2007-01-25 ING Commercial Banking Russia:
• Mineral resource tax payment affects liquidity
• Razguliay: increasing need for external finance
• Russia uses Davos forum to discuss WTO entry
FX and money market
Yesterday, the euro slid into the USD1.295-1.296/EUR corridor, possibly because of euro/yen movements on Asian markets, where the euro reversed its upside trend. Today’s release of Germany’s IFO figures may keep the euro volatile, although we do not expect it to drop far below the current support level of USD1.2935/EUR. On the Russian FX market the rouble lost almost five kopecks and fell from RBL26.476/USD to RBL26.521/USD as a result of dollar/euro movements.
On the money market, interbank overnight rates climbed almost 4% in anticipation of today’s substantial tax payments scheduled (excise and mineral resource tax). Nostro balances and CBR deposit accounts reached RBL607.6bn in the morning, but we believe they will gradually fall until the beginning of next week.
Ivan Bokhmat, Moscow (7 495) 771 7994
Rouble bond market
Yesterday was rather active and strong in the rouble debt market with prices tending to rise. Unlike previous days, purchase orders appeared in mid- and long-term papers both in corporate and government papers: RGD-7 (+5bp), FSK-4 (+9bp), Gazprom-4 (+15bp), OGZ46014 (+40bp), OFZ46017 (+8bp). HCFB-4 (+30bp) continued to rise on expectations that it will also be included in the MICEX "A" list, following HCFB-2 and HCFB-3. For the time being, the external environment looks neutral for the local market; costs of short-term rouble funds are under 4% despite the tax payment period. In such conditions, investors picked up papers at rather attractive levels. In addition, positive sentiment was triggered by yesterday’s additional placement of the longest OFZ46020 (maturing in February 2036). Demand three times exceeded the offered volume and RBL9.7bn out of RBL10bn was placed with a weighted average yield of 6.88% and cut-off yield of 6.89%. The premium to the secondary market was tiny at 2bp. Today our outlook is neutral, while incoming US home sales data could increase volatility in external markets.
Olga Golub, Moscow (7 495) 755 5176
Credit commentary
Razguliay: increasing need for external finance
Agro holding Razguliay reported its preliminary results for 2006, with total revenue amounting to US$809m. In dollar terms, revenue growth saw some progress from 10% YoY in 2005 to 15.8%. In RBL, revenue growth speeded up by 1.2pp to 11.2%. Growth was mainly supported by the sugar division (47% of the total revenue) expanding 20% YoY in 2005 compared to the 5% YoY growth of the grain division.
The sugar division also saw healthy EBITDA growth, up 93% YoY relative to the weak 3% YoY EBITDA growth of the grain division. Total EBITDA was US$106.7m, up 17.3% YoY, with a margin of 13.2% relative to 13% in 2005.
Razguliay saw a significant net debt increase during 2006 to US$388m compared to US$280m at the end Jun06 and US$160m at the start of the year. As a result, the Net debt/EBITDA hit 3.6x in 2006, twice that of 2005.
We do not expect the net debt/EBITDA ratio to slide in 2007 as the company plans substantial investments, which according to its management, will be financed with internal funds to around 35% of needed funds. Although the company may further attract investments into equity, replicating its successful IPO experience in March this year, we also see the material possibility of raising more debt.
Currently the company has two rouble bonds of RBL2bn each: Razguliay-2 is trading at 10.77% yield to put in Apr’08, while Razguliay-1 has 10.50% yield to put in Apr’07. We see the fair yield for Razguliay-2 above 11%, taking also into account likely further placements of the company bonds. In our view the weak point of the company’s credit profile is that it will retain exposure to increased financial risks in the mid-term, as well as to industry risks (seasonality, high competition, excessive reliance on government support).
Stanislav Ponomarenko, Moscow (7 495) 755 5480
Russia
WTO accession
Russia uses the Davos forum to discuss its WTO entry
Today, Economy Minister German Gref will start a new round of negotiations on the country’s WTO entry. Russia has completed the main part of negotiations and won the support of the EU and the USA, but some technical issues need to be discussed and resolved. Yesterday, bilateral agreements with Costa-Rica and Salvador were successfully signed. Currently, the only obstacle to the entry is the position of Georgia, which blocked the process in response to serial aggravation of its political and economic relations with Russia. Although the Russian delegation sounds quite optimistic about further prospects, the Georgians are much more reserved, stressing that the negotiations are very preliminary and needed to clarify positions on both sides. Nevertheless, we believe that the last barrier to Russia’s entry will be finally eliminated already in 1Q07. The gradual stabilisation and warming between Russia and Georgia is becoming clearer, and Russia has not ruled out that economic sanctions against Georgia will be fully removed soon (including the transport blockade and the resumption of Georgian wine and mineral water imports to Russia). The Russian Ambassador returned to Tbilisi last week – which also signal stabilisation of relations.
The agreement with Georgia will end the exhausting negotiations and open door for the entry already in 2007.
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Investment implications: We welcome the progress on WTO negotiations as it opens avenues for the long awaited entry to the organisation and makes it possible this year. We expect political and economic gains from entry, in particular in the mid and long term, and further acceleration in foreign investment inflow.
Julia Tsepliaeva, Moscow (7 495) 755 5489
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