Even `Bad' Bond Market Can't Keep Gazprom Away as Payments Loom

Russian borrowers are being forced into a bond market that a Gazprom PJSC executive labeled as "bad and unfair" just two months ago.

Since then, conditions have only worsened as oil prices tumble and China’s meltdown draws investors to havens. Yet Gazprom and GMK Norilsk Nickel PJSC are said to be among companies trying to thaw a nine-month freeze in benchmark Eurobond issuance. Their plans underscore how a wall of $117 billion in external Russian corporate debt due in the coming year is colliding with markets that show no sign of forgiveness as the Federal Reserve gets set to raise interest rates.

“We don’t care for Russian corporates at the moment, we view the situation in Russia as unattractive with current oil prices and valuations,” said Philipp Good, a money manager on a team overseeing $3 billion of global bonds at Fisch Asset Management Ltd. in Zurich. He added he “wouldn’t touch” Gazprom bonds even if they were priced at a premium to the market level, offering 600 basis points more than U.S. government benchmarks.

Average yields paid by Russian companies on their dollar-denominated bonds have increased more than 20 basis points, or 0.2 percentage point, since Gazprom Deputy Chief Executive Officer Andrey Kruglov complained about them in June. The cost of default protection on Russian government debt surged the most after Brazil last month among eight emerging markets that rely on China for trade, according to data compiled by Bloomberg and JPMorgan Chase & Co.

Gazprom, the world’s biggest natural-gas exporter, has $1.7 billion of bonds maturing in November and needs to raise at least $35 billion in net debt by the end of 2018 to finance its investment projects which it won’t be able to raise locally, according to Sberbank CIB estimates. Gazprom won’t rule out borrowing if conditions are favorable, the company’s head of financial department Alexander Ivannikov said Sept. 1. Gazprom’s press service declined to comment when contacted by Bloomberg on Friday.

Concern about the impact of sliding oil prices and the slump in China on a nation now overshadow sanctions incurred from Russia’s involvement in Ukraine, said Sergey Dergachev, a senior money manager who helps oversee $13 billion of emerging-market debt at Union Investment Privatfonds GmbH in Frankfurt. Russia is the world’s largest energy exporter and counts China as its biggest trading partner.

“Russia specific issues have fallen somewhat in recent months,” Dergachev said by e-mail Thursday.

Gazprom may tap the market for a 1 billion-euro ($1.1 billion) bond in October, according to a person familiar with plans. Norilsk Nickel, Russia’s largest mining company, may sell at least $500 million in September, two people familiar with the matter said last month, declining to be identified. 

Bond Penalty

Since Russia’s annexation of Crimea in March of last year, corporate bond yields have surged more than 100 basis points to 8.27 percent, according to JPMorgan indexes. The yield investors demand to hold Gazprom’s 2037 bonds have climbed about 60 basis points during that period, to 8 percent, even though it hasn’t been sanctioned.

“The interest rates on the market do not correspond to the quality of such a company as Gazprom,” Kruglov said June 18 at an investment panel in St. Petersburg. At the time he said Gazprom would avoid foreign bond markets in 2015.

Issuance Drought

Russian corporates sold $564 million in foreign currency bonds this year compared with $10 billion in 2014 which was less than a quarter of the amount the year before, Bloomberg data show.

“If they sell successfully others may follow,” Alexey Bulgakov, an analyst at Sberbank CIB, said by phone from Moscow on Thursday. The largest private oil producer Lukoil PJSC, iron-ore miner Metalloinvest Holding Co., as well as Eurochem Mineral & Chemical Co. and OAO Phorsagro may follow suit, he said.

Norilsk Nickel, which gets 95 percent of its revenue from exports, hasn’t tapped the international capital markets for more than two years. It has foreign-denominated bonds due in 2018, according to Bloomberg data.

Gazprom’s sale of $700 million one-year notes in November marked the last benchmark-sized Eurobond. OAO Ak Bars, a bank in Russia’s Tatarstan region, in July raised $350 million in three year-notes yielding 8 percent. That followed a $137 million issue by pig-iron maker OAO Koks in the same month.

“I do not think we will see a wave of Russian credits coming to the market as general sentiment towards emerging markets is still shaky,” said Dergachev at Union Investment.

(For more Russia Credit columns, see NI RUSCREDIT.)