What does this mean: Rosneft has not been upgraded – and how to use it

And why this news about the largest borrower in the domestic bond market was a gift for investors

Author:  1top.company

Rosneft is the largest borrower on the Russian domestic bond market. But it was for her that the S&P agency did not raise the rating in February, when it revised all ratings following the increase in the country. We are looking at how this affected Rosneft bonds and why it is important for their buyers.


✔ Rosneft stayed with BB –
✔ What is S&P dissatisfied with?
✔ What does all this mean?
✔ Large offer of securities
✔ Banks love Rosneft
✔ What to do?

Rosneft remained with BB–

The international rating agency Standard and Poors (S&P) (one of the three most reputable in the world) on February 23, 2018 raised Russia’s sovereign rating in foreign currency to the  investment grade BBB–. This means that the agency has seen improvements in the economy, and accordingly, the country’s credit obligations – loans, Eurobonds  – have become more reliable.

As a rule, following a change in a country’s rating in one direction or another, agencies change ratings and companies. First of all, those associated with the state. On February 27, S&P announced the upgrade of the credit rating to the investment level of a number of companies – Transneft, Gazprom, Russian Railways, RusHydro. But Rosneft left the previous BB- non-investment rating

What is S&P dissatisfied with?

S&P analyst Alexander Gryaznov explained that the agency’s decision not to raise the rating is due to the fact that Rosneft has large short-term debt (2.2 trillion rubles at the end of 2017) and depends on  refinancing loans from local banks. Rosneft does not want to borrow at high rates and continues to accumulate short debt. Banks are not very capable of giving Rosneft as much money as it needs – they are too small, and the state did not provide support for  debt refinancing , which casts doubt on the strength of ties between Rosneft and the state, the agency believes

S&P believes that the government does not interfere too much in the activities of the state-owned company, and the management of Rosneft has sufficient autonomy, which is also a negative factor for the rating

Finally, S&P is embarrassed by Rosneft’s deals abroad, which have a negative impact on the  company’s cash flow – the acquisition of the Essar Oil refinery in India for $ 3.9 billion, advance payments in Kurdistan, and operations in Venezuela. These deals, according to analysts, are not operationally beneficial for Rosneft at the moment. “There is no sign that Rosneft will moderate its waste – no,” Alex Fack, an analyst at Sberbank CIB, wrote in November 2017. Even the sanctions failed to stop Rosneft from making foreign purchases, in which it behaves “illegibly,” he said. Fack has calculated that since the purchase of TNK-BP in 2013, Rosneft has already spent $ 22 billion on acquisitions, and has invested another $ 8 billion in Venezuela.

True, the rating outlook remains “positive”, and reflects the possibility of raising the ratings of Rosneft, if “the government will demonstrate its readiness to provide the company with direct or indirect support in managing liquidity and improving the capital structure,” the agency said in a report.

Gift for investing in Rosneft bonds

Strange as it may seem, maintaining the “junk” rating has become a gift for investors. “The fact that Rosneft has not been upgraded should be taken advantage of,” says Denis Kuchkin, co-founder of the 1top.company service.

For most companies, a “junk” rating means lower investor confidence, increased profitability (the lower the rating, the more expensive it is to borrow), the paper becomes an object of speculation – investors try to buy it quickly and sell it just as quickly, but at a higher price. This all increases the premium (profit) for investors up to a certain point. The difference in interest rates on bonds of companies with ratings BBB- and BB- may be 0.7-1.5 percentage points

According to Kuchkin, due to the low rating, Rosneft shares are traded at a yield premium to comparable securities, for example, Transneft bonds. The premium to them is 0.10-0.15 p.p. per annum

Expert commentary

“We note that many large Russian OSGs (government-related organizations) are under international financial sanctions, but do not have such problems. Some of these OSGs previously issued infrastructure bonds with government assistance and had access to the National Wealth Fund, which allowed them to finance large strategic investments. The government did not provide Rosneft with access to such instruments. “
“We understand that the government is tolerant of the growing short-term debt of Rosneft, which, given the size of the company, also creates risks for the entire Russian banking system.”
“We assess Rosneft’s liquidity indicators as“ less than adequate ”, which reflects the ratio of liquidity sources to needs at a level below 1x. Our estimate is mainly driven by the reduction in cash on the company’s balance sheet and the accumulation of short-term debt with maturities.

