As our very own Boris Johnson cancels his trip to Moscow, focus will be on Japan’s Premier Abe and his Russian visit later this month. Expectations are that high on the list of business will be the prospect for a new gas pipeline between the two countries to supply the world’s largest importer of Liquid Natural Gas.
Unfortunately, Russia’s Gazprom PJSC is not that confident on the outlook for Japanese future gas demand to warrant the outlay involved. Broadly, with Japan’s nuclear reactor capabilities coming back online slowly (three are now operational with a further twelve or so cleared by Japanese regulators for operation out of the 42 that are operable) combined with Japanese energy efficiency plus use of cheaper coal is hindering Russia’s commitment to further investment.
Alexander Medvedev, Gazprom’s deputy head recently, when asked about Japan, said ‘The market is already supplied’ adding ‘There is still huge potential for customers in China, India, Vietnam, Bangladesh, Pakistan and Kuwait, the project would need a deep feasibility study by both sides’. A pipeline would optimally carry 20 to 30 billion cubic meters a year which is about a quarter of Japan's current annual demand.
Gazprom PJSC is one of our favourite Russian companies and we widely hold two issues from their special purpose entity GAZ Capital SA, one denominated in US dollars and the other recently issued in sterling. Both issues are rated by Fitch at BBB- while Moody’s and Standard and Poor’s have them one notch lower and so non-investment grade, but both have moved the outlook up in recent months to stable and positive respectively.
The US dollar 8.625% 2034 issue is priced around 131, a yield of 5.75% and a spread of 315bps off of the US Treasury curve. According to our Relative Value Model (RVM) this equates to an 18.5% expected return, including one year’s yield, if this 9.64 year duration bond moved to fair value.
The sterling issue we hold is the Gazprom 4.25% maturing April 2024 which was issued last month at a spread of +342.3bsp over the UK Gilt curve; a price of 100. Currently this bond is priced on the bid at 100.50, a yield of 4.15% and a spread off of the UK Gilt curve of 345bps We have seen a little widening of the spread due to the recent Gilt market rally but still a movement up in price from issue. Our UK Gilt RVM calculates fair value for this bond at a spread of +209bps, if this bond price moved to that spread it would generate a return, including one year’s yield of around 12%, a very comfortable return for the duration of just under 6 years.