Russia talks seven-year euro notes to yield about 3%; Abu Dhabi’s Senaat launches downsized $300 million sukuk

By Rebecca Melvin

New York, Nov. 27 – Russia’s announcement on Tuesday that it is pricing a new euro-denominated benchmark of seven-year notes came as something of a surprise to the market in light of heightened tensions in the Central and Eastern Europe region after Russia seized three Ukrainian navy ships and wounded six sailors on Sunday.

The action caused Ukraine on Monday to impose martial law for 30 days in areas bordering Russia, and many in the international community including the United Nations Ambassador Nikki Haley condemned the action.

Nevertheless, Russia was talking a deal on Tuesday that was expected to be €1 billion in size with a yield of about 3%. Russia’s existing bonds, which fell on Monday, remained weak on Tuesday.

“Pricing looked a little generous, but given everything that has been going on, I guess it’s not that surprising,” a London-based market source said regarding the new Russia bond.

“I thought the Russian new issue went OK,” the source said, adding that it looked like the sovereign was going for size over pricing.

Meanwhile, some in the market press suggested that the timing of the deal was Russia’s way of thumbing its nose at the international community after rebukes came its way. Others thought the timing was strategic in case further U.S. sanctions were imposed in reaction to the seizure of Ukraine’s ships. But indications on Tuesday were that the United States would not impose additional sanctions.

Nevertheless, some suggested the bond issue, which is being sold via sole bookrunning manager VTB Capital, won’t have as much appeal this week as it might have had last week before the incident.

Another aspect of the new issue is the fact that it is denominated in euros, which are more expensive than dollars, and marks Russia’s first euro-denominated bond in five years. In addition, Russia has only one outstanding euro note, which is of short duration, making new issue concession comparison difficult.

A set of U.S. sanctions was imposed on Russia and some Russian companies including United Co. Rusal plc in April. The sanctions prohibited investors from holding Rusal debt and those bonds fell by half and virtually shut down the new issue market.

Russia was last in the international debt market in March before U.S. sanctions went into place in April. That deal for $4 billion of eurobonds in two tranches came after international condemnation for the poisoning of British spy Sergei Skripal and his daughter Yulia with a nerve agent.

Russia’s existing 5 7/8% notes due 2043 were bid at 102.2 on Tuesday, compared to 102.3 on Monday and 103.5 on Friday.

Russia’s PJSC PhosAgro’s 3.949% notes due 2023, $500 million of which priced in January, were around 93 after the Moscow-based chemical company released third-quarter results that were better than expected. Revenue and EBITDA were up by 35% and 72%, respectively, driven by favorable market conditions and the company’s leaner cost structure, according to Gimme Credit analyst Alexandre Dray.

Dray put out a note published on Tuesday that the weaker Russian ruble contributed to the increase in EBITDA margin, but asserted that higher sales and prices were the key drivers of positive results. Dray’s firm revised up its full year 2018 EBITDA forecast with moderate EBITDA growth expected for 2019.

The zero-volatility spread for the PhosAgro 2023 notes stands at around 268 basis points, according to Gimme Credit.

Elsewhere, Senaat General Holding Corp. PJSC launched a seven-year Islamic bond, or sukuk that was downsized to $300 million from $600 million.

It is pricing for yield at mid-swaps plus 170 basis points.

Abu Dhabi Islamic Bank, Citigroup, Dubai Islamic Bank, First Abu Dhabi Bank and Standard Chartered Bank are the joint lead managers and bookrunners arranging the meetings for the senior unsecured debt.

Proceeds of the Regulation S deal are earmarked to repay existing debt.

Senaat is an industrial investment holding company owned by the government of Abu Dhabi.

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