S&P rating report

Large offer of Rosneft bonds

There is a large supply of Rosneft securities on the market – after the imposition of sanctions, it cannot borrow on Western markets and is forced to raise funds from local investors. Since the beginning of the year alone, the company has made three placements. In early February, it attracted 50 billion rubles with a yield of 7.64% and a coupon of 7.5%. In early March – another 20 billion rubles, but the coupon has already amounted to 7.3%. And there was also a small placement at the end of March, but its volume was less than 3 billion rubles – Rosneft did it in the expectation that it would receive a lot of securities under the offer, but this did not happen.

Today, 7 classic issues of Rosneft bonds for 90 billion rubles and 39 issues of exchange-traded bonds for 2 trillion 871 billion rubles are circulating on the domestic market . In 2017 alone, it is estimated that the company borrowed about 1 trillion rubles.

Rosneft is known for its loans, which greatly influenced the Russian money market. On December 11, 2014, the company carried out a closed placement of bonds  – in an hour it raised 625 billion rubles among a limited number of banks. After that, “Black Tuesday” (December 16) came on the foreign exchange market , when the dollar reached 80 rubles in the auctions, the euro reached 100 rubles. Market participants were afraid that the company would buy up all the currency. Later it became known that she borrowed from the Central Bank, turning the deal through the bank “FC Otkrytie”. At the end of January 2015, Rosneft again raised 600 billion rubles in an “opaque” way. All these actions of the company coincided with the periods of repayment of foreign currency loans abroad.
According to S&P analysts, a repeat of this scenario is now unlikely, since the Bank of Russia has practically nullified the possibility of lending to Rosneft through foreign exchange repo transactions.I want to receive such News by mail  Subscribe
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Expert commentary: banks love Rosneft

The demand for paper is even greater. This is evidenced by the fact that in early February the company was going to place securities for 15 billion rubles, and placed it for 50 billion rubles.

“For the next two or three months , investor demand will be concentrated in Rosneft bonds,” Kuchkin says. “Naturally, investors are now trying to speculate in securities and sell them at a higher price.” However, this situation will last no more than a quarter. Gradually, the spreads (difference in yield) on Rosneft bonds and other first-tier securities will narrow.

Why? Firstly, no new offer of ruble bonds from the oil company is expected. Secondly, there is a liquidity surplus in the market for banks – at the beginning of 2018 it was estimated at 3.5 trillion rubles. A liquidity surplus means that banks have too much money and need to be put somewhere. And given that it was formed largely by the banks under resolution, which received very cheap government funds (at almost 0% per annum), the purchase of bonds with a yield of 7.5% looks very attractive for them.

According to S&P estimates, this year, banks that are on the reorganization of the Bank of Russia will receive about 1 trillion rubles. Rosneft is a great opportunity to place this money. “Now, among the players with high liquidity, there is competition in the market for stable borrowers, and if Rosneft offered bonds worth 200 billion rubles, the market would buy everything,” Kuchkin believes.

Accordingly, the demand for paper will grow, while it is possible that large investor banks will purchase large issues for operations with the Central Bank or to keep on the balance sheet until a coupon yield or offer is received, then a shortage of Rosneft bonds will form for small investors, and it may sell so much above par that the effective profit to sell will begin to decline.

Large offer and low rating – “buy” recommendation

High demand and high supply mean that Rosneft bonds can be bought on the market and there is no need to pay a premium for low liquidity, which can kill all yields.

1top.company recommends paying attention to Rosneft shares, but buying them as long as these two factors act – a large supply on the market and a low rating. At the same time, private investors should pay attention to  issues placed after January 1, 2017  , since these issues have a favorable taxation regime  – their  coupons are not subject to personal income tax , which, as you might guess, increases the investor’s income compared to similar ones. issues, coupons of which are subject to personal income tax .

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