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Russia, CIS, Europe & Turkey Credit Markets Brief: 13 July – 28 July

Russia, CIS, Europe & Turkey Credit Markets Brief: 13 July – 28 July

Gazprom tapped the international markets – Alfa Bank issued a RUB10bn Eurobond – AFK Sistema declared technical default on bonds –– Halyk Bank acquires Kazkommertsbank – IBA plans to restructured approved by shareholders – Greece returned to the capital markets – Halbank to issue a US$2bn bond in the international markets

 

Russia

Russian gas giant, Gazprom issued international bonds for CHF500mn maturing in 2022 with a 2.25% coupon. Notes were sold at a price of 100% with an initial yield of 2.25%. Deutsche Bank, Gazprombank, JP Morgan and VTB Capital managed the transaction.

Russia’s Alfa Bank issued a RUB10bn 4-year Eurobond with an 8.9% coupon, on the looser end of its 8.75-9% final guidance. Alfa Bank itself and Citi organized the transaction.

Ksenia Yudayeva, first deputy chairwoman of the Russian Central Bank, said there was scope for lowering the key rate further, RIA news agency reported. After cutting the key rate three times this year, the CBR is set to hold another board meeting on rates today.

Russian banks’ profit margins could take a hit if the Central Bank continues with its push to reach the 4% inflation target by the end of the year. According to a report put together by Raiffeisen Bank, the current average margin in the Russian banking sector stands at 4.9%, but this could drop by as much as 2% if the CBR were to reduce the benchmark rate to 6.5-6.75%, as it signalled it intends to do.

German conglomerate Siemens filed a lawsuit against a Russian state firm after two gas turbines it sold for use in Russia turned up in Crimea, a region subject to EU sanctions on energy technology. The scandal that ensued could force the German company to reassess its presence in Russia, with some local news outlets reporting that the Germans could pull out from joint ventures with Russian entities. Germany and the European Union are under pressure to show they take potential sanctions-busting seriously after Reuters disclosed that Russia had moved the turbines to Crimea and that a firm part-owned by Siemens had been hired to help install them.

AFK Sistema declared technical default on bonds following an asset freeze implemented by a Russian court as part of Rosneft’s lawsuit against the conglomerate. State-controlled Rosneft has accused Sistema of stripping assets from Bashneft, an oil producer now owned by Rosneft, but which was previously held by Sistema. Initially, Rosneft sought to collect RUB106.6bn (US$1.8bn) in damages from Sistema, but later upped its claim to RUB17bn. The next court hearing on the case will be held on July 19.

Severstal, one of Russia’s largest steel producers, reported a 20% rise in earnings for the second quarter as the country’s economic recovery boosted domestic demand, but said a strengthening global market was tainted by worries over threats of trade tariffs. Earnings before interest, taxation, depreciation and amortisation rose 19.6% to US$629mn over the past 12 months, driven by a 22.2% rise in revenues to US$1.93bn. Both were roughly in line with analyst estimates. Net profit fell 77.6% to US$136mn due to a one-off non-cash charge.

Exxon Mobil Corp. says it is legally challenging a US$2mn fine assessed against it by the US Treasury Department for “egregious” violations of sanctions against Russia when now-Secretary of State Rex Tillerson was chief executive. The Treasury said that the oil company violated Ukraine-related sanctions by signing eight legal documents related to oil and gas projects in Russia with Igor Sechin, Head of Rosneft OAO, who is on Treasury’s list of sanctioned Russian nationals. The violations occurred from about May 14-23, 2014, while Tillerson led the company, Treasury’s Office of Foreign Assets Control said in a statement. Exxon responded in a statement that it has gone to U.S. District Court in Dallas to challenge the Treasury action. A spokesman for the oil company, Scott Silvestri, called the Treasury Department fine “fundamentally unfair.”

