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Eastern Europe Fixed Income: Weekly Overview
March 23 – April 5, 2015
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www.citadele.lv
Regulator – FCMC, www.fktk.lv
Ģirts Vārna
Financial Markets Broker
Girts.Varna@citadele.lv
Mikus Veits
Financial Markets Analyst
Mikus.Veits@cbl.lv
Edgars Lao, CFA
Fund Manager
Edgars.Lao@cbl.lv
The region’s Eurobond market* gained 2.1% over the
last two weeks. In terms of country performance,
Turkey underperformed the market adding 0.4%,
while Russia and Kazakhstan outperformed the
market rallying 4.9% and 3.8%, respectively
Russia’s latest mid-term growth forecasts above
market consensus
Corporate news: Sberbank, Alrosa, NLMK, Norilsk
Nickel, RSHB, Evraz, DTEK, Avangard, Nostrum,
VIVACOM
General news
Last week, Russia’s Minister of Economic Development Alexey Ulyukaev revealed the latest official key macro forecasts, which are
important inputs for the next year’s budget. In particular, Russia’s economy is expected to shrink by 3.0% y/y in 2015, while it could
rebound by 2.3% y/y in 2016. Inflation is seen at slightly above 7.0% at the end of 2016, compared to almost 17% at the moment.
Moreover, the Minister assumes that the average oil price could rapidly grow by $10/bbl per year starting from $50/bbl in 2015 up to
$80/bbl in 2018, hence Russian ruble would appreciate to RUB 52-53/$ in 2018 from the average RUB 61/$ in 2015. All in all, presented
growth figures are above market consensus (GDP at -4.2% in 2015 and +0.5% in 2016) due to Mr. Ulyukaev’s better expectations of oil
price recovery and stronger local demand.
Corporate news
Russia’s largest bank Sberbank reported relatively sound Q4’14 financial results. Loan portfolio and deposits each grew by 18% q/q,
hence its loan-to-deposit ratio remained stable at 114%. During the whole of 2014, Sberbank’s loan portfolio expanded by roughly
37% y/y, compared to the sector’s average of 26% y/y. In Q4’14, Sberbank’s NPLs ratio dropped to 3.2% from 3.5% amid sizeable
(equivalent to 0.4% of gross loan portfolio) write-downs. As a result, the provision coverage ratio diminished slightly to 1.4x from 1.5x a
quarter ago. However, Sberbank’s profitability continued to trend lower with ROAA dropping to 0.9% from 1.4% in Q3’14, which negatively
affected its capitalization metrics. In particular, the total CAR declined by 1.9pp q/q to mere 12.1%. Nevertheless, on a stand-alone basis
Sberbank’s Eurobonds seem relatively attractively valued, in our view.
Russia’s diamond producer Alrosa delivered credit-positive Q4’14 financial results. Revenues and EBITDA soared by 43% and 51%,
respectively, driven by the ruble depreciation and inventory release. As a result, EBITDA margin increased by 2pp q/q to a very solid 46%
in Q4’14. On the other hand, Alrosa’s total debt denominated in Russian rubles spiked by 20% q/q to RUB 197bn and translated into a
marginal increase in the total debt/LTM EBITDA ratio to 2.1x from 2.0x a quarter ago. Due to several steps taken to increase liquidity in
December, at the end of the reporting period Alrosa’s liquidity profile was broadly balanced with a short-term debt of RUB 21bn covered
by a cash pile of RUB 22bn. All in all, we currently have a neutral view on Alrosa’s Eurobonds.
Russia’s steelmaker NLMK released credit-neutral Q4’14 financial results. Top line shrunk by 10% q/q and EBITDA declined by 9% q/q to
$627mn. Hence, EBITDA margin during the quarter remained stable at 27%. NLMK’s total debt dropped by 16% q/q to $2.8bn and the
total debt/LTM EBITDA ratio continued to trend downwards, as it reached rather healthy 1.2x compared to 1.5x a quarter ago. In addition,
NLMK’s liquidity profile remained strong with a cash cushion of $1.2bn and a short-term debt of $0.8bn. All in all, NLMK’s Eurobonds, in
our view, seem attractively valued on a stand-alone basis.
Russia-based nickel and palladium producer Norilsk Nickel reported solid H2’14 financial results. Revenues increased by 8% h/h and
EBITDA was up 28% h/h to $3.2bn due to higher metal sales prices, effective cost control measures and the ruble depreciation. As a
result, EBITDA margin increased by 8pp h/h to the very strong level of 52%. Norilsk Nickel’s total debt increased by just 4% h/h to $6.3bn
and translated into a lower total debt/LTM EBITDA ratio of 1.1x amid higher profitability. Moreover, the Company’s liquidity profile
remained very strong, as cash cushion of $2.8bn covers debt repayments for at least next three years. All in all, Norilsk Nickel currently is
the richest credit in Russia and yield-wise does not provide attractive investment opportunities, in our view.
