RUSSIA - Oct.8 - Debt Upgrade.

Moody's Investors Service places 4 Russian banks on review for an upgrade in the first signal of how companies can benefit from the historic upgrade of Russia's sovereign credit rating to investment grade. Russia's largest mobile phone operator, Mobile TeleSystems, is having its $400m international bond priced just as Moody's announces it is raising the Russian government's ratings two notches to Baa2. The surprise upgrade allows bankers to shave $1m a year off MTS's annual interest payments. Chris Tuffey of CSFB, says: "We were about to price the transaction when Russia was upgraded. There was quite an aggressive move up in Russian debt prices, both sovereign and corporate. We went to the market, changing the price talk from (a coupon of) 8.625% to 8.375% and few clients dropped away". The last-minute cut in borrowing costs is possible because the respective sovereign rating is perhaps the most important factor for pricing corporate bonds. Once the government rating rises to investment grade, the pool of potential investors in the country's corporate bonds also expands to include the more conservative institutions that shy away from speculative grade credits. Fixed-income analyst at the Moscow-based brokerage Nikoil Boris Ginzburg says: "This means a lower cost of borrowing for Russian companies, access to long-term capital and a more liquid market". Alfa Bank and MDM Financial are among the banks placed on review. Globally low interest rates and Russian companies' improving credit worthiness have already allowed the market to more than double in size this year. According to Dealogic, Russian issuance totals $7.1 bn in the year to date, compared with $3.3 bn for 2002. Other Russian deals in the pipeline for the next few months include a mooted $1 bn bond from the oil company Yukos. A string of international bonds is expected from the banking sector, including state-owned Sberbank, Vnesheconombank and Vneshtorgbank. After the sovereign ratings upgrade, analysts expect corresponding improvements for companies. "The (yield spreads) between them and the sovereign will narrow", says Dildora Yusupova at Merrill Lynch. Although Standard and Poor's and Fitch Ratings maintain Russia at junk ratings, analysts agree the country has taken a leap since the 1998 financial crisis that led to several corporate bond defaults. Ginzburg says: "People differ on whether Russia deserves investment-grade rating. But Moody's decision is a fact and it will bring a new type of capital into the country").