Russia's Central Bank announced it had sent to the prosecutor’s office documents confirming its position on troubled lender Bank Yugra, which it has temporary placed into administration. Russia's top prosecutor had demanded earlier this month that the CBR reverse decisions to bring in temporary administrators to Bank Yugra and overturn a moratorium on creditor claims to the bank.

Russian inflation is closing on the target level and inflation expectations are stabilizing, potentially opening the door for the regulator to cut interest rates more, it said in a recent financial review. Consumer inflation in Russia unexpectedly accelerated to 4.4% in June, challenging the central bank's aim of bringing inflation up to 4% this year. Despite the latest pickup, the Central Bank may still reach its target as core inflation, which excludes prices for food, fuel and utility tariffs, slowed to 3.5% in June, analysts have said.

Russian oil major Rosneft is to offer two exchange bond issues totalling RUB266bn, Russia’s PRIME news agency reported. The bond issues are worth RUB90bn and RUB176bn, respectively.

Russia and Kuwait will seek to bolster their partnership in the oil and gas sector, with a particular focus on LNG, according to TASS, a Russian news agency. Russia's Minister of Energy Alexander Novak is due to meet with Kuwait's Oil Minister Essam Al-Marzouk on the sidelines of a crucial OPEC, where the two will discuss new trade opportunities in oil and gas, potentially an extension of an MoU signed between Gazprom and Kuwait National Petroleum Co. in 2015. Kuwait is currently in the process of building a new LNG production and shipping terminal due for completion in 2020.

Russia's Ministry of Finance sold RUB30bn (approx. US$502mn) of OFZ treasury bonds at auction this week. According to the Ministry, it sold RUB15bn in 2020s and RUB15bn in 2022s at yields of 8.12% and 9.74%, respectively.

Promsvyazbank, a Russian privately owned lender, issued international bonds for US$500mn with an 8.75% coupon. The notes were sold at a par with Gazprombank, Promsvyazbank, RBI Group and Renaissance Capital acting as joint bookrunners

Russian transport leasing state-owned company GTLK is looking to select banks to organize a planned US$85-170mn 7-year Eurobond issuance. The issuance is expected to launch on September 1 2017.

Russian Copper Company, the country's third largest copper producer, is currently in talks with banks to raise fresh funding for a new plant to be constructed at the Tominsk copper deposit in the Urals region. The company is in talks with Sberbank, VTB and Gazprombank to raise a portion of the RUB65.9bn (approx. US$1.1bn) project, the company's CEO told Reuters.

 

CIS

Kazakhstan’s largest bank has completed a merger with its biggest rival in a US$560mn, deal that policymakers hope will stabilise the country’s fragile banking sector. Halyk Bank announced it had paid KZT185bn (US$560mn) for 96.8% of the shares in Kazkommertsbank, the country’s second-largest lender. The takeover will give Halyk control of around 37% of the country’s banking market, almost four times more than its next challenger.

Kazakhstan's Central Bank left its base rate steady at 10.5% on stable inflation and said an expected deceleration of inflation "increases the possibility of lowering the base rate both in the short-run and in the horizon of the upcoming 12-18 months." The National Bank of Kazakhstan (NBK) has cut its rate by 150bp this year and by 650bp since the start of the easing cycle in May 2016.

International Bank of Azerbaijan (IBA) announced that its plan to restructure US$3.3bn of its debt won approval from creditors holding 93.9% of affected credits. Claimants with 94.1% of the principal amount cast votes, the state-run lender said in a statement quoted by Reuters. Two-thirds support was needed for the plan to be adopted.

Ukraine's Central Bank will reportedly ask the Auditing Chamber of Ukraine to delist the local unit of PwC, a move that would effectively prohibit the accounting firm from auditing Ukrainian companies, according to Reuters. Analysts believe the move is intended to punish PwC for its failure to flag risky lending practices and PrivatBank, the country's largest lender – which was bailed out and recapitalised in December last year.

