Gazprom Eurobond at Risk as Russia Sanctions Stigma Grows

By Ksenia Galouchko and Natasha Doff  

Photographer: Andrey Rudakov/Bloomberg

A Gazprom employee stands near to the bitumen processor at the OAO Gazprom Neft oil... Read More

Two months into a drought in Russian corporate bond sales, signs are emerging that companies are becoming anxious to tap overseas markets again. What’s less clear is if investors are interested in buying.
While OAO Gazprom last week joined OAO Alfa Bank in indicating it was making plans to sell bonds, some investors said they’d be reluctant to purchase debt issued by the state-controlled gas producer amid the tightening international sanctions against Russia.
“Our clients wouldn’t be happy with us buying Russian bonds, especially from a state-controlled entity,” Viktor Szabo, who helps oversee $13 billion in emerging-market debt at Aberdeen Asset Management Plc in London, said by phone Sept. 15. “We most
probably wouldn’t be interested in buying.”
Russian companies were frozen out of the Eurobond market after the annexation of Ukraine’s Crimea peninsula in March provoked sanctions from the U.S. and European Union, with the latest penalties announced last week. While Gazprom’s and Alfa’s funding hasn’t been included, buying their debt breaches the spirit of the law if not the letter, said Christian Schiweck from GS&P Kapitalanlagegesellschaft SA in Luxembourg. Brigitte Posch at Babson Capital Management LLC said the debt could be sold if the companies paid a risk premium.

Political Decision

Russia’s dominant gas producer is preparing the sale of about $1 billion in foreign-currency bonds this fall, a Gazprom official said Sept. 8, asking not to be identified because the information isn’t public. Alfa Bank, the largest private lender, may sell $500 million in subordinated debt, Chief Managing Director Alexey Marey said Aug. 19.
Gazprom’s euro bond due July 2018 slumped this quarter, pushing the yield up 179 basis points to 4.64 percent at 12:39 p.m. in Moscow, compared with a 10 basis-point increase to 4.01 percent for the yield on the Bloomberg EUR High-Yield Corporate Bond Index. (BEUH)
“It’s all about politics,” Schiweck, who manages 800 million euros ($1.03 billion) of assets, including Gazprom debt, said by e-mail Sept. 15. “We wouldn’t buy Alfa’s new issuance for the same reasons we wouldn’t buy Gazprom. We are on the cautious side.”
Gazprom should be able to raise financing in Asia, where investors are less concerned by EU and U.S. sanctions, Schiweck and Aberdeen’s Szabo both said.

Risk-Reward

Posch, London-based head of emerging-market corporate debt at Babson, where she manages about $1.8 billion, said Gazprom and Alfa should be able to sell securities at a “correct risk-reward premium.” Even so, investors would “most likely” be very wary of Gazprom bonds, she said by e-mail Sept. 15.
The Gazprom press service and Alfa Bank’s press service declined to comment when reached by phone yesterday.
The natural gas producer must repay about $944 million in euro-denominated debt this year and has about $3.4 billion in euro and dollar debt due in 2015, according to data compiled by Bloomberg. Alfa Bank has no debt due in 2014, with $600 million in dollar bonds to redeem next year, the data show.
Alfa Bank ended a three-month freeze in Russian corporate Eurobond issuance in June, raising 350 million euros of three-year notes at 5.5 percent. OAO Sberbank and OAO Gazprombank followed with their own offerings in the first sales window since Russia’s March annexation of Crimea.

‘Unlucky Investors’

Capital markets seized up again after U.S. penalties in July prevented Gazprombank and Vnesheconombank from accessing dollar financing beyond 90 days. Last week the EU and the U.S. expanded sanctions, further limiting access to foreign financing. They also prohibited the export of goods, services or technology to Russian deep-water, Arctic offshore, or shale projects by five Russian energy companies, including Gazprom.
The yield on the euro-denominated 2017 bond of ABH Financial Ltd., the holding company for Alfa, is up 145 basis points to 5.94 percent since it started trading in June. The company sold the 5.5 percent coupon note at 505 basis points above mid-swaps.
Corporate offerings of foreign-currency bonds since the Crimea incursion slid 69 percent to $7.1 billion from the same period last year, according to data compiled by Bloomberg. The ruble weakened 0.9 percent to 38.67325 versus the dollar today.
“Investors will treat Russian bond issuance cautiously,” Yannick Naud, who helps oversee $190 million as a money manager at Sturgeon Capital Ltd. in London, said by e-mail Sept. 15. “For Gazprom, raising $1 billion could prove challenging,” while “the pain from losses on very recent bank issues is still acute for unlucky investors,” he said.