/ world today news/ Gazprom joined the global trend – it released “perpetual” Eurobonds in foreign currency. This is an extremely risky business: just as Russian gas sales in Europe have fallen, the threat of sanctions against Nord Stream 2 does not add to Gazprom’s appeal. It seems that foreign investors should run away from such a company. But the Europeans and Americans, on the contrary, stood in line to lend. Why?
For the first time in the history of the Russian financial market, Gazprom launched corporate perpetual subordinated Eurobonds on the international debt market, said Denis Shulakov, First Vice President of Gazprombank. These are the so-called perpetual Eurobonds, which have not yet been issued by any Russian non-financial company. “Previously, perpetual bonds in foreign currency were released only by some Russian banks – for example, BTV and “Alfa”, but this is really the first such placement among non-financial companies. The permanent bonds of Russian Railways were issued in rubles this year,” noted Vasiliy Tanurkov, Director of the Corporate Ratings Group at ACRA.
It is surprising that despite the frankly negative geopolitical and information background related to Navalny’s story and the threat of new severe sanctions against Gazprom’s Nord Stream-2 project, there are generally those willing to extend loans to the company for an indefinite period.
Moreover, the main creditors were not Russian investors, but foreign ones. “Gazprom” placed two tranches – for 1 billion euros and for 1.4 billion dollars. In both cases, investors from Europe “generously” granted loans to Gazprom. Europeans bought half of Eurobonds (in euros) and a third of bonds in dollars. In second place are the investors from Great Britain, who bought respectively 21% and 27% of the securities. In third place are investors from Russia (19% and 20%). Even the American investors could not pass and granted a loan to Gazprom. Americans bought 5% of Eurobonds in euros and as much as 16% of Eurobonds in dollars. In fifth place are investors from Asia and the Middle East, who acquired respectively 3% and 4% of Gazprom’s Eurobonds.
Why do Europeans and Americans so calmly grant loans to the “disliked” Gazprom, over which hangs the sword of Damocles of sanctions? First, it’s good for them. “With zero or negative interest rates set by the central banks of key countries around the world, investors are forced to put money into risky assets to earn at least some return, sometimes not even exceeding inflation. Hence the demand from foreign investors,” says Anton Prokudin, leading methodologist of the Expert-RA rating agency. “Perpetual bonds are an extremely attractive investment object because the interest rates on such issues imply a significant premium for ordinary bonds,” notes Tanurkov.
“Investors all over the world choose bonds that promise at least some income like hot bread. In Russia, there is also an unusual demand for Eurobonds as the most convenient alternative to foreign currency deposits,” says Alexander Kuptsikevich, analyst.
Secondly, investors are confident that nothing bad will happen to Gazprom, despite the decline in gas sales and revenues, as well as despite the accumulation of geopolitical clouds. Gazprom, as a large state-owned corporation, is considered “too big to fail”, so investors are confident that Gazprom will pay its debts. In addition, the amount for it is relatively small – it is probably just a test issue,” says Alexander Kuptsikevich.
Investors do not believe that the US will dare to impose sanctions directly on Gazprom, completely banning the supply of Russian gas to the EU. “It is clear that whatever sanctions are imposed on Gazprom, European consumers simply cannot physically refuse Russian gas, which means that the company will have a source of income to service its debt,” notes Tanurkov.
On the other hand, Washington could impose financial sanctions against Russian government debt. However, it is believed that even in the worst case, the sanctions will be applied to new bond issues, but not to previously issued securities on the secondary market, adds Kuptsikevich. “As practice shows, sanctions are imposed in such a way that they do not harm foreign investors,” agrees Tanurkov.
“Sanctions affect the Russian economy less and less, and investment uncertainty in the world is growing. Well-known rating companies published a series of articles about the strong, sometimes seemingly “artificial” devaluation of the ruble and its strong, even mathematical, expected recovery. Oil will go up in price sooner or later. Both factors contributed to the fact that the issue of perpetual Eurobonds by “Gazprom” will definitely be profitable. We can only guess who will be the last in line on the day of payment,” says Plekhanov State University Associate Professor Alexander Timofeev.
Still, the risks are high. Why did Gazprom start this story, why was there such a rush? It turns out there has never been a better time. According to Tanurkov, in fact, right now, when interest rates are almost zero all over the world, companies have the opportunity to borrow as cheaply as possible. Therefore, in 2020 there is a real boom in the placement of perpetual bonds. Since the beginning of 2020, more than 25 issuers worldwide have launched such securities on public markets, including BP, Eni and Enel. Permanent Eurobonds allow companies to raise capital that is actually close to equity, but much cheaper. “The situation for the placement of bonds by Gazprom turned out to be very favorable: the interest rate is only 3.9-4.6% in foreign currency. Two years ago, only foreign companies with the highest credit rating could borrow at the rate of 4% for a long period, but now it turned out that the emerging markets are available to large corporations,” says Anton Prokudin.
What is the difference between perpetual and non-permanent bonds and why are they not popular in Russia before? The main difference is the lack of an expiration date. Having once bought this security, the investor gets the opportunity to receive a coupon yield “forever” every year. However, there are stipulations. Usually, as in the case of Gazprom, a withdrawal option is provided. Gazprom has a withdrawal option set after five years. This means that the company will have the right to redeem the bonds at par, but will not be required to do so.
“Previously, perpetual bonds were not used in Russia due to high interest rates. The longer the term of the bond, the higher the yield that investors demand from it. Interest rates are now at historically low levels, which allows companies to borrow for a longer period,” explains Kuptsikevich.
“Because of their lack of maturity, perpetual bonds are an intermediate form of capital raising, similar in nature to preferred stock. The placement of perpetual bonds itself is primarily an alternative to raising capital in the form of issuing new shares, when the main shareholders do not want to dilute their share in the company, “says the director of the corporate ratings group at ACRA.
How will Gazprom spend money from European and American creditors? First, he can spend them paying off debts that are coming due. Second, for general corporate needs. On the other hand, Gazprom itself states that it is collecting funds for the gasification of the country.
Translation: V. Sergeev
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