Corporate Russia is issuing debt at a record pace in 2004 but rising borrowing costs, a short lived banking crisis and a messy dismantling of oil major Yukos are likely to slow the pace of new deals, portfolio managers say.
In 2003 Russian corporations sold more debt than ever, fuelled by low global interest rates, a strong economy awash in petro-dollars, and investors generally eager to put money into higher yielding emerging debt.
According to financial data provider Dealogic, Russian corporations issued a record $6.1 billion in debt in 2003 and so far in 2004 have tapped the capital markets for $4.05 billion with five more months left in the year.
But the performance of Russian corporate debt has not been stellar over the last two months as uncertainty over the country's economic and political direction and market volatility have increased, fund managers say.
"I would expect less issuance in the second half of the year and a tough time for Russian corporates to issue into the capital markets," said Michael Ganske, emerging markets portfolio manager at DWS investments in Frankfurt.
"Looking forward it will be tough to see the same development as last year because now investors are more critical regarding Russian risk and more critical regarding the corporate side because here you never know," said Ganske.
Portfolio managers are quick to note that Russia's macroeconomic fundamentals such as bulging hard currency reserves and strong economic growth make it an enticing place for investment.
Russia does not need to issue sovereign bonds which means it won't crowd out corporate issuers, however interest rates, Yukos and banking sector concerns will hamper new deals.
Rising US benchmark interest rates is the top reason for many emerging market asset managers why Russian corporations may slow their rush to issue new debt.
US rate concerns is closely followed by the controversial judicial assault on oil major Yukos that could drive it into bankruptcy has soured some investor opinion of Russian assets, according to a Reuters poll.
And finally, investors may not be too enthusiastic to buy corporate debt, especially from banks.
A crisis of confidence ensued after the central bank withdrew licences from two small banks and was forced to orchestrate the bailout of a top-20 bank. A run on deposits at Russia's largest private bank also helped to lay bare the desperate need for banking reforms.
"Overall, Russia's sovereign spread over US Treasuries is not very generous. This tells me looking forward I want to be more defensive, so less leveraged risk in Russia means less corporate Russian exposure in a global emerging market strategy," said Ganske.
As the US Federal Reserve sets out on a cycle of raising interest rates, borrowing costs for Russian corporations will increase, forcing them to jump into the market at a moment's notice.
"I think that companies which did not place the bonds in the first quarter of the year made a slight mistake," said Pavel Mamai at Renaissance Capital in Moscow.
"Many were waiting for better conditions. I think the right strategy for Russian companies is to use every improvement in the market to place eurobonds because in the coming years, costs will grow," Mamai added.
But it is not just any company that can issue bonds nowadays, managers say.
For example, gas monopoly Gazprom last week increased the size of its latest bond issue by $250 million to $1.25 billion, the first investment grade Russian corporate debt offering.
"With a company like Gazprom, I have no concerns at all about buying their bonds because for me they are quasi-sovereign whereas with others you have to be careful about liquidity after the sale," said Raphael Kassin, head of emerging markets fixed income at ABN AMRO Asset Management in London.
One Gazprom bond that matures in 2034 is yielding 9.0 percent versus the Russian benchmark sovereign bond that matures in 2030 only yields 7.92 percent.
Contrasted against Gazprom's successful deal is Bank of Moscow's decision to wait for the summer lull to pass before deciding how to sell $200- $300 million of eurobonds.
"What is happening now with (Bank of Moscow) is not the most successful attempt. I think the major reason is caution by foreign investors toward Russia," said one fund manager at a dedicated Russian fund in Moscow who requested anonymity.
"Bank of Moscow suffered because of the banking crisis. Banks in Russia are much riskier investments compared with industrial companies," said the fund manager.
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