Russian investment grade corporates: our favourite picks

Bonds

Althea Spinozzi

Fixed Income Strategist

Summary:  Russia is in a position to endure a prolonged economic shock better than most emerging markets thanks to its substantial international reserves and prudent monetary policies. We find value in Russian investment-grade corporate bonds with short term maturity. Alrosa, Gazprom, Lukoil and Severstal are among our favourites.


In an analysis I have published last week, I have looked at emerging market sovereign risk in terms of monetary policies and debt. In this analysis I have observed that numerous emerging market economies are deteriorating fast amid the coronavirus pandemic. However, Russia together with Indonesia and the Czech Republic look to be better equipped to navigate the current economic recession and if necessary to intervene in case of further weakness.

Today, I would like to explore the Russian bond market to understand whether it is possible to find interesting notes in US dollar which can provide an rich pick up over the treasuries. Because volatility continues to be high as we approach the US election and Covid-19 cases rise globally,  we believe it is crucial to minimize duration risk especially among risky assets. That’s we are looking mainly at maturities up to six years.

Before diving into the Russian bond market, I would like to invite you to read Christopher Dembik’s analysis on the Russian economy. As he explains in his latest published article, the country is going through a prolonged phase of economic contraction. Extractive industries (commodity-based companies), which are at the core of the Russian economy, have performed poorly as commodity prices stayed low throughout the year. On the other hand the manufacturing sector looks to be recovering already. Although the majority of emerging markets are facing the same problems, Russia seems to be in better conditions to navigate this crisis, and to have the necessary tools to get through another economic shock caused by a second Covid-19 wave.  As a matter of facts, the country’s international reserves are solid, and monetary policy and debt have not been used as extensively as in other EMs.

It is important to note that while Russian government and corporate debt looks better compared to the one of other EMs, bond prices will most likely fall further due to the adverse global macro-economic backdrop. This is why it is crucial to reduce duration risk and cherry pick among short term maturities.

Alrosa:

Alrosa is a Russian group of diamond mining companies, accounting for almost 30% of the global diamond extraction. After the post-pandemic slowdown in sales, the company has seen strong sales numbers in august, however as a second wave or coronavirus seems now most likely, we can expect these numbers to subside. The company is solid with a very moderate financial leverage, thus we don’t believe it will be exposed to a credit downgrade, unless Russian sovereigns are downgraded.

The company has three bonds outstanding: one with maturity November this year (XS0555493203), another with April 2024 maturity (XS1843441731) and the last one maturing in June 2027 (XS2010030919). We believe that these notes are most likely to reprice as we get closer to the US election. Indeed, the company might have difficulties to refinance the notes which will mature on November the third, as at the same time the market will be busy to recalibrate risk during amid the election results. This might be the perfect time to enter in the notes with 2024 maturity which at the moment offer a yield around 2.25%, but may come cheaper.

Gazprom and Lukoil:

Even though revenues in both companies have struggled this year because of low natural gas prices, in the past two months there has been a sensible recovery. We like both companies because their financial leverage is contained compared to the energy industry average. The yield offered by their bonds is comparable even though Gazprom’s debt structure is more complex than Lukoil’s. The main difference between these companies is that Gazprom State-owned, while Lukoil is privately owned. We therefore prefer the bonds offer by Gazprom, as they should be more resilient amid a market selloff. The Gazprom notes with maturity 2022 (XS0805570354) offer around 1.7% in yield, while Lukoil 2023 (XS0919504562) offers around 1.75% in yield

Severstal:

Severstal is a Russian steel company. The note with maturity 2022 (XS0841671000) offer around 2% in yield which represent a pickup of 180bps on Treasuries for a 2-year investment horizon only. Even though demand from the auto manufacturing sector has plummet, other sectors’ demand such as construction has increased. This trend helped fundamentals not to deteriorate as fast as expected. The company’s financial leverage is slightly higher than the one of Novolipetsk, however, in order to buy bonds in the latter it is necessary to stretch one investment to 2024. We believe that the opportunity to invest in short-term bonds with a considerable pick up over the Treasuries makes Severstal 2022 notes very attractive.

Caption: Russian corporate bonds vs Russian government curve. Source: Bloomberg.
Issuer NameCouponMaturityBloomberg composite RatingMaturity TypeNext call dateCurrencyISINMinimum Investment
ALROSA FINANCE SA4.654/9/2024BBB-CALLABLE1/9/2024USDXS1843441731200,000
GAZPROM NEFT (GPN CAPITA611/27/2023BBB-AT MATURITY-USDXS0997544860200,000
GAZPROM (GAZ CAPITAL SA)4.957/19/2022BBB-AT MATURITY-USDXS0805570354200,000
GAZPROM (GAZ CAPITAL SA)5.9991/23/2021BBB-AT MATURITY-USDXS0708813810200,000
LUKOIL INTL FINANCE BV4.5634/24/2023BBBAT MATURITY-USDXS0919504562200,000
MMC NORILSK (MMC FIN)6.62510/14/2022BBB-AT MATURITY-USDXS1298447019200,000
MMC NORILSK (MMC FIN)4.14/11/2023BBB-AT MATURITY-USDXS1589324075200,000
MMC NORILSK (MMC FIN)3.37510/28/2024BBB-CALLABLE7/28/2024USDXS2069992258200,000
MMC NORILSK (MMC FIN)3.8494/8/2022BBB-AT MATURITY-USDXS1622146758200,000
MMC NORILSK (MMC FIN)2.559/11/2025BBB-CALLABLE6/11/2025USDXS2134628069200,000
MMK INTL CAPITAL DAC4.3756/13/2024BBBAT MATURITY-USDXS1843434959200,000
NOVATEK(NOVATEK FIN LTD)4.42212/13/2022BBBAT MATURITY-USDXS0864383723200,000
OJSC NOVO(STEEL FUNDING)49/21/2024BBB-AT MATURITY-USDXS1577953174200,000
OJSC NOVO(STEEL FUNDING)4.56/15/2023BBB-AT MATURITY-USDXS1405775617200,000
PHOSAGRO(PHOS BOND FUND)3.9494/24/2023BBB-AT MATURITY-USDXS1752568144200,000
PHOSAGRO(PHOS BOND FUND)3.051/23/2025BBB-CALLABLE10/23/2024USDXS2099039542200,000
ROSNEFT(ROSNEFT INT FIN)4.1993/6/2022BBB-AT MATURITY-USDXS0861981180200,000
RUSSIAN RAIL(RZD CAP)4.3753/1/2024BBBAT MATURITY-USDXS1574068844200,000
SBERBANK (SB CAP SA)6.1252/7/2022BBB-AT MATURITY-USDXS0743596040200,000
SEVERSTAL (STEEL CAP)3.159/16/2024BBBAT MATURITY-USDXS2046736919200,000
SEVERSTAL (STEEL CAP)5.910/17/2022BBB-AT MATURITY-USDXS0841671000200,000
SIBUR SECURITIES DAC2.957/8/2025BBB-AT MATURITY-USDXS2199713384200,000
SIBUR SECURITIES DAC3.459/23/2024BBB-AT MATURITY-USDXS2010044621200,000
SIBUR SECURITIES DAC4.12510/5/2023BBB-AT MATURITY-USDXS1693971043200,000
VNESHECONOMBANK(VEB FIN)5.94211/21/2023BBB-AT MATURITY-USDXS0993162683200,000
VNESHECONOMBANK(VEB FIN)6.0257/5/2022BBB-AT MATURITY-USDXS0800817073200,000

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.