Russian $ Eurobond primary market is back after a halt due to July-August sell-off.
Total placements amounted to $13.15 bln ytd, out of which sovereign eurobonds accounted for $6.5 bln, financial sector — $1.1 bln, and other corporate issues — $5.5 bln.
In September, three companies announced new $ placements: Severstal, Chelyabinsk and Sibur.
The justified yield to maturity of Severstal is 3–3.1%, slightly above NLMK’s, Russia's largest steel producer, which has a net debt/EBITDA marginally below that of Severstal.
Severstal record low yield placement with bid to cover almost three times confirms strong demand for Russian investment grade issues, however according to BondRadar over 30% was taken by Russian entities, 23% by Europe and 22% by UK and 9% by Asian funds.
We would like to draw your attention to Chelpipe, which looks most attractive with respect to potential pricing.
We believe that Chelpipe will offer the highest premium given that the company has the lowest rating among its peers, and is making a debut in dollar-denominated placement — the bulk of the its debt is denominated in roubles.
New placements on Russian USD Eurobond market, $ mln
Source: Bond Radar, ITI Capital
Short description of key issuers
- Severstal is a vertically integrated steel and steel-related mining company with major assets in Russia. Steel production was 12 mln tonnes in 2018
- The company enjoys a sustainable business model due to availability of own raw materials, the highest share of high value-added products among Russian metal makers and low production costs, which ensures the highest EBITDA margin in the global steel industry (>30%)
- In 2018 Severstal posted an earnings rise: revenue was $8.6 bln (+9.3%), EBITDA — $3.1 bln (+21.9%), net income — $2.05 bln (+51%)
- Balanced approach to investments and borrowing under favourable market conditions allow the company to maintain low net debt/EBITDA: 0,5х as of 30.06.2019
- Severstal expects to deliver additionally around 10-15% to its annual EBITDA during the next five years by offering superior client experience, opening up additional revenue streams and achieving a significant production cost advantage against its peers
- ChelPipe is among the world's top 10 pipe companies, a major domestic producers of tubular products, its share in the Russian tubular goods output is about 17%. ChelPipe Group is comprised of ferrous industry companies, oilfield services providers and main-line equipment manufacturers. The company offers integrated solutions for the O&G and power engineering. The company's business strengths include a significant share of high value-added products and long-term relationships with key customers. The company is committed to a balanced investment policy and implements operational improvements. In 2019 , ChelPipe has increased its order book by concluding supply contracts for gas pipelines construction projects in Kazakhstan and Turkmenistan
- In 2018, the Company improved its financial performance and reduced its debt. The group's revenue reached 178.8 bln roubles. (+13% yoy), EBITDA margin grew to 15.8% (2017: 14.9%, and net profit amounted to 178.8 bln roubles. (+13% yoy). Net debt/EBITDA dropped to 2.4x from to 2.9x in 2017 and remained stable in 1H2019.
- Fitch has upgraded its rating on Chelpipe to BB- on November 2018, the outlook is stable. The upgrade reflects deleveraging, modest capex and growing demand for steel pipes
- The Group sells its petrochemical products including polypropylene, polyethylene, other plastics and fuel products. The group is primarily dependent on its own raw materials produced by the gas processing units based on by-products purchased from oil and gas companies. Sibur's customers are engaged in the chemical, fast moving consumer goods (FMCG), automotive, construction, energy and other industries in 80 countries worldwide
- Sibur’s major shareholders are Leonid Mikhelson (48.5%), Gennady Timchenko (17.0%), Sinopec (10%) and China's Silk Road Fund (10%)
- The group's 2018 revenue reached 589 bln roubles ($9.1 bln), average annual growth rate was 14% over the last three years. EBITDA margin in 2015–18 was stable in the range of 34–36%. Net debt/EBITDA was 1.8x as of the end of June 2019
- The ZapSibneftekhim project (95% complete) with polyolefins production capacity of 2 mln tonnes of per year will triple Sibur's polyethylene and polypropylene production capacity. The company plans to hold an IPO after the launch of the project in 2020, the company's value stands at $20-26 bln, according to preliminary estimates
Russia corporate yield curve and new issues
Iskander Lutsko, Chief investment strategist