Ukrainian iron ore producer Ferrexpo, which last year sought to restructure its balance sheet, is looking at raising a new 4-year pre-export facility, according to local press reports. The company is reportedly looking to raise between US$300mn and US$350mn, and a report in Reuters suggests BNP Paribas is arranging the transaction. The company last hit the loan market in 2013, securing a US$350mn 5-year loan maturing in August next year.

The High Court of London has ruled that Ukraine pay GBP2.8mn (approx. US$3.6mn) in compensation related to its 2015 default on US$3bn in Eurobonds issued in 2013. The Court ruled that Ukraine must also pay the par value of the Eurobonds in addition to a US$75mn coupon payment and penalty interests on that amount. An appeal to the decision is scheduled for review in January 2018.

The National Bank of the Republic of Belarus is letting domestic banks use blockchain technology to transmit bank guarantees, part of a wider strategy aimed at introducing the technology into the securities marketplace. The Central Bank plans to apply the technology to the Belarusian over-the-counter securities market and the stock exchange, a move aimed at increasing register transparency in the capital markets. 

 

Europe

Moody's affirmed Latvia's A3 rating, maintaining stable outlook, noting that the Baltic country’s long-term local and foreign-currency bond and deposit ceilings remain unchanged at AAA. The agency added that the stable outlook balanced the assumption policies supporting country's economic resilience will be maintained against presence of geopolitical risk in region. Moody's believes Latvia's creditworthiness will continue to remain constrained by geopolitical risk posed by "volatile relations" with Russia.

Hungary's Central Bank kept interest rates on hold, with any price pressures from strong economic growth seen as unlikely to lift inflation beyond its 3% target level this year or next. The bank signals a further loosening in monetary conditions with unconventional tools, saying inflation would reach its target in a sustainable way only in early 2019.

PKO Bank Polski, a Polish lender, issued international bonds for EUR750mn maturing in 2021 with a 0.75% coupon. Notes were sold at a price of 99.792% with an initial yield of 0.803%. Banco Santander, BNP Paribas, Citigroup and Goldman Sachs managed the transaction.

The European Commission said it would start legal action against Poland over an overhaul of the judiciary that it says undermines the independence of judges, despite the Polish President's veto of key parts of the controversial legislation. The new laws effectively give the national assembly the ability to elect members of a committee that then choose the country's Supreme Court judges. European Commission President Jean-Claude Juncker said it could suspend its voting rights in the EU despite the threat of a veto from Hungary, which has largely supported Poland's efforts to reform the judiciary.

Latvian regulators fined two more lenders over involvement in attempts to circumvent international sanctions on North Korea, bringing the total number of banks fined to 5, with the investigation continuing. Norvik Banka agreed to pay €1.3mn (US$1.5mn) and Rietumu Banka will pay EUR1.6mn, the Financial and Capital Market Commission said Friday in a statement, quoted by Bloomberg. The Baltic country of 2 million people has seen foreign cash held on deposit fall 28% since the end of 2015 because of the tighter rules. Three other Latvian banks were fined in June for similar violations.

Greece officially launched its first bond in three years, a 5-year transaction that will in part be used to buy back existing notes due 2019. The plans were initially delayed in order to conclude a bailout review. Bank of America Merrill Lynch, BNP Paribas, Citigroup Global Markets, Deutsche Bank, Goldman Sachs, and HSBC were mandated to lead the sale.

Hungary's Central Bank has added HUF50bn (approx. US$190.96mn) in additional banking system liquidity through one and 12-month foreign exchange swap tenders this week. The tenders increase the total amount of liquidity injected by the Central Bank to HUF900bn, according to official statistics.

 

Turkey

According to Turkish Central Bank governor, new data indicates a strengthening recovery in economic activity and that an upward revision in global growth forecasts and subdued volatility were underpinning risk appetite. In a presentation to members of the Turkish banks' association in Ankara, he reiterated that the bank's tight stance in monetary policy will be maintained until the inflation outlook displays a significant improvement.

