Dealmaking Jumps to Three-Year High as Borrowing Costs Drop: Russia Credit.

08.12.2010

Russian mergers and acquisitions hit a three-year high this quarter as companies took advantage of a drop in dollar borrowing costs.

Deals involving Russian companies reached $33.8 billion since Sept. 30, the most since the last three months of 2007 and three times the level in the same period last year, according to data compiled by Bloomberg. The figure compares with $37.7 billion for China and $8.2 billion for Brazil, the data show.

X5 Retail Group NV, Russia’s largest food retailer, VTB Capital and PepsiCo Inc. are doing deals in Russia after interest rates on loans and bonds fell. Rates on three- to five- year ruble loans have dropped to between 8 to 12 percent from 13 to 15 percent a year ago for Russian companies, said Andrey Goltsblat, managing partner at his own Moscow law firm, which focuses on M&A.

“Attractive rates are a key factor in the M&A pickup,” Goltsblat said. “The cost of funding is dramatically cheaper than 12 months ago.”

Moscow-based X5 is borrowing the equivalent of $1 billion in five-year ruble loans from OAO Sberbank, the lender said, at a rate brokerage Renaissance Capital estimates at between 7 and 8 percent a year. The yield compares with the 18.46 percent coupon the retailer offered investors on 8 billion rubles ($257 million) of bonds it sold in June 2009.

X5, which is half-owned by billionaire Mikhail Fridman’s Alfa Group, said Dec. 6 it was paying 51.5 billion rubles ($1.65 billion) for supermarket chain Kopeyka in a transaction to be closed later this month.

Western Terms

The terms of the Sberbank loan are “comparable with those provided by leading western banks,” the Moscow-based lender said in a statement that day. Alexander Baziyan, a Sberbank spokesman, didn’t return e-mailed requests for comment.

The deal follows Purchase, New York-based PepsiCo’s pact last week to buy 66 percent of dairy and juice company OAO Wimm- Bill-Dann for $3.8 billion and E.ON AG’s agreement to sell its 3.5 percent stake in natural gas monopoly OAO Gazprom for 3.4 billion euros ($4.6 billion). VTB Capital announced on Dec. 6 its acquisition of a 19.3 percent stake in OAO Rosbank from billionaire Vladimir Potanin’s Interros Holding Co.

“Russian companies have recently recovered investment appetites together with the recovery of credit spreads,” Marina Vlasenko, a credit analyst at Commerzbank AG in London, said by e-mail yesterday. “Cash cushions on the balance sheets of stronger companies and weakened positions of others after the crisis” are also contributing to the surge in M&A deals, she said. “Most of these deals are funded on the debt market.”

Dollar Bond Rally

The average yields on Russian dollar bonds fell 114 basis points, or 1.14 percentage point, this year to 5.85 percent on Dec. 7, according to JPMorgan Chase & Co’s Corporate EMBI Russia Blended Yield. The yield tumbled to 5.26 percent in October, the lowest level since the index was set up in May 2002, and down from the average of 10.4 percent in 2009.

While the cost of funding acquisitions has fallen, this has only benefitted larger companies, said Grigory Dudarev, managing director Evli Russia Ltd, an M&A adviser based in Moscow.

“It’s still difficult for mid-cap and third-tier companies to get access to loans,” he said. Current levels aren’t indicative of the number of transactions because “a number of deals coming through were just delayed till the final quarter,” Dudarev said.

The ruble weakened 0.3 percent to 31.0775 per dollar in today’s trading, its biggest drop this month. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, show the ruble at 31.3806 per dollar in three months.

Debt Protection

Russia’s dollar bonds due in 2020 fell, pushing the yield 2 basis points higher to 4.830 percent. The price of the country’s ruble notes due August 2016 fell, leaving yield 3 basis points higher at 7.31 percent.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps was little changed at 144 today, down from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating, cost 15 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.

Yield Spread

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries declined 3 basis points to 191, according to JPMorgan EMBI+ Indexes. The difference compares with 123 for debt of similarly rated Mexico and 161 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

Russia’s dollar bonds due in April 2015 were yielding 3.316 percent yesterday, 64 basis points more than similar debt of Brazil. Turkey’s 7.25 percent dollar bonds due in March 2015 yield 2.989 percent and the yield on 8.25 percent bonds due December 2014 of Colombia, rated three levels lower than Russia at Ba1, is at 2.824 percent, according to Bloomberg prices.

X5’s 8 billion rubles of 2016 securities, which can be redeemed though a put option in June 2011, yielded 7.1 percent on Dec. 3, the last time they traded on the Micex Stock Exchange, according to data compiled by Bloomberg.

Standard & Poor’s put X5 on credit watch with a negative outlook, reflecting “uncertainty about the potential implications” of the acquisition, the rating company said in a statement e-mailed yesterday.

X5’s total net debt will be $3.2 billion once the takeover is completed, Troika Dialog analysts Mikhail Krasnoperov and Artur Galimov said in a research note yesterday.

By Jason Corcoran and Denis Maternovsky.

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