Page 96 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
Market development
Russia's corporate domestic bond market took off in 2001 and doubled in size nearly every year both in terms of size of bond issued and the volume of total bonds issued.
Both the number and volumes of bonds issued in 2006 doubled. A total of 290 corporate and municipal bonds were issued over the course of the year with a total value of RUB543bn (US$20.9bn), according to agency CBonds. A sector breakdown is given in Figure 4.18.
The domestic ruble-denominated bond market remains an attractive form of financing for most companies and a convenient way to tap into the growing pool of liquidity in the otherwise fragmented banking sector.
The driving force of the market remains companies' huge demand for investment capital. By the end of December 2006, total corporate bonds outstanding hit US$34.3bn, and exceeded the outstanding volume of federal bonds (US$33.3bn) for the first time.
Banks have become the biggest issuers and Gazprombank was the most active in 2006, tripling the number of domestic bonds it issued year-on-year. VTB was next, raising RUB52bn (US$2bn). Rosbank was Russia's most active commercial bank on the domestic fixed income market, with RUB40bn (US$1.5bn) of issues in 2006, putting it in third place overall.
The 10 largest bonds accounted for a quarter of the total issues. Banks account for 29% of the total outstanding bonds as of the start of 2007 – three times more than any other single sector. The rapid growth of retail lending and the growing bank loan portfolios will continue to feed demand for bonds for the foreseeable future.
Corporate bond issuance is not expected to slow. The total volume of major corporate bond placements due in 2007 was estimated at US$8bn at the start of the year and it is likely to increase through the year. The largest bond supply is expected to come from banks (US$3.1bn), retailers (US$1.6bn) and the power sector (US$1.3bn).
Even as the established companies become more leveraged, or tap other sources of financing, such as IPOs or syndicated loans, there is a never-ending stream of fresh issuers as the medium- size companies increasingly come to market to raise money.
And in 2007 there will be huge demand from the power sector, as the privatisation of state-owned utilities company UES moves into full swing. UES says that it needs to spend US$118bn by 2010 on building new generating capacity and upgrading existing infrastructure, a substantial proportion of which will be financed by debt, including bond issues. In 2006 the first in this wave of power- bonds were issued by the generating companies OGK-5, OGK-3, HydroOGK, and MOESK.
Secondary market trading
The trading on the secondary market is growing as both the liquidity and depth of the market increases. As of the start of 2007 the total trading volume on the local market is US$500m per day, with corporate bonds accounting for 80% of turnover.
In 2006, the average trading volume of corporate papers doubled to US$400m and is likely to grow further, along with the growing number of good quality and large issues.
As a share of total debt outstanding, the monthly average turnover of local debt remains around 15%, which means that over a one-year period local bonds have changed hands roughly twice (compared to three to five times for municipal bonds).
This sort of ratio is generally evidence that trade intensity is growing at the same pace as the volume of the market. At the same time, the relatively low liquidity of federal bonds in comparison to their total debt outstanding is a result of pension funds' significant long positions in sovereign papers.
Foreign hedge funds own about half the debt, as the yields plus ruble appreciation are attractive. However, this means the market is volatile as ruble appreciation will slow if oil prices fall.
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