Today we will look at few debt securitiies as investment ideas for this week
The most liquid issue on the Moscow Exchange in the line of Eurobonds of the RF Ministry of Finance. The yield spread to UST remains wide (50 bp) relative to the dock levels, which creates potential for further price growth. Unlike Eurobonds of Russian banks and corporations, the bonds of the Ministry of Finance are completely devoid of ruble risk: when selling (redeeming) sovereign Eurobonds, the income in the form of exchange rate differences is exempted from paying personal income tax. From this point of view, sovereign Eurobonds are quite comparable to direct investment in dollars or euros (while the holder of the Eurobond also receives a coupon income). Due to the sanctions, the RF Ministry of Finance does not place new dollar-denominated eurobonds, which creates a shortage of securities with Russian sovereign risk as the issues mature. The peculiarity of the Eurobond maturing in 2028 is that, due to its very high coupon rate (12.75% per annum), it offers a high level of current yield (the ratio of coupon payments expected over the next 12 months to the current market price).
In the segment of short-term dollar-denominated securities, we find one of the two "perpetual" issues of Alfa-Bank with a coupon of 8.0% interesting. The next call on this security is scheduled for February 3 next year at par. This will be the first opportunity for the issuer to withdraw the Eurobond, the maintenance of which is, in our opinion, unreasonably expensive in the current environment of very low interest rates (the bond was placed in 2016). In this regard, we believe that the chance of a call being realized is very high. Note that the yield to call in February next year is 4%.
The coupon on Eurobonds is taxed, so we distinguish issues with a relatively low coupon, which includes, for example, the issue of Norilsk Nickel with maturity in 2025. It was placed in September this year - during the period when Russian issuers are placed at the lowest in post-Soviet history Russian rates. Thus, this 5-year issue was placed at 2.55% per annum. Note that it is listed on the Moscow Exchange, while circulation on the organized market enables its holders to receive a tax deduction (recall that, in addition to the coupon, currency revaluation is also taxed on corporate and bank Eurobonds). If a security has been held in the portfolio for more than three years, the investor has the right to file for a tax deduction of up to RUB 3 million. per year for each full year after three years. Note that a makewhole colloption is provided for this issue. This type of call allows the borrower to withdraw the issue before maturity, paying the holder a certain compensation, which is expressed in the form of a predetermined premium in the yield to the underlying security (for dollar securities, a comparable maturity UST is used). If Norilsk Nickel decided to withdraw this Eurobond on the makewhole call option now, it could do it at a price of 106,8% of the nominal.
Now that rates are at historic lows and the markets (judging by the shape of the Treasury curve) are not expecting an increase in the base dollar rate until 2023, there are ample opportunities for issuers to refinance their debt at lower rates. We propose to pay attention to those perpetual securities of Russian banks, the next calls on which are planned until the end of 2022. These are the issues of Alfa-Bank, VTB, MKB and Tinkoff. Note that in the current reality of close to zero interest rates, coupons on these securities look like a real anachronism (8-9%), and we believe that at least some of the issuers will prefer to replace the existing Eurobonds with cheaper issues for servicing, having withdrawn them on the first call option. Note that in case of non-withdrawal on a call, the security holder is rewarded with a high current yield (by this indicator, perpetual securities are the undisputed leaders in the Eurobonds segment). Of the 4 issues noted above, we single out the VTB Eurobond (yield to the nearest call 4.2%), which is actively traded on the Moscow Exchange with a minimum lot of $ 1,000.
In the context of low yields, currency revaluation has a very negative effect on the level of investors' income in Russian Eurobonds. A natural way to avoid this is to choose as objects for investment those securities in respect of which a preferential taxation regime is applied - Eurobonds of the Ministry of Finance of the Russian Federation. We suggest paying attention to the recently placed euro bonds - in particular, to the sovereign issue with maturity in 2027. Note its relatively low coupon (1.125%), which is again important from a tax point of view.
Unlike the dollar-denominated Eurobonds, the Russian Euro segment has not yet fully recovered from the impact of the current crisis in terms of price levels. Among the relatively short securities, our favorite in this segment is the senior issue of VEB.RF with maturity in February 2023. It is listed on the Moscow Exchange and has a minimum lot of 1 share (1,000 euros).
Like other eurobonds in the single European currency, the issue of Russian Railways with maturity in 2027 has not yet reached its price levels, which were observed on the eve of the pandemic. We associate the prospects for its recovery primarily with the fact that this Eurobond is a "green" issue. Actually, it became the first bond of this type placed by a Russian company on the foreign market. Note that this segment of the bond market is one of the fastest growing in the world.
In mid-October 2020, Gazprom placed its debut “perpetual” issue in the single European currency. Thus, investors received a highly profitable euro-denominated instrument from a reliable issuer with a Russian risk (S&P assigned this subordinated security a rating 2 notches lower than the issuer's senior Eurobonds - BB). The issue provides for the first call at par in October 2025. The coupon (3.897%) is paid once a year. Unlike indefinite issuers in the financial sector, which can be written off or converted into shares in the event of a decrease in the bank's capital adequacy, Gazprom's perpetual issue is not subject to this risk. True, the issuer at its discretion may not pay the coupon (which will not entail its technical default), however, unpaid coupons will be capitalized. Note that the yield on the Gazprom issue outpaces its closest competitor in the segment of Russian euro securities by about 60 bp. etc., which seems to be a rather generous premium to the market. We do not exclude its narrowing in the near future.
The sector of ruble-denominated Eurobonds is somewhat overshadowed by the interests of investors, which is due to the over-the-counter nature of trading in these instruments, as well as the relatively high minimum lot (10 million rubles). Meanwhile, the duration of the Russian domestic ruble-denominated corporate bond market is small (less than 3 years), in particular, due to the fact that many even long-term securities have put options. And this, not to mention the fact that the level of exchange liquidity of the majority of ruble debt bonds placed on the local market leaves much to be desired. In this context, AlfaBank's senior ruble Eurobond maturing in January 2025, which does not provide options for early withdrawal and / or revision of the coupon level, in our opinion, deserves attention. Now on this security you can fix the yield of 6.5%. Due to the fact that this issue was placed relatively recently - in January this year - its coupon is relatively small, which is important from the tax point of view. Note that one of the factors increasing the comparative attractiveness of ruble Eurobonds is the cancellation from 2021 of tax incentives for coupon income on OFZs and local ruble corporate bonds issued in 2017-2019. Thus, the low coupon / high yield ratio of Alfa-Bank's ruble Eurobond maturing in 2025 looks interesting in our opinion.
Joint Managing Director
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