May 23, 2016 / 10:21 AM / 2 years ago

Russia to sell US dollar bonds through VTB Capital

* Russia eyes first US dollar bond since 2013

* VTB Capital is sole lead manager

* Proceeds won’t go to sanctioned entities

By Sudip Roy

LONDON, May 23 (IFR) - Russia is marketing its first US dollar bond since 2013 after hiring state-owned bank VTB Capital to lead the deal.

The sovereign has announced initial price thoughts of 4.65-4.90% for a 10-year offering.

Russia’s intention to raise money in the global bond market has been shrouded in controversy. Earlier this year, the sovereign sent a request for proposals to 28 international and domestic banks for a potential bond issue.

However, international banks quickly came under pressure from US and EU regulators to desist with any plans to work on a deal.

Many banks declined to respond to the RFP. But others did initially but were then forced to reassess after the US State Department had reportedly warned some banks that helping Russia raise money would undermine international sanctions imposed on certain Russian entities for Moscow’s role in Ukraine.

Goldman Sachs, for example, was forced to perform an about turn after pitching for the deal.

Last week, Deputy Finance Minister Sergei Storchak said Russia had not cancelled plans for the Eurobond.

“Everyone assumed they could get a deal done without Western banks being involved, but only with all the big Russian state owned banks and perhaps a few Chinese banks, so it’s very interesting to see VTB as sole lead,” said a banker away from the deal.

The bond’s documentation says that the proceeds raised won’t go to sanctioned entities, according to the source.

“But once money has been disseminated into the Russian system, who knows where it goes?” he added. “It’s impossible for anyone to tell.”

It remains to be seen how many international investors buy the deal. The Russian sovereign is not sanctioned and, in the past, some investors in the UK have said they would have no problem investing in a new issue.

“Pricing 4.65-4.9% is certainly not expensive for Moscow given geo-political risks/tensions. Moscow will aim to do a big deal - with very significant Western institutional investor interest, with the message to the West being ‘look, despite your sanctions, your investors still buy into the Russian story, and are participating in scale in this deal,'” said Tim Ash, senior credit strategist at Nomura.

Russia has US$3bn bond due in September 2023 outstanding, which is the closest reference point for the new transaction. That bond closed on Friday at a yield of 3.96%, according to Eikon. It is currently trading at a yield of 4.06% or spread of 244bp over mid-swaps.

Russia last sold debt in the US dollar market in September 2013 when it raised US$7bn-equivalent through a four-tranche transaction. Demand for that deal was more than US$16bn.

Russia is rated Ba1 by Moody‘s, BB+ by Standard & Poor’s and BBB- by Fitch.

Reporting by Sudip Roy, additional reporting by Michael Turner; editing by Alex Chambers

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