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


Tags: portfolio management

Sep 25, 2012
Fridman’s X5 With No CEO Pays Premium to Magnit: Russia Credit

The previous strategy based on growth through mergers and acquisitions has run its course, according to Vladimir Potapov, global head of portfolio management at VTB Capital Investment Management. “X5 Retail currently doesn’t have a permanent CEO, which worries investors,” Potapov said by e-mail yesterday.

X5 Retail Group NV is selling bonds for the first time in three years at a premium to competitor OAO Magnit as the Russian supermarket chain part owned by billionaire Mikhail Fridman searches for new management.

X5 plans to start offering 5 billion rubles ($160 million) of three-year bonds on Sept. 28 with a yield of 9.73 to 10.15 percent, Moscow-based OAO Alfa Bank, one of three banks arranging the sale, said in an e-mailed statement. Magnit issued a similar-sized bond yesterday at 8.9 percent, compared with a yield of about 2.9 percent paid by France’s Carrefour SA on 600 million euros ($775 million) of notes in September.

The retailer is looking to regain its footing after Chief Executive Officer Andrei Gusev quit in July and Jan Fuchs, who ran the hypermarket unit, departed the following month. While first-half sales rose 7.2 percent, billionaire CEO Sergey Galitskiy’s Magnit reported a 33 percent surge.

“X5 has issues with the management and strategy, while Magnit has a clear strategy,” Konstantin Nemnov, a director of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg, which manages $1.6 billion of debt, said yesterday by phone. “Galitskiy is doing a really great job. Magnit is much stronger at the moment.”

Refinancing Needs
Proceeds from the debt sale will be used for refinancing loans to diversify the company’s creditors, Vladimir Rusanov, a spokesman for X5, said in an e-mailed response to questions. X5 pays 2.5 percentage points more than the MosPrime rate, or about 9.14 percent based on yesterday’s three-month level, for a three-year loan taken in 2010. Rusanov declined to comment on the search for a new chief executive and its effect on the sale when contacted by phone.

The company is rated B+ at Standard & Poor’s, four steps below investment-grade status and one level behind Krasnodar-based Magnit. Now Europe’s biggest retailer by market value after Cheshunt, U.K.-based Tesco Plc, Magnit has a capitalization of $16.9 billion compared with $6.12 billion for Moscow-based X5, according to data compiled by Bloomberg.

Gusev’s resignation had a “negative strategic effect” and that the company is yet to find a replacement “is a reflection of the fact that X5’s strategy is not as clear as that of Magnit,” Dmitry Turmyshev, an analyst at Broker Credit Service in Moscow, said by phone yesterday. “The success of the sale will depend on how investors perceive their credit quality,” he said.

Ruble Declines
The ruble weakened 0.4 percent to 31.1600 per dollar by the 7 p.m. close in Moscow yesterday. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 31.6075 per dollar in three months.

The yield on the government’s domestic ruble bonds due in June 2017 slid one basis point to 7.56 percent. The yield on Russia’s dollar bonds due in April 2020 fell eight basis points to 2.88 percent yesterday. Russia’s international ruble bond due in March 2018 declined, boosting the yield five basis points to 6.23 percent. Russia is rated Baa1 by Moody’s Investors Service, the third-lowest investment grade.

The extra yield investors demand to hold Russian government bonds rather than U.S. Treasuries increased five basis points to 206, according to JPMorgan Chase & Co.’s EMBIG indexes. The difference compares with 163 basis points for debt of similarly rated Mexico and 153 basis points for Brazil, rated one step lower than Russia.

Protection Cost
The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose eight basis points to 150, according to data compiled by Bloomberg. The default swaps cost 12 basis points less than contracts for Turkey, which is rated three levels lower at Ba1 by Moody’s. 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.

X5 is joining ruble-bond sales from lenders OAO Moscow Credit Bank and OAO Pervobank to metals producer OAO Novolipetsk Steel as a 12 percent increase this quarter in the price of Urals crude, the nation’s chief export earner, helps drive down yields for corporate issuers.

“It’s a great moment in the market right now,” said Konstantin Kostrub, head of fixed-income trading at ING Groep NV in Moscow, said yesterday. “The company is taking advantage of that and borrowing at affordable rates.” While the chain’s growth slowed because of the management shakeup, credit quality will improve after the issuance, he said by phone.

Chain Expansion
X5 added 700 stores with the 2010 purchase of discount retailer Kopeyka in a 2010 transaction valued at 51.5 billion rubles including debt. The Kopeyka acquisition followed that of the Karusel hypermarket chain in 2008 and Paterson brand in 2009. X5 itself was established in 2006 when the Pyaterochka and Perekrestok chains merged. The company operated 3,298 stores in Russia and Ukraine at the end June this year, according to its website.

The previous strategy based on growth through mergers and acquisitions has run its course, according to Vladimir Potapov, global head of portfolio management at VTB Capital Investment Management. “X5 Retail currently doesn’t have a permanent CEO, which worries investors,” Potapov said by e-mail yesterday.

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