment: to those fishing in high yield RUB bonds

While screening through the top yielding ruble bonds recently, we noticed that the Sibacademinvest bond was trading at approximately 94% of par, offering a 30% yield to a put in January 2009 (Bloomberg ticker SIBINV). 

 

SIBINV is a development company concentrating on the acquisition of land or projects, property construction and the management of a real estate portfolio. According to the company’s 2007 IFRS statements, its cash flows are tiny (sales revenues of USD10 mn, mainly operating lease proceeds), but its balance sheet appears strong: Over USD200 mn worth of real estate investments funded by almost USD120 mn of equity and USD90m of debt.

 

However, the key feature of Sibacademinvest’s credit profile is that it is ultimately controlled by Igor Kim, who is the principal owner of URSA Bank (Ba3/NR/B+) and a clutch of smaller Russian banks, Vostochny Express, EtalonBank, Mass Media Bank, etc. We are confident that Mr. Kim will support SIBINV if the latter fails to either sell some of its assets or independently obtain re-financing for the RUB1 bn bond put option. 

 

Mr. Kim's core assets are financial institutions, and reputation is of paramount importance in this business. Hence, we firmly believe that Mr. Kim has a vested interest in avoiding defaults at any of companies under his control. Furthermore, he also has the ability to support Sibacademinvest: Even only counting URSA's balance sheet of almost USD8 bn, there will hardly be a problem to help refinance a USD40 mn bond. On a related point, as of the beginning of 2008, half of SIBINV's debt was due to related banks including URSA.

 

We have to admit the SIBINV bond is barely liquid, and we are now seeing quotes at 90 / 97.9 (YTW 45% / 18.5%) – a gaping bid/offer spread. But we believe that better offers may be found in this paper.