LONDON, Feb 24 (Reuters) - Investors who snapped up Gazprom's $1.75 billion bond sale on Friday are chasing other Russian corporate debt, as high oil prices and the government's reluctance to borrow send Russia's sovereign bonds soaring.
A dozen Russian corporates have announced plans for new international bond issues to follow Gazprom (GAZ.MO), which upped its bond from $1 billion after orders topped $6.5 billion. They include TsentrTelekom (ESMO.RTS) and food group Wimm-Bill-Dann (<A HREF="aol://4785:WBD">WBD.N</A>).
"Russian corporates are attractively priced as a sector, compared to the Russian sovereign," said Igor Ojereliev, emerging debt strategist at Threadneedle Asset Management.
Russian corporate bond yields, although falling, are closer to those of similarly rated credits across the world than those of the sovereign, which is now viewed as expensive.
"Russia trades almost flat to Mexico. From the rating perspective, Russia is
trading tighter than where it should be trading," said Ojoreliev.
JPMorgan's Emerging Market Bond Index plus (11EMJ), the industry benchmark, showed Mexican debt yielding 311 basis points more than safe-haven U.S. Treasuries on Monday.
Its debt is rated BBB- by both Fitch Ratings and Standard and Poor's, while Moody's Investors Service has Mexico one notch higher, at Baa2. These investment grade ratings allow Mexico to tap a much wider range of funds than sub-investment grade ratings of BB+ and lower.
Russia's EMBI+ segment was yielding 372 basis points, despite its much lower, "junk" ratings -- BB from S&P, Ba2 from Moody's and BB- from Fitch.
The yield premium on Colombian debt is almost double that on Russian debt, at 681 basis points, despite the two sovereigns sharing two out of three ratings.
Russia has stayed out of international capital markets since August 1998, when the country suffered a painful financial crisis, triggering a default on its local debt, and a crash in the value of its currency, the rouble.
Russia never defaulted on its international bonds, although some Russian companies did so.
CORPORATE YIELDS ARE HIGHER
Investors are still wary enough of Russian corporates to demand yields in line with the risk they are taking, said Ojereliev.
Gazprom's bond nevertheless saw keen demand, from investors on both sides of
the Atlantic, helping trim the firm's funding costs despite its size, which put the deal among the largest debt sales by sub-investment grade corporate borrowers.
"Up until three months ago, they were paying nine to 9.5 percent for one year money. They have just paid 9.625 for 10 year money. That is a great trade for them," said a trader at a German bank, away from lead managers Dresdner Kleinwort Wasserstein and Morgan Stanley.
The bonds ended Friday over 2.5 points higher, and rose again on Monday.
"There was a $6.6 billion order book, albeit a bit spoofy," said the trader.
"I guess there was a $3 to $3.5 billion of real demand. A lot of people got massively under-allocated."
Buyers "spoof" when they bid for more bonds than they really want, anticipating that orders for a popular bond will be cut back. Lead managers in turn hope this will result in fund managers chasing bonds after launch, driving up the price.
OIL REMAINS THE KEY
Russian debt yields remain hostage to oil prices, however, although analysts
said Russian companies would still be able to borrow if oil falls.
"In the case of Russian corporates much has to do with the high price for energy," said Isaac Tabor, head of emerging market economics at Merrill Lynch in London. "Part of the shine could disappear if the general expectation of a short-lived conflict in Iraq comes to fruition." Russia's budget it predicated on an average 2003 price for its Urals blend (URL-E) of $21.5 per
barrel, which was trading at $31.2 per barrel on Monday. Russia's largest exports are oil and gas, which have helped support the country while it restructures its economy after 1998.
Tabor said the Russian state has a large enough fiscal reserve so that it would be able to stay out of bond markets, at least until Urals prices are in the teens.
At present, those prices have been boosted by fears of a war in Iraq. The U.S. has been pushing for military action against Iraq to enforce United Nations resolution 1441, passed in November last year, which demanded Iraq disarm or face "serious consequences."
Prices are expected to fall rapidly if the war in Iraq proves as quick as most market analysts expect.
At lower oil prices, "Russian corporates will have to pay more generously than they do these days, but the market will remain open," said Tabor.