Currently, fixed income issuance in Russia is made up predominantly of plain vanilla bonds, in the form of corporate notes and bonds issued by the government and a number of local authorities.
However, the complexion of the bond industry will look increasingly diverse by the end of this year as new sectors come to market, according to Mikhail Galkin, director of fixed income research at MDM Bank.
“Russia’s banking sector is developing extremely quickly and banks need to grow and stay competitive. For that they need funding and preferably as cheap as possible,” said Mr Galkin, who was speaking at this year’s Bond Investors Congress in London.
According to Mr Galkin, Russian banks, through the use of securitisation for instance, will be able to reduce their finance costs and also address the growing appetite for debt from a different class of investors, compared to the emerging market investor base banks currently sell their unsecured bonds to.
“Until 2006 we have been seeing Russian banks issuing primarily vanilla unsecured bonds. However, with the rapid growth and development of such segments as point-of-sales loans, car loans, credit card operations and mortgages, the asset base of top Russian banks has reached the critical size where they now have enough assets to do deals involving asset-backed securities,” he explained.
“ABS will allow even the niche and small banks, sometimes unrated, to tap the international debt markets, once they have at least $100m in homogeneous assets (car loans and mortgages) and arrange them into a rated securitisation deal,” added Mr Galkin.
The bond market in Russia was worth around $180bn (€137bn) at the end of 2006, with 56 per cent of notes in the form of either corporate or sovereign eurobonds. The remainder comes from corporate or sovereign debt issued in roubles.
Oil and gas, finance and the transport industries are the sectors most active in Russia’s bond market. VTB, the finance group 99 per cent owned by the government, and Gazprom, Russia’s largest gas producer, are expected to launch multi-tranche deals shortly as appetite grows for high yields debt.
Investors in rouble-denominated bonds can typically enjoy coupon rates with spreads of 60-90 basis points over US treasury notes of the same issuer/same duration, as a result of how yields are calculated on the local currency.
Growth rates in Russia’s fixed income space would continue to be strong in the corporate sector, supported by a backdrop of virtually no defaults, though the upside in sovereign bonds “is now very limited”, said Mr Galkin.
NM
