OAO Gazprom starts canvassing investors Monday as the world’s biggest gas producer prepares to sell bonds abroad for the first time in 16 months to take advantage of record-low borrowing costs for Russian companies.
Gazprom will meet fund managers until Wednesday, a banker with knowledge of the transaction said. Average yields on Russian dollar bonds fell to 5.26 percent on Oct. 13, the lowest since JPMorgan Chase & Co. began tracking them in May 2002, and were at 5.63 percent on Nov. 12, down from 7.35 percent May 25.
“Yields are so low in absolute terms it makes huge sense to issue debt,” Jeremy Brewin, who helps manage $2 billion at Aviva investors in London, the fund management arm of the U.K.’s second-biggest insurer, said by telephone. “If they are not doing it this time, they are missing an opportunity.”
Companies in emerging markets are selling more debt as near-zero interest rates in the U.S. and Europe drive demand for higher-yielding assets. State-controlled Gazprom, based in Moscow, is likely to sell 10-year debt that may yield 6 percent to 6.2 percent rather than opting to sell bonds due in as long as 30 years, Brewin said.
Petroleo Brasileiro SA’s dollar bonds due in 2018 are yielding 4.299 percent, or 121 basis points less than similar- maturity Gazprom bonds. The spread has narrowed from 222 basis points on May 25, data compiled by Bloomberg show. The Brazilian state-run oil producer’s foreign-currency long-term debt is rated Baa1 by Moody’s Investors Service, the same as Gazprom’s.
Gazprom probably will be “flexible depending on potential demand” and may seek to sell debt with an “optimal maturity” of 10 or 15 years, according to Nikolay Podguzov, the head of fixed income research at VTB Capital, the investment banking arm of Russia’s second-biggest bank, in Moscow.
Gazprom hired JPMorgan Chase & Co. and Credit Agricole CIB to organize a benchmark bond sale, according to the banker involved in the sale. The sale is Gazprom’s first on international markets since July 2009, data compiled by Bloomberg show.
The yield on Gazprom’s 8.125 percent dollar notes due in 2014, its last bond offering, fell to a low of 3.914 percent on Nov. 4 from this year’s high of 7.1 percent on May 25. The bond yielded 4.36 percent on Nov. 12.
OAO Lukoil, Russia’s biggest non-state oil company, sold $800 million of 10-year bonds that were priced to yield 6.25 percent on Oct. 29. The Moscow-based company is rated Baa2 by Moody’s, one step below Gazprom and the Russian government.
VEB, the Russian government’s development bank, sold $1 billion of 15-year bonds yielding 6.8 percent last week, the longest maturity for a Russian issuer since 2007, data compiled by Bloomberg show. Gazprom hasn’t sold dollar debt with a maturity of more than 10 years since 2007 when it offered investors $1.25 billion of 30-year securities.
The ruble fell 0.2 percent to 30.80 per dollar in Moscow trading on Nov. 13. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency fluctuations and interest rate differentials and allow companies to hedge against movements, show the ruble at 31.0378 per dollar in three months.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 2 basis points, or 0.02 percentage point, to 143 on Nov. 12, down from this year’s peak of 217, according to CMA prices. 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.
Credit-default swaps for Russia, rated Baa1 by Moody’s, its third-lowest investment grade rating, cost 10 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 4 basis points to 198, according to JPMorgan EMBI+ indexes. The difference compares with 140 for debt of similarly rated Mexico and 172 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The yield spread on Russian bonds is 39 basis points below the average for emerging markets, near the smallest difference since September 2009 and down from a 15-month high of 105 in February, according to JPMorgan Indexes.
Most of the borrowing by Gazprom is in dollars to match its earnings, as gas prices are linked to oil products denominated in the U.S. currency, Chief Financial Officer Andrey Kruglov said in an interview last month. The company and its units have $12.6 billion of dollar bonds, according to data compiled by Bloomberg.
Gazprom, Russia’s biggest international corporate borrower, relies on export revenue to finance investment as prices in Europe are as much as 10 times higher than in Russia, Chief Executive Officer Alexei Miller said last month.
Revenue from domestic gas sales was 494.9 billion rubles ($16.2 billion) in 2009, or a quarter of the total, according to Gazprom’s annual report posted on its website.
The share of revenue from Russia may increase as the government plans to bring domestic gas prices in line with those for European customers, excluding transportation costs, by 2014. Gas prices in Russia climbed 34 percent in the first quarter, according to Gazprom.
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