Turkey’s President Recep Tayyip Erdogan tried to act as a mediator in the Gulf crisis with visits to Saudi Arabia, Kuwait and Qatar, even as his country entrenches its military presence on Qatari soil. “Qatar’s sovereign rights must be protected,” Defence Minister Fikri Isik said ahead of Erdogan’s July 23-24 visit, according to multiple media reports. “On the other hand, we are saying that primarily Saudi Arabia and all other countries should sit down at a table and solve this through peaceful dialogue. To that end, Turkey is ready to make any contribution.”

Turkey’s private sector long-term foreign debt rose 1.94% to stand at US$209bn as of the end of May, from US$205bn at the end of April, the Central Bank said. Non-financial private companies’ long-term debt stock also rose by 1.48% month on month to US$99.7bn at the end of May while private banks’ debt rose by a stronger 2.58% to US$91.6bn. Private banks’ loan debt rose 0.12% US to $63.2bn in May while their bonds' debt rose 8.53% to US$28.35bn.

Halkbank, Turkish state lender, announced it would issue up to US$2.5bn of bonds or similar debt instruments with a maximum 12-year maturity in the international markets. It also said it would issue as much as US$1.5bn of covered bonds with maturities of up to 10 years in international markets

Project finance by Turkish banks is likely to decline to US$12bn this year, a drop of two-thirds from two years ago, as demand has been hit by lower energy prices and high financing costs, a senior executive at Garanti Bank told Reuters. Project finance deals by Turkish banks totalled US$34.5bn in 2015 and tumbled to just US$16bn last year. Project financing deals amounted to US$4bn in the first five months of this year, the lowest level in a decade.

The European Bank for Reconstruction and Development (EBRD) announced it had invested the EUR75mn in a covered bond issued by Turkish lender Garanti Bank, in a bid to encourage a new source of funding for Turkish banks.  According to an EBRD, the Baa1-rated bond is backed by a portfolio of residential mortgages and bonds of this kind are rare in the country’s banking sector.  Garanti will use this investment to finance environmentally-friendly projects.

Turkey is working on corporate tax cuts in some strategic segments of the economy in order to boost investment in the real sector, Finance Minister Naci Agbal told Reuters. Agbal said that work on the tax cuts had not yet been finalised, as the finance ministry was still evaluating the sectors and the rates.

Odea Bank AS issued international bonds for US$300mn maturing in 2027 with a 5Y USD Swap Rate + 5.723% coupon. The notes were sold at par. Bank of America Merrill Lynch and JP Morgan managed the transaction.

The national government is preparing to increase its debt limit for the first time since 2009 after first-half borrowing left the Treasury near its legal ceiling. Government officials are working to change the law for 2017 debt by the end of the year, according to local press reports.

The government has reportedly withdrawn a list of German companies it initially purported to be supporting terrorist organisations, a list that included top tier German names including Daimler and BASF. The list of over 600 companies was initially sent to Interpol in a bid to provoke a probe into whether they supported "terrorist organisations" according to German daily Die Ziet, a move critics allege would have largely amounted to a crackdown on anti-Erdogan Turks working in the country. Both Turkish Deputy Prime Minister Mehmet Simsek and President Tayyip Erdogan denied the probe into German companies.

The country’s Central Bank said this week that it plans to keen monetary policy tight until the inflation outlook improves, opting to leave its main policy and repo rates steady. The Bank has been somewhat reticent to hike interest rates for fear of a political backlash and subdued credit growth. It has instead relied on a variety of unconventional tactics - including buying and selling currency swaps - to help keep inflation under control

Non-performing loans in Turkey are expected to reach 4% by the end of 2017, according to new figures from PwC, largely driven by an economic slowdown, significant foreign currency borrowing, and inflation. The accountancy firm argues that the trend could open up new opportunities in the country's distressed asset market, as asset reconstruction companies are still fairly young in the country.

 

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