Art of investments


Comment of Vladimir Potapov, Global Head of Portfolio Management Business at VTB Capital Investment Management to Bloomberg

Tags: portfolio management

Jan 29, 2013
VTB Capital Says Quality Counts as Bond Market Stratifies: Russia Credit

Russian investment-grade corporate ruble bonds are this year’s best bet as they offer higher yields than government securities and greater potential for price gains than foreign-currency debt, according to VTB Capital.

The yield premium investors demand to hold Russian corporate bonds over government notes will fall this year by as much as 100 basis points, said Vladimir Potapov, global head of portfolio management at VTB Capital Investment Management, a unit of Russia’s second-largest bank. The spread between OAO Russian Railways bonds due in April 2019 and similar-maturity Russian government debt has dropped to 96 basis points from as much as 146 in December.

Investors seeking higher yields than near-zero rates in the U.S. and Europe flocked to Russian Eurobonds last year, helping drive down the average rate on corporate debt by 170 basis points, according to JPMorgan Chase & Co. indexes. Ruble debt from issuers including OAO Rosneft and OAO Gazprom, which share the government’s investment-grade category, will benefit this year as the country opens the market to foreign investors through such systems as Euroclear Bank SA, VTB Capital said.

“We’ll see a shift in investor interest to the first-tier corporate ruble bonds,” Potapov, who manages the equivalent of $4.8 billion, said in a phone interview from Moscow on Jan. 23.

“The next rally should happen in that segment. Eurobonds almost entirely drained their growth potential last year.”

Euroclear Start
Finance Minister Anton Siluanov said in October that the government may allow Euroclear access to sovereign and corporate debt at the same time. Euroclear plans to activate its account “imminently” to allow settlement of government debt, Stephan Pouyat, Euroclear’s head of product management global reach in Brussels, said by phone yesterday. Corporate debt will be covered at a later stage, Martin Gregson, a spokesman for the Brussels-based organization, said by e-mail.

The yield on the government’s ruble OFZ bond due in July 2022 has fallen 22 basis points, or 0.22 percentage point, this year to 6.63 percent, according to data compiled by Bloomberg. That compares with a peak of 10.5 percent in September.

There is no potential for government debt to gain after investors bought into the segment in anticipation of a start to Euroclear’s operations this year, according to Denis Poryvay, an analyst at ZAO Raiffeisenbank in Moscow.

Domestic Bonds
The central bank’s move toward inflation targeting and stricter bank capital rules will boost the appeal of domestic investment-grade bonds, Poryvay said yesterday by phone. Bank Rossii is targeting inflation of as low as 5 percent this year compared with a rate of 6.6 percent in 2012.

Banks will gradually exit second- and third-tier bonds as the central bank tightens regulations on reserves, increasing requirements for non-investment grade debt, to help improve capital structure, Alexei Bizin, who manages about $400 million in Russian assets at Third Rome LLC in Moscow, said by e-mail yesterday.

“We’ll see the ruble bond market separate into segments this year,” he said.

Ruble Drops
The ruble weakened for the first day in six, losing 0.5 percent to 30.1850 per dollar by 8:05 p.m. in Moscow.

Russia is ranked BBB, by Fitch Ratings, the second-lowest investment-grade category. A drop in the country’s sovereign dollar bonds due in April 2020 cut the yield 10 basis points to 2.61 percent. The yield on Russia’s international ruble bond due in March 2018 rose two basis points to 5.753 percent.

The cost of protecting Russian debt against non-payment for five years using climbed two basis points to 134, according to data compiled by Bloomberg. That compares with 121 basis points for contracts on Turkey, which is rated one step lower by Fitch at BBB-. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose one basis points to 156, according to JPMorgan indexes. The difference compares with 158 for debt of similarly-rated Mexico and 138 for Brazil.

Russian companies raised a record $41.4 billion in international bond offerings last year, 34 percent more than the previous peak in 2007, according to data compiled by Bloomberg.

There is potential for ruble debt to appreciate this year, while central bank steps to curb inflation and market liberalization will boost investor appetite, VTB Capital’s Potapov said.

“All this has had a positive impact on how investors view the risk of investing in the Russian bond market,” he said.

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