Morgan Stanley Sees Russian Bond Rout Propelling Buybacks

By Lyubov Pronina and Natasha Doff  

Russian companies are set to seize on sliding asset prices to buy back their bonds, helping stem the third-biggest rout in emerging markets, according to Morgan Stanley and Erste Sparinvest.
Steelmaker OAO Severstal and Far East Shipping Co., whose cash piles both amount to 1.1 times short-term debt obligations, are among companies with an “incentive to buy back bonds,” Morgan Stanley said in a report two days ago. Corporate notes slid 5 percent since new U.S. penalties limited access of some Russian companies to dollar funding on July 16, the most after Ukraine and Venezuela among more than 50 countries in the Bloomberg USD Emerging Market Corporate Bond Index. (BEMC)
European Union sanctions late last month further curbed appetite for Russian assets amid a worsening of the crisis in Ukraine, leaving companies grappling for new funding sources. Severstal, which in May repurchased $288 million of two Eurobonds, is considering using
about $1 billion of proceeds from an asset sale to lower debt, including possibly a buyback, Chief Executive Officer Alexey Mordashov said on July 30.
It could “put a very strong floor in the market,” Peter Varga, who manages $750 million in emerging-market corporate bonds at Erste Sparinvest in Vienna, said by e-mail yesterday. “It’s basically a good option to buy back bonds trading at a discount.”

Bond Selloff

Severstal’s $750 million of securities due in October 2022 slid as much as 4.37 cents from July 16 to a three-month low of 94.50 cents on Aug. 7, sending the yield up to 6.79 percent. The 2018 debt of Far East Shipping lost 14.9 cents to 67.5 cents in the period.
“There will be some cash-rich, non-sanctioned corporates using this opportunity to buy back debt,” thus providing some support for Russian corporate credit, Morgan Stanley said in its research note.
The press office for Far East Shipping declined to comment in e-mailed responses to questions from Bloomberg News. Severstal’s press service declined to comment.
Buybacks will help companies lower debt and boost accounting gains, particularly if they expect the conflict in Ukraine will get resolved, Lutz Roehmeyer, who helps manage about $1.1 billion of emerging-market assets at Landesbank Berlin Investment GmbH, said by e-mail yesterday.

‘No Visibility’

In the market rout that followed President Vladimir Putin’s annexation of Ukraine’s Crimea peninsula in March, companies including Severstal turned the slump in asset prices to their advantage by repurchasing debt.
While companies may benefit in the short term, a prolonged standoff poses risks, according to Roehmeyer and Dorothea Froehlich, a Zurich-based money manager at MainFirst Schweiz AG.
Russia retaliated last week against sanctions with a food-import ban on products from the U.S., EU, Australia, Canada and Norway. Tension escalated yesterday as Ukraine blocked a Russian aid convoy from crossing into its territory.
“There is no visibility on how long the standoff with the West will continue,” Froehlich, who helps oversee $750 million in emerging-market assets, including Russian corporate bonds, said by e-mail yesterday. “In such an environment, you don’t want to spend cash. You hoard it.”
OAO Gazprom Neft, which was listed in Morgan Stanley’s note, sees no benefit from buying back bonds, Chief Financial Officer Alexey Yankevich said on a conference call yesterday. OAO Phosagro, another company cited in the report, doesn’t plan to buy back Eurobonds, the company’s press service said yesterday. The fertilizer producer’s bonds due in February 2018 fell 4.1 cents on the dollar this month to 94.8 cents today.
“It’s basically a good option to buy back bonds” for companies with surplus funds, or those having low indebtedness with good cash flow and with good access to financing, Varga of Erste Sparinvest said.