22.10.2008 - MDM Comment: Market color, State support, EUCHEM, KOS, RUB

It has not been a good day for Russian financial markets thus far. A dollar rally in the FX markets is sending oil prices lower, which in turn is dragging down Russian equities. The same combination of factors is largely responsible for the continued migration of local individuals, corporates and banks from the ruble into the dollar (as not everyone understands how the peg works and looks at RUB/USD rate only), forcing the Central Bank to spend reserves to protect ruble at 30.40 for the basket. Bonds continue to be under selling pressure. One of the new factors behind that pressure is the generally pessimistic mood in EMs on a heightened fear that Argentina may default.

Below are our key stories and comments for today:

1. The government has selected six sectors of the economy that it believes need to be supported via loans from state-controlled banks, according to Interfax, quoting a reliable source within the banking sector. Interfax reports that the six sectors are retail, construction/development, agriculture, defense, car manufacturing (because of the high ‘multiplier’ effect) and oil production. We are, of course, yet to see how obedient and swift the state banks will be in executing the government’s and respective lobbyists’ ‘wish list’. In our view, the chances of securing supportive financing are higher for those meeting one or more of the following criteria: 1) largest players in respective sector; 2) state-controlled or socially sensitive and 3) already have substantial borrowings from state banks.

2. Eurochem (NR/BB/BB) said it had raised a USD1.5 bn loan from a syndicate of banks at a price as low as LIBOR+180bp. Eurochem is one of Russia’s corporates with a very solid credit profile. Robust prices for fertilizers in 2007-1H08 have allowed the company to generate strong cash flows and drive net debt down to zero (as of mid-08). We hope that Eurochem is very careful with the loan proceeds it receives. In a broader context, the news signals that debt markets are not entirely shut down for Russian national champions (although the deal was most likely initiated before September’s events).

3. Kazanorgsintez (NR/B-/B-) has released its 1H08 IFRS results (pls see those attached). Remember we commented briefly yesterday the press-release that the company published explaining declining profitability. The accounts confirmed our fears: the Debt/EBITDA ratio increased to above 7X, leaving a clear and present risk of a new covenant violation (the Eurobond covenant was renegotiated from 4X to 6X earlier this year). In this environment the company has little choice but to slash capex and try to improve profitability. Otherwise refinancing will become a grueling exercise. On the positive side, we believe that TAIF (a private fund) will now have to sell Kazanorgsintez. Previous rumors were that Gazprom group may bid for this asset – a scenario that implies a credit upside for the lenders to KOS. For now, however, we recommend to avoid increasing exposure to KZOSRU 11.

4. Four high profile officials – the minister of finance Alexey Kudrin, his deputy Sergey Shatalov, first vice-premier Igor Shuvalov and president’s economic aide Arkady Dvorkovich – said that ruble devaluation is not on the cards. We maintain our view that the Central Bank of Russia will support the ruble at current levels unless oil price weakness proves deep and prolonged.

22.10.2008 13:34