*
50% EMBI Global Diversified Europe region and 50% CEMBI Diversified Europe region
Eastern Europe Fixed Income: Weekly Overview
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State-owned Russian Agricultural Bank (RSHB) released weak H2’14 financial results. Loan portfolio continued to expand by 10% h/h,
while deposits added just 2% during the period, bringing the loan-to-deposit ratio to the very elevated 186%. The management basically
channeled the entire net interest income in H2’14 towards provision build-up, hence RSHB incurred a massive RUB 48bn (equivalent to
ROAA of -2.8%) net loss in 2014. Obviously this put a negative pressure on the Bank’s capitalization, which measured by the total CAR
lost 5pp last year and finished at a moderate level of 13.0%. Although the Russian government’s support, the key factor in RSHB’s credit
quality, is expected to remain strong, at this stage we stay sidelined from its Eurobonds.
Russia’s steelmaker Evraz published credit-positive H2’14 financial results. Although top line declined by 8% h/h due to lower steel
products prices, EBITDA soared by 15% h/h to $1.2bn owing to cost and asset optimization, as well as to devaluation of ruble and
hryvnia. As a result, EBITDA margin gained 4pp h/h and reached almost 20% in H2’14. During the reporting period, Evraz’s total debt
shrunk by 8% h/h to $6.9bn and translated into a total debt/LTM EBITDA ratio of 3.0x, down from 3.8x a half-year ago. Company’s liquidity
profile is stable, as the short-term debt of $1.0bn is covered by an equivalent amount of cash. All in all, we currently have a neutral view
on Evraz’s Eurobonds.
DTEK, Ukraine’s largest energy company, announced and later changed its invitation to exchange its $500mn 9.5% Eurobonds maturing
in April 28, 2015. The offer includes a 20% cash consideration and a 10.375% coupon p.a. on the new notes, and the latest proposal
includes an increased minimum acceptance condition of 98% (up from initial 85%), increased early instruction fee of 3%, up from 2%
originally, and final maturity in March 2018 instead of the previous April 2019. In addition, 50% of the principal amount of the new notes
shall be redeemed in September 2017. The early exchange deadline expires on April 8, and the final exchange offer is set to expire in
April 22. At the same time, DTEK seeks the approval of an exchange scheme by the High Court of Justice of England and Wales, , to be
able to exchange all of the 2015 notes outstanding provided 75% acceptance rate is achieved. All in all, DTEK’s exchange offer seems
less attractive than those proposed by its peers (Metinvest and Ferrexpo), which in our view reflects also the relatively weaker credit
standing of DTEK.
Avangard, Ukraine-based producer of shell eggs and egg products, posted credit-negative Q4’14 financial results. In dollar terms,
revenues and EBITDA fell 19% q/q and 20% q/q, respectively, largely as a result of a significant drop in sales volumes as well as a 40%
increase q/q in egg products cost of sales. Thus, EBITDA margin remained flat at 32% compared with the quarter before. Avangard’s
cash-to-short-term debt ratio fell from 2.5x to 0.4x over the quarter as the Company’s October 2015 Eurobond was reclassified into short
term debt. The Company’s total debt/LTM EBITDA rose further, reaching 2.7x at the end of Q4’14, compared with 1.7x at the end of
Q3’14. All in all, we see the Company’s situation as severely constrained. While some market participants expected the Company to
express its intentions towards the October maturity along with Q4’14 results, the Company obviously decided to take more time to assess
the longer-term negative impact on its operations and its cash generation ability before announcing some restructuring offer, which we
think is inevitable.
Nostrum Oil & Gas, Kazakhstan’s independent exploration and production enterprise, released negative Q4’14 financial results. In dollar
terms, revenues decreased 8% q/q in Q4’14, while EBITDA fell 22% q/q, and, as a result, EBITDA margin declined from 57% in Q3’14 to
51% in Q4’14. Nostrum’s liquidity profile remains to be strong, as the cash cushion of $375mn more than offsets the short-term liabilities
of $15mn. However, the Company’s total debt/LTM EBITDA ratio deteriorated by 0.2x reaching 1.9x at the end of FY’14, as a result of
contraction in EBITDA. While acknowledging the risks associated with the low oil price, we continue to view Nostrum’s Eurobonds as an
attractive investment opportunity in the region for risk-inclined investors.
Bulgarian telecommunications operator VIVACOM released credit-neutral FY’14 financial results. Revenues declined marginally to
BGN 806mn over the year, while EBITDA contracted by 6% y/y to BGN 320mn, resulting in a compression of the respective margin from
42% to 40%. Subscriber base decreased in fixed voice segment, which was more than offset by an increase in mobile segment subscriber
base, and further supported by the dynamics of fixed broadband segment subscriber base, with ARPU declining in all of the segments.
VIVACOM’s liquidity profile remained strong, as the cash cushion covered short-term debt fivefold. Finally, the Company’s debt burden,
measured as total debt/LTM EBITDA, remained flat at 2.5x over the year, as both debt and EBITDA declined at a similar pace. All in all,
we view VIVACOM’ sole Eurobond as attractively valued within the region’s ‘single B’ universe.
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Eastern Europe Fixed Income: Weekly Overview
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