MARKET SIGNALS 10.20.2020

INVESTMENT IDEAS

Today we will look at few debt securitiies as investment ideas for this week

IDEA #1: The bonds of the Ministry of Finance

The most liquid issue on the Moscow Exchange in the line of sovereign Eurobonds. The yield spread to UST remains widened (70 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. Due to the sanctions, the Ministry of Finance of the Russian Federation does not place new Eurobonds, which creates a shortage of securities with Russian sovereign risk. A feature of the issue 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).

IDEA #2: State Transport Leasing Company

The issue of the State Transport Leasing Company offers one of the highest yield levels among short-term securities on the Moscow Exchange, and looks interesting against the background of current dollar-denominated deposit rates (1-2%). This issue is one of the few Russian-risk securities that have not yet overcome the consequences of the current crisis. This is due to the high dependence of STLC's financial indicators on the air carrier industry (about 40% of the leasing portfolio). Meanwhile, international agencies have not yet worsened their ratings of the issuer, maintaining a "stable" outlook on them. The main reason for this is the support of the company from the state (in fact, the issuer is 100% owned by the state). Even if we assume that the second wave of the pandemic will hit the air carriers again, the issuer's refinancing risks remain, in our opinion, low, given, for example, the free access of STLC to the primary foreign market. Thus, in October 2020, the issuer announced its intention to place a 7-year dollar issue, while at the same time placing an offer for a partial redemption of the issue with maturity in 2021.

IDEA #3: Norilsk Nickel

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. It should be noted that it is listed on the Moscow Exchange, while circulation on the organized market enables its holders to receive a tax deduction (apart from the coupon, currency revaluation is also levied 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.

IDEA #4: Gazprom

If we assume the likelihood of the scenario of credit spreads moving towards their dock-like levels, then it is obvious that this process is most favorable for the prices of the most distant securities. For example, the net (no-coupon) price of a dollar-denominated issue of Gazprom maturing in 2034 increased by 25 figures in 2019. This was due to an active decline in the yield on the underlying asset (UST) and a narrowing credit spread. At the same time, the holder of the paper also received a coupon (8.625%). Thus, an investor who bought this bond at the beginning of 2019 and closed his position exactly 12 months later had the opportunity to earn 2.5 times more on the growth of its price than on the coupon itself. Now the z-spread for this issue is widened by about 90 bp relative to its low of the end of 2019. If we assume that as the second wave of coronavirus passes, it will decline to its dock-like level, then the net (coupon-free) price of the security will increase from the current 151% to 159% of par.

IDEA #5: VTB

Now that rates are at historic lows and markets 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. This is especially true for securities placed several years ago, when rates were at local maximums. 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 very overstated, and we believe that some of the issuers will prefer to replace the existing Eurobonds with cheaper issues for servicing, recalling them on the first call option. Note that in case of non-withdrawal of the security, the holder is rewarded with a high current yield - according to this indicator, perpetual securities are the leaders in the entire Eurobonds segment. Of these 4 issues, let us single out the VTB Eurobond, which is traded on the Moscow Exchange with a minimum lot of $ 1,000. Note that this Eurobond is a marginal one in Finam IG, as a result of which its yield can be increased.

IDEA #6: VEB.RF

Unlike dollar-denominated Eurobonds, which have not only recovered in value relative to their dock levels, but have also rewritten their historic lows in yield, the Russian Euro segment has not yet fully recovered from the effects of the current crisis. This is due to the fact that European risk-free bonds have practically not changed in value since the beginning of the crisis, while credit spreads of securities have widened due to the crisis. This led to the fact that now they are on average 4 pieces cheaper than at the beginning of the year. However, all drawdowns are bought out sooner or later. As the global economy recovers, credit spreads (risk premiums) will begin to normalize and euro-denominated Eurobonds will gradually compensate for the losses of the current crisis. Among the short-term securities, our favorite in the segment is the senior issue of VEB.RF with maturity in February 2023. It is listed on the Moscow Stock Exchange and has a minimum lot of 1 paper (1,000 euros). If the credit spread of this issue normalizes to its levels before the start of the pandemic (about 100 bp, now it is about twice as high), its price could rise to 108% of par.

IDEA #7: Russian Railways

In the Euro segment, we also highlight the Russian Railways issue with maturity in 2027. Like other Eurobonds in the single European currency, this issue is still far in price terms from its levels observed on the eve of the pandemic. However, we associate the prospects for its recovery not only with the general market trend - the reduction in credit spreads of borrowers from EM as the situation in the global economy normalizes, but above all with the fact that this Eurobond is a "green" issue. In fact, it became the first green bond placed by a Russian company on the foreign market (later, by the same Russian Railways, another issue was placed). This segment of the bond market is one of the fastest growing in the world, the demand for such securities is generated by the so-called ESG funds (Environmental, Social and Governance). Note that the Euro Green Bond Index (tracking green Eurobonds denominated in the single European currency) just recently overcame the consequences of the current crisis, rewriting its historical maximums.

IDEA #8: Alfa-Bank

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 high minimum lot (10 million rubles). Meanwhile, the duration of the Russian domestic ruble-denominated corporate bond market is not large (about 3 years), in particular, due to the fact that put options are provided for many even long-term securities. And this is 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, Alfa-Bank'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 of 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 the Alfa-Bank ruble Eurobond maturing in 2025 looks interesting in our opinion.

Alexey Shternshis
Joint Managing Director
Capital Pi 

Сapitalpi.fund


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