Veles Capital - Daily bonds review - Mar 28, 2011.
Charles Plosser appeals FED to raise the base rate and sell assets. Friday the trades at the U.S. Treasury bonds market closed downwards. Besides the outflow of capital from the defense assets' market that was indicated within the recent days, the demand of treasuries was disrupted by the statement by the head of FRB of Philadelphia Charles Plosser. He offered a plan on cutting down the program of economy stimulating within the frames of which according to Plosser FED is to up the base rate to 2.5% during a year. Aside each upping of the rate by 25 b.p. assets (Treasuries and mortgage bonds) ought to be sold for 125 bn USD. Given offer enforces the pressure on the Treasuries' quotes on the threshold of the QE2 program cutting.
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In the first half of the current week the FED will conduct 3 auctions on placement of 2ayear, 5ayear and 7ayear bonds, which will press the state bonds' quotes at the midaterm section of the curve. Besides, a significant volume of important macrostats is expected to be output this week, so we expect upping of the price volatility at the foreign debt market. Main attention of the investors will surely belong to the data on the labor market of U.S. and EU. Also the data on real estate prices in the U.S., provisional estimate of the consumer prices index and business activity index in EU, business optimism index in the U.S. will become public.
Buyers returned to the Russian market of foreign debt. The preserving high level of the oil prices and return of demand to the risky assets supported demand of the Russian Eurobonds.By trade results the Russian notes' quotes grew 10 b.p. average. In the corporate segment, the demand was for the bonds of TNKaBP, Lukoil and Gazprom. Russiaa30 added 7 b.p. and formed 116.33% of the nominal value. The sovereign spread narrowed down to 121 b.p.
Probably the market of Russian currency bonds will be pressured by the climbing yield curve of the Treasuries early this week.
Bank of Russia is full of optimism. The liquidity supply accumulated earlier was quite enough for the banks to pass the MET and excises payday easily. Sum total volume of the liquidity remains reduced significantly last Friday -by 230 bn RUR and formed 1,231 bn RUR, however, the rate of interbank market did not react much. Therefore, the indicative overnight MosPrime did not leave the level of 3.16% annually, and the overnight rates of IBC remained at the level of 2.9a3.2% annually.
The main attention of the market participants belonged to the session of Bank of Russia on Friday. Positive oratory of the official representatives of the regulator within the recent periods on the dynamics of the inflation turned into the decision to keep the key interest rates without changes and once again to raise the standards of FRR. Required reserves of the banks on liabilities to legal personsanonresidents were upped from 4.5% to 5.5%, and for the natural persons or other liabilities - from 3.5% to 4.0%. Therefore, Bank of Russia still sees the inflow of capital from the foreign markets as a main threat. Note that the similar decision at the January session of CB did not actually reflect on the remains of the liquidity and the money market, and currently the same situation is likely to develop.
Within the first hours ruble rate was getting stronger versus the biacurrency basket at the domestic currency trades due to the expectations of the rates upping by the Bank of Russia. It corrected afterwards after the decision by CB has been announced (however, by the end of trade ruble did manage to get 4 kopeks stronger - 33.57). This morning the rate of the basket versus ruble opened higher than 33.6 RUR. Correction of ruble supports preservation of the CB rates levels and the climbing dollar at forex.
Preservation of the refinancing rate without change allowedruble debt market to keep the positive pulsebeat.Corporate loans prices upped by 6 b.p. average, and the following issues remained being the most liquid ones: Gazpromnefta8, a9, a10, MTSa7, a8, Alrosaa21, a23. Besides, the bonds of Magnit climbed slightly, due to having output the annual IAS report (see our comment below), and also the issues that entered the secondary trades: LSR MBa3 at the close of the session were trading at the level of 100.66% of the nominal value, UVZa2 - 100.8% of the nominal value, AFK Sistemaa4 added just 3 b.p.
