Page 105 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
Bonds and real estate
Construction is now the third biggest contributor to economic growth and the advent of mortgages means that the sector is unlikely to slow for several years. In all, real estate prices have grown 253% in the primary market and risen 288% in the secondary market between 2000 and 2005, while inflation was only 189% over the same period. Construction companies are increasing- ly turning to the bond market to raise money to finance developments, as shown in Table 4.8.
Table 4.8: Bonds connected to real estate borrowing (RUBm, US$m, %)
Issue
Glavmosstroy-2 Mirax-1 Mirax-2 Mirax-8 SU-155
PIK-5
LSR
LSR-Invest Adamant-1 Adamant-2 HORUS 07
Open Investments Don Stroy
ZUN-1 (LenspecSMU) ZUN-2 (LenspecSMU)
Amount
RUB4,000 RUB1,000 RUB3,000
US$100 RUB1,500 RUB1,120 RUB1,000 RUB2,000
RUB500 RUB2,000 US$50 US$150 US$150 RUB1,000 RUB1,500
Coupon (%)
11.50 11.50 10.99
9.70 10.50 10.20 11.00 10.70 13.10 11.25
9.88
9.13 10.00 11.25 11.69
Put
20/09/07 None None 23/01/07 None 22/05/07 22/03/07 03/06/08 None 24/05/07 None None 01/11/08 05/05/08 28/07/08
Maturity
17/03/11 19/08/08 17/09/09 27/02/08 30/03/07 20/05/08 20/03/08 08/12/09 05/06/08 20/05/10 30/05/07 09/11/07 01/11/10 22/04/10 20/01/10
YTW (%)
TRUST
Price (%)
100.88 101.05 100.63 100.19 100.09
99.65 100.02 100.00** 100.25 99.86 100.00 100.50 100.25 100.00 99.90
Tens of billions of dollars are being poured into real estate by
their own resources. At the end of last year, construction was
according to Trust Bank in Moscow, or US$113bn in 2005, the latest figures available.
In an effort to keep up with demand, companies are leveraging up to finance the construction frenzy. Construction companies issued four CLNs worth a total of US$450m and 18 ruble bonds worth a total of US$850m in 2006.
Residential real estate is the main source of growth and is expected to drive the sector for at least the next decade. The volume of residential construction grew by 44% between 2000 and 2005, or 7.5% a year, which is on a par with GDP growth over the same period. However, in 2006, residential growth rates accelerated to 12% as 48m square metres were added with a market value of US$60bn, according to Trust Bank. That is about an extra one square metre per person – Putin reiterated this in his state of nation speech in April – for every adult in the country against the average of 20.8 square metres they currently inhabit – less than half the European average. The government estimates that there is a deficit of 1.7bn square metres that will take 16 years to build at current rates of construction.
Ruble Eurobonds
Ruble Eurobonds made their debut in 2005, with the issue of a RUB2.5bn bond by the Russian Bank for Development (owned by telecoms conglomerate AFK Sistema) in the form of CLNs.
The market expanded rapidly in 2006 with seven new issues worth a total of RUB41.4bn (US$1.6bn) with four of them in the form of CLNs (see Table 4.9).
As elsewhere in the fixed income market, banks dominate the issues and are likely to continue to dominate going forward.
The ruble Eurobonds are especially attractive for foreign investors as they are settled and cleared by Euroclear, whereas foreigners buying ruble-denominated bonds on the Russian exchanges are exposed to the greater counterparty risks of dealing with the National Depositor Company, the dominant bond depository, as well as being liable to both Russian capital gains and interest taxes. Buying ruble Eurobonds avoids both these problems.
10.52 MO 10.48 MO 10.99 MO
9.72 MP 10.58 MO 11.45 MP 10.68 MO
– MO 12.64 MP 12.06 MP 10.01 MP
8.71 MP 10.22 MO 11.36 MP 11.61 MP
*MP – Market Perform, MO– Market Outperform, MU – Market Underperform **-<<What if market...>>
Source: MICEX, Bloomberg, TRUST
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banks and oligarchs, funded out of contributing 15% to GDP growth,