The Daily Update - Russia Gazprom China Pandas

Late last week Moody's Investor Services raised Russia’s outlook to stable from negative adding Russia’s strategy ‘reflects an ambitious fiscal consolidation strategy incorporating conservative spending and revenue assumptions’. Russia’s Economy Minister Maxim Oreshkin, said there are ‘objective grounds’ for a ratings upgrade.

Moody’s cited an improvement in the economy as well as a fiscal consolidation strategy that should help wean the country off its dependence on oil. That means that all three major agencies have now confirmed the economy is stabilising after almost a two year long recession, the longest in almost two decades. The Economy Ministry expects growth to reach 2% in 2017 while its 4% inflation target is also within reach, currently at 4.7%. Stabilising oil prices, the Russian budget has $40 per barrel built into it, improving mining, agriculture and manufacturing data all are contributing to the improved outlook.

This news has benefited our Russian although there is no sign as yet of an upgrade with Standard and Poor’s and Moody’s retaining their non-investment grade rating; with Fitch the only one of the three that held their BBB- investment grading during Russia’s economic and political problems. By way of an example our holding of Gazprom 8.625% maturing in April 2034, a USD denominated issue, is now priced around 130.75 which is a spread of 311 bps off of the US Treasury curve. If we utilise the Fitch rating, the better of the three agencies, this equates to a price which makes the bond 2.4 credit notches cheap to our fair value spread of 203 bps and offers us a return plus yield of 15.7%. Should this bond trade into its fair value spread it would rally around 15 points in price terms.

And now for something completely different; China is allowing JPM and BNP to underwrite so called Panda bonds domestically. Panda bonds are issued by foreigners into China’s domestic bond market. Sales in the world’s third largest corporate note market were up 9% last year to around 9.2 trillion yuan (USD 1.3 trillion) according to Bloomberg data, both JPM and BNP are looking to boost their teams to take advantage of the relatively cheap funding offered by the Chinese domestic market to foreigners looking at growing business in China. China is constantly looking at ways to deregulate and open up their domestic markets, although in a very controlled manner, however this confirms their wish to have further diversity in the domestic bond market.