Russia Floats $1.2 Billion Eurobond

Russia waded into a bearish emerging debt market Thursday and walked out with 2 billion Deutsche marks ($1.2 billion) in a Eurobond placement analysts said illustrated strong foreign appetite for the country.


Unlike the oversubscribed $1 billion dollar-denominated Eurobond issue last fall -- Russia's first since 1917 -- Thursday's offering was targeted at European institutional and retail investors who wanted to get their hands on high-yielding mark paper. Both the size of the issue and the interest-rate spread were at the upper end of market expectations.


Lead managers Deutsche Morgan Grenfell and Credit Suisse First Boston had sold about 70 percent of the bonds by afternoon trading in Europe, the bulk to German and Swiss investors, syndicate officials said.


"We have seen some very good buying at this early stage, bearing in mind that the underlying market is quite volatile," a CSFB official said.


The bonds pay 9 percent annual interest, a spread of 370 basis points above German government bonds.


The terms are less favorable than a couple of weeks ago, when spreads of 325 to 350 basis points were bandied about, but the overall pricing is in line with the current price of the dollar Eurobond on the secondary market. That issue was placed at 345 basis points above U.S. treasuries.


Trading was slightly under face value late Thursday, in line with a slipping overall market.


Robert Devane, head of fixed income for Troika-Dialog in Moscow, said the placement "generally speaking can be considered a success," but added that the market reception was "not as exuberant as it was for the first Eurobond issue last year."


The recent rise in spreads had little to do with events in Russia.


Comments by U.S. Federal Reserve Chairman Alan Greenspan last month pointing to possible higher U.S. interest rates put a damper on investors' appetite for mark-denominated bonds, and bearishness in Latin American bonds has spilled over into the rest of the market.


"If the markets hadn't deteriorated in the last several weeks we probably could have gotten better terms," another CSFB official said. "I view it as an excellent success ... despite fairly difficult market conditions."


Investors largely discounted recent upheavals in the Russian government, if anything taking President Boris Yeltsin's recent state of the nation speech and promised cabinet reshuffle in a positive light."The fact that Yeltsin is alive and kicking and putting in new efforts to continue reforms is seen as a very positive sign for the market," a Deutsche Morgan Grenfell official said.


Finance Minister Alexander Livshits -- whose head is reportedly on the chopping block in the reshuffle -- hailed the offering Thursday after his return from investor road shows in Zurich and Frankfurt earlier this week.


"Despite the fact that the placement coincides with the government reshuffle, it has been very successful," Livshits told Interfax.


By tapping the international capital markets, the cash-strapped Finance Ministry is able to raise money more cheaply than on domestic markets, where yields are now in the upper 30 percent range.


Russia will receive the money March 25. Oleg Boukleshev, head of the Finance Ministry's division of international financial markets, said the use of the proceeds would be decided by the new government, but that one possible allocation is for restructuring Russia's internal debt.


Paying off higher-yielding debt, such as state treasury bills and MinFin bonds, would reduce the state's debt-servicing costs.


Traders said the size and pricing of the Eurobond could set a bench mark for future issues by other CIS countries such as Ukraine and Kazakhstan.