Several placements are coming to the domestic market this week, which might occupy the attention of the investors. So, 7 bn RUR worth of bonds of Post of Russia are to be placed on Tuesday, 2 bn RUR by BNP Pariba and 2.5 bn RUR by OTP Bank; on Wednesday two issues by UTair for 3 bn RUR are to come; Thursday: VEB will enter the primal market with 15 bn RUR offer. As for the entire investment background, we expect no changes. Support to the domestic market will still be provided by volume of money liquidity and the decision of Bank of Russia on preservation of the refinancing rate without changes.
Friday Magnit output consolidated IAS report for2010. Totally, the network showed expected strong adding of operation estimates, which was provided by new stores opening. Within 2010, the company expanded its network with 827 stores, which provided trade spaces' adding 34.2% and almost 40% upping of the aCapital assetsa. At that, the sales of the network grew by 45% to 7.8 bn USD, EBITDA -by 23% to 613 mn USD and the net profit by 21% to 334 mn USD.
Along with that after such a remarkable growth of operating estimates comes the other side. Stores opened at the expense of borrowed assets, which resulted in 3 times upping of the financial debt estimate, and Debt/EBITDA upped from 0.84 to 1.64.
Still we assume the annual results of the company are good. First, the debt load did grow, remained however at a low level. Second, its rise was compensated by the improvement of the business margin. Moreover, the total level of the credit risk still is reduced. However, the output results are likely neutral to the bonds of Magnit due to the loans are offering not high premium versus BFL (about 150a170 b.p.) while the issuer has no international credit rating.
Issuer's news/Russian Post
Friday the Post of Russia closed the order book for the debutbonds. Rate of the coupon was set at the level of 8.25% annually in course of the orders collection, which fits the yield by the 3ayear offer in the amount of 8.42% annually. As we outlined in our comment to the placement, such a low rate of the yield on the loan by the monopoly does not seem to be attractive to us. We prefer the Lombard issue of Irkut MBa1 and bonds of KAMAZ at the comparable duration. The lastamentioned one obtains a far more firm financial position and the premium versus BFL is 20 b.p. higher than the one of Post of Russia.
Currently the orders are being collected on the bonds of UTair, JSC (NR/NR/NR). Two issues in the volume of 1.5 bn RUR each are offered to the investors. The circulation period of the loans will form 3 years. Coupon benchmark was set within the range of 9.1a9.4% annually, which fits the yield of 9.42a9.74% annually and the duration of 2.55 years.
UTair occupies the leading positions at the domestic market of air carriage. In 2010, the company took the 2ndplace among the Russian carriers by the volume of the passenger traffic. The share of domestic service in the passenger traffic of the company formed 86% in 2010.
UTair occupies the 4th place worldwide by the volume of the helicopter transport. At the domestic market, the company provided 18% of the passenger services in 2010. Worldwide UTair is almost a monopoly supplier of helicopter services for UN missions (70% of market). Share of the company's sales from helicopter services formed 34a38%.
Surgutneftegas is the principal shareholder of UTair having 75.64% of the carrier's shares via its pension fund.
We estimate the financial position of UTair as complicated though the improvement trend might be traced. EBITDA margin does not exceed 12% and net profit margin is near noaloss point. Debt load is high: debt/EBITDAby the results of the 1H 2010 formed 7.22 at that more than half of the financial debt is shortaterm debt. According to our rating model, sum total level of the credit risk by the results of 1h 2010 formed 3.88 via the 5apoint scale having lowered from 4.03 within a half year.
The company has no international credit rating, which makes it impossible to include the bonds of UTair to the Lombard list.
The issues of UTair to be placed offer a 68 b.p. spread even by the lower border versus its own curve. Nevertheless, the appeal to earn potentially up to 166 b.p. of the price growth involves great risk due to the liquidity of the company's bonds at the secondary market is low. Besides, due to the extremely weak financial position we do not recommend participating in the issuer's placement with the target of longaterm investment. Moreover, Lombard loans with not less yields might be bought at the secondary market (for instance: My Banka3 (B3/a/a), Profmediaa1 (a/B+/a), LSR MBa1 (B2/a/B), LSR MBa2, Tatfondbank MBa1 (B2/a/a).
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