OAO Main Road, a group comprising ZAO Lider, which manages natural-gas exporter OAO Gazprom’s pension funds, and companies such as Portuguese toll operator Brisa-Auto Estradas de Portugal SA, is selling 8 billion rubles ($261 million) of 18-year debt later this month. OAO Western High-Speed Diameter plans to market 10 billion rubles of 20-year, state-guaranteed bonds this month and 15 billion rubles next year for a St. Petersburg highway. Ust-Luga Port on the Baltic Sea plans to sell as much as 10 billion rubles of notes next year.
Russian sellers may have to pay more relative to sovereign debt than their peers in India and China. Main Road expects to pay a premium of 1.6 percentage points over Russian Finance Ministry bonds, half a point more than comparable Indian spreads and a point more than Chinese, data compiled by Bloomberg show.
“The risk reward is obviously better for infrastructure bonds than for pure sovereign bonds,” said Yerlan Syzsykov, a fund manager in Dublin at Pioneer Investments, which oversees about $252 billion. “From this perspective, we’ve always been looking at this as sovereign-plus, pricing-wise.”
Infrastructure investments in emerging markets will total $4 trillion over the next five years, according to Syzdykov. Pioneer, a unit of Italian bank UniCredit SpA, has invested in projects in countries including Peru, Philippines and Brazil.
Funding Roads
Russia needs about $1 trillion over the next decade to finance the overhaul of the country’s transportation system and capital markets can be used as “a supplement to, or instead of traditional bank financing,” according to Oleg Pankratov, co- head of global banking at VTB Capital in London.
Prime Minister Vladimir Putin's government is using the market to close a funding gap for roads the World Bank estimates at about 1.2 percent of gross domestic product, or about $15 billion. The bonds also are a response to capping state expenditures this year after Russia reported its first budget deficit in a decade.
“The idea of infrastructure bonds was born out of the crisis,” Alexei Chichkanov, head of the St. Petersburg government’s investment committee, which oversees the city highway project, said in a Nov. 3 interview. “It became clear that financing large infrastructure projects without additional state guarantees is extremely difficult.”
Moscow Gridlock
Russian state spending on transportation will fall to 1.9 percent of GDP this year from the “already low level of” 2.5 percent in 2009, the World Bank said in a report published on June 16. Gridlock in the capital costs Moscow 400 billion rubles a year, the Transport Ministry estimates.
“Our infrastructure has reached a critical condition, it needs massive, long-term investments,” said Alexander Sinenko, deputy head of the Federal Financial Market Service in Moscow. “It’s necessary to seek financing on the securities market.”
India plans to spend $1.5 trillion in the decade through 2017 to build roads, ports and power plants. Prime Minister Manmohan Singh asked companies and investors on March 23 to fund half the planned $1 trillion budgeted for the five years starting April 2012. China is spending about $300 billion to build a high-speed network of at least 18,000 kilometers (11,185 miles) by 2020.
“The needs are huge and there is an increasing number of projects that are coming on stream and being developed,” said Bertrand Millot, the chief investment officer at Cordiant Capital Inc., a Montreal-based investor in emerging-market loans and infrastructure projects. “Governments are slowly but surely realizing that they can’t do everything themselves and the private sector should be involved.”
30-Year Concession
For Russian corporate debt to qualify as an infrastructure bond, notes must be issued by a winner of a government concession or receive state guarantees, Sinenko said on Nov. 2. Transport Minister Igor Levitin said last year he expects annual sales of the infrastructure bonds to reach 75 billion rubles.
Main Road, based in Moscow, signed a 30-year concession agreement last year with the Russian government for a 32.4 billion ruble project, according to the company’s website. The government will contribute 11 billion rubles and a further 19 billion rubles will be raised from the capital markets.
The group expects to pay a premium of 160 basis points, or 1.6 percentage points, for state OFZ bonds on 18-year debt non- callable for the first 11 years after the issue, according to an Oct. 28 report by OAO Gazprombank, the lending arm of Russia’s gas export monopoly that’s managing the sale.
Russian Risk
In India, the extra yield investors demand to own Infrastructure Development Finance Co.’s 9 billion rupees ($203.5 million) of 8.48 percent bonds due in 2013 rose to 110 basis points as of Nov. 2 from 109 basis points on Oct. 1, according to Barclays Plc prices on Bloomberg.
The Chinese rail ministry’s 10 billion yuan ($1.5 billion) of 4.1 percent notes due 2025 traded at a spread of 53 basis points above the 15-year China government bond, according to Chinabond prices and Bloomberg data.
“Investors demand a higher risk premium to buy Russian equities and you can really tell that bondholders are also seeking the same higher premium for weaker corporate governance and institutional underdevelopment,” Pioneer’s Syzdykov said.
The ruble was little changed at 30.7851 per dollar by the 5 p.m. close in Moscow. 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 31.0526 per dollar in three months.
Default Swaps
The yield on Russia’s dollar bonds due in 2020 rose 2 basis points to 4.203 percent. The yield on the country’s ruble notes due November 2014 gained 1 basis point to 6.820 percent.
The cost of protecting Russian debt against non-payment for five years using credit-default swaps rose 4.5 basis points to 134, down from this year’s peak of 217, according to prices from 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, cost 11 basis points more than similar contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries increased 1 basis point to 198, according to JPMorgan Chase & Co. EMBI+ indexes. The difference compares with 128 for debt of similarly rated Mexico and 178 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
‘Attractively Priced’
The yield spread on Russian bonds is 35 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
Ust Luga Port on the Baltic Sea, picked by Putin to become the end point of a new pipeline, plans to sell as much as 10 billion rubles of bonds with maturities of five or seven years.
The group expects rates to be “more attractively priced” than the 9.9 percent on the ruble debt it sold in 2007, which matured earlier this year, Maxim Shirokov, chief executive officer of the operator, OAO Ust-Luga Co., said in a Nov. 2 interview. The port needs the funds to help build terminals and a maritime logistics center, he said.
“We are looking to investors who aren’t ready to work with high risk,” he said. “The project in Ust-Luga needs this type of financing as we are poised to start.”
