Deripaska Follows McDonald's to Yuan Bond Market

 Oleg Deripaska, owner of United Co. Rusal. Photographer: Simon Dawson/Bloomberg

Billionaire Oleg Deripaska’s United Co. Rusal is planning Russia’s first offering of bonds in China, spurred by McDonald’s Corp.’s debut sale in yuan.

The world’s biggest aluminum producer will meet with investors and banks in two weeks to prepare for the sale, Oleg Mukhamedshin, head of capital markets, told reporters at a China investment conference in Moscow on Sept. 2.

Rusal, which is based in Moscow and owns two smelters in China, became the first Russian company to sell shares in Hong Kong, raising $2.2 billion in January. It’s joining Wal-Mart Stores Inc., the world’s top retailer, in planning a yuan bond sale after the government permitted foreign borrowers this year. McDonald’s became the first international nonfinancial company to issue when it sold 200 million yuan （$29 million） of 3 percent notes due in September 2013 on Aug. 20.

China is “going to be one of the largest markets for Rusal,” Mukhamedshin said. “We need to grow our presence on this market.”

Rusal, which doesn’t have credit ratings, may need to offer a yield at least 550 basis points, or 5.5 percentage points, above McDonald’s yuan bonds, said Sergey Dergachev, who helps manage about $6 billion of emerging-market debt at Union Investment in Frankfurt. Oak Brook, Illinois-based McDonald’s yuan bonds are ranked A3 by Moody’s Investors Service.

“For Hong Kong-based investors, this issue will be a great diversification play with significant yield pick-up compared to the majority of local bonds,” Dergachev said. Rusal will probably sell the equivalent of at least $100 million to provide enough securities to attract international investors, he said.

Overtaking Germany

China overtook Germany as Russia’s second-largest trading partner in the first six months of this year, helped by exports from Russian commodity producers including Moscow-based Rusal, OAO GMK Norilsk Nickel and OAO Rosneft. Hong Kong will become the most important place for Russian companies to raise foreign capital in two or three years, Stephen Jennings, chief executive officer at Moscow-based investment bank Renaissance Capital, said in an interview in Moscow last week.

Rusal produces cathode blocks, a component of aluminum, at two plants 600 kilometers from Beijing in Taiyuan. The company plans to boost Asian sales to 30 percent of the total this year from 20 percent in 2009.

Rusal completed Russia’s biggest corporate debt restructuring in December, extending the maturity on almost $10 billion owed to more than 70 creditors to over seven years. The company refinanced its biggest chunk of debt, $4.5 billion owed to Russian development bank VEB, by obtaining loans last month from OAO Sberbank due in December 2013, with an option to extend the term for a further 1 ? years.

Creditor Approval

In a new bond sale, “for a company the size of Rusal anything less than $500 million doesn’t really make sense,” said Mikhail Stiskin, a metals analyst with Troika Dialog in Moscow, who rates Rusal a “Buy”。 “Given the abundant liquidity in the ruble bond market, it makes more sense to sell in Moscow.”

Russian companies have sold 453.5 billion rubles （$14.8 billion） of local bonds this year, heading for an annual record. Rusal said in May it will issue 30 billion rubles of bonds to refinance debt and reduce funding costs.

Rusal needs approval from creditors for new debt, which took a few weeks for the ruble bonds, Mukhamedshin said in an e- mailed response to questions on Sept. 3.

Shares Slump

Rusal’s stock in Hong Kong remains 26 percent below the sale price of HK$10.80 on Jan. 26. Alcoa Inc., the largest U.S. aluminum producer, has fallen 20 percent in New York trading and Aluminum Corp. of China Ltd., based in Beijing, has lost 23 percent.

China’s decision in February to allow foreign companies to sell debt may lure dozens of international companies, Hong Kong Chief Executive Donald Tsang told a conference in Moscow last week.

London-based HSBC Holdings Plc’s China unit and Bank of East Asia Ltd. in Hong Kong sold yuan bonds in 2009, data compiled by Bloomberg show. Wal-Mart, based in Bentonville, Arkansas, said in March it was considering bonds in yuan.

VTB Group, Russia’s second-biggest lender, may sell debt in Hong Kong dollars as early as this year to diversify its sources of funding, Deputy Chairman Herbert Moos said in an interview last month. The Moscow-based bank became Russia’s first company to issue notes in Singapore dollars last month and is also considering yen-denominated bonds.

‘Captive Demand’

“There is good captive demand for blue chip Russian credits in Asia, mostly out of the private banking industry,” said Luis Costa, an emerging-markets strategist at Citigroup Inc. in London. “It will be healthy to see more Russian companies exploring the Asian demand.”

Yuan bonds issued by Chinese companies have returned 6 percent this year, their best performance since 2005, according to a Bank of America Merrill Lynch index tracking 1.37 trillion yuan of debt. Ruble-denominated corporate debt gained 4.8 percent this year, the Micex CBI Index shows.

Russian government bonds rose on Sept. 3, pushing the yield on dollar notes due in 2020 down 2 basis points to 4.583 percent, the lowest level since Aug. 23. The country’s ruble notes due November 2014 were unchanged, leaving the yield at 6.87 percent, the lowest since Aug. 19.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 1.5 basis points to 164.5, 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.

NDFs

Russia credit-default swaps cost 0.5 basis points less than contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. Russia swaps cost as much as 40 basis points less in April.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 6 basis points to 214, according to JPMorgan EMBI+ Indexes. That compares with 155 for debt of similarly rated Mexico and 212 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The so-called yield spread on Russian bonds is 63 basis points below the average for emerging markets, down from a 15- month high of 105 in February, according to JPMorgan Indexes.

The ruble climbed 0.1 percent to 30.6650 per dollar, its strongest level since Aug. 23. 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 30.8273 per dollar in three months.

Diversification

Prime Minister Vladimir Putin opened the Russian section of a pipeline that may eventually carry 50 million tons of eastern Siberian oil to China on Aug. 29.

Foreign issuers of yuan debt are attractive to investors because they offer diversification from local issuers, said Arthur Lau, a fixed-income fund manager at JF Asset Management Ltd. in Hong-Kong. “With the relaxation of rules recently, I think we will see a surge in renminbi debt investment products in Hong Kong,” he said.