Russia regions load up on debt
• Russia’s regions are loading up on debt even as borrowing costs rise to a five-year high, selling as much in October as in the first nine months of the year on bets the federal government’s economic pain will deepen.
The oil-producing KhantyMansiysk Autonomous Region, which has the same BB- Standard & Poor’s credit rating as the sovereign, sold 14-billion rubles (US$344-million) of bonds on Oct. 14 at a 239 basispoint premium over similar-duration government securities, according to Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow. Regions have sold 44.7-billion rubles of debt this month, bringing the total this year to 97.3-billion rubles.
Local governments across Russia’s nine time zones are coming to the market as their ability to generate revenue is sapped by an economic slump that falling oil prices and U.S. and European sanctions over the crisis with Ukraine are worsening. Moody’s Investors Service cut on Oct. 17 the sovereign’s credit rating to the second-lowest investment grade, with a negative outlook.
“They’re waiting for the worst to come next year,” Anton Tabakh, an analyst at the Energy and Finance Institute in Moscow, said by email on Oct. 13. “Some regional governments, which might have expected to receive federal-budget financing at lower rates, or just waited in hopes of a better market, realized it’s not going to happen in sufficient volumes and are forced to sell, offering solid premiums.”
The borrowers are selling bonds even as the average muni yield jumped 51 basis points this month to the highest since December 2009, according to data compiled by UralSib Capital.
While bond sales picked up pace in October, the 2014 total is half of that of last year’s. The premium investors demand to hold Russian regional debt over sovereign securities has climbed to 159 basis points since reaching a five-month low of 90 at the start of August, UralSib data show.
The city of Volgograd, the republics of Bashkortostan and Karelia, and the regions of Voronezh and Krasnoyarsk sold debt this month, data compiled by Bloomberg show. Their credit ratings range from an investment-grade for Bashkortostan, an oil-producing region, to junk ratings for the other four. They all sold securities with coupons of at least 11.4%.