LONDON, March 6 (IFR) - If Russian issuance last year was
dominated by financials raising capital ahead of the transition
to Basel III, then 2013 could turn out to be the year that the
metals and mining sector leads the way.
Companies such as Evraz, MMK, Norilsk Nickel and Severstal
are rumoured to be preparing bond issues, with others,
particularly gold firms, thought to be waiting in the wings.
So far, NLMK is the only Russian company from the sector to
have raised funds in the international bond market this year,
selling a USD800m five-year deal in early February.
But the pipeline, which is led by Russia's largest steel
manufacturers, is building. There are several RFPs for steel
makers, one DCM syndicate banker said, and a number of companies
are likely to be eyeing issuance over the coming weeks, if
The sector is a key one this year because demand is as
strong as it has ever been as US investors and others are
desperate for credits that offer comparatively high yields.
Issuers, meanwhile, are aware that a recession in Western
Europe, a key export market, may lead to worse figures in 2013
and a weaker credit story in the future.
Now is the perfect time to issue, bankers and analysts
agree. "US investors in particular are showing more interest in
mining companies in Russia," said Peter Archbold, head of basic
materials, EMEA corporate finance, at Fitch Ratings. "That
really is in contrast to previous years: previously I had very
few calls from the American market for European and Russian
metals and mining issuers."
This demand is already being seen in the secondary markets,
with cash prices on the Evraz curve, for example, climbing
steadily since the summer of 2012. This is because it is one of
the only 'yieldy' names in emerging EMEA, a trader told IFR.
Unlike their oil and gas counterparts, most steel companies
are sub-investment grade - with the exception of NLMK - and the
biggest ones are in the double B category. This means they offer
a decent amount of yield but the risk is not high enough to
scare away investors.
SHRINKING PROFIT MARGINS
The other reason is that several of these companies want to
issue debt based on 2012 or early 2013 accounts because profit
margins are expected to shrink, a syndicate official said.
"They want to finish it off now, because the situation is
only going to get worse with Europe the way it is at the
moment," he said.
Large parts of Europe, a key export market for Russian steel
firms, are either in recession or experiencing a slowdown in GDP
growth. China, another key market, is expected to have GDP
growth closer to 7% than the 10% it recorded in the past.
"The steel sector is mired in a recession given the chronic
overcapacity and lack of supply side discipline and we expect
razor thin steel making margins to last [into the] next decade,"
said Mikhail Stiskin, a senior analyst with Sberbank investment
research. "The equity valuations of most Russian steels look
stretched given the headwinds and we broadly retain a downbeat
However, there is a risk that if companies increase their
debt pile as Ebitda margins shrink, it may adversely affect
their leverage ratios.
"It depends on what they are doing with the debt that they
raise," said Archbold.
"If they are using it to extend their maturity of their debt
profile or to refinance existing debt, that is not necessarily
an issue," he said.
Indeed, one banker said he believes that most of the
activity will be refinancing driven, in particular of loans,
rather than new money being raised for expansion.
The high-yield names that have strict covenant packages
stipulating debt-to-Ebitda ceilings will, in particular, seek to
refinance outstanding loans before they roll off, added the
banker, as once the debts mature, and the earnings environment
deteriorates, these issuers will have less room for manoeuvre in
case they breach their terms.
"It will be a matter of looking at the outstanding debt
stock in a challenging market for metals and mining companies
and making it more efficient," said the banker, who added that
with yields at near historical lows, the bond market was a more
attractive option than the loan market.