By Jason Webb - Aug 20, 2010 4:29 AM GMT+0800
OAO Gazprom’s falling debt payments and prospects for increasing cash flows are cutting the cost of insuring the Russian gas monopoly’s bonds relative to the government’s to the lowest in three months.
The cost of protecting state-run Gazprom debt against non- payment for five-years using credit-default swaps dropped to 227 basis points yesterday compared with 159 for contracts linked to the government, according to data provider CMA. The 68 basis- point gap is the narrowest since May 6. Gazprom’s contracts cost as much as 339 basis points in May.
The difference may drop to as low as 55 basis points as investor confidence in Gazprom increases, said Paul Crean, a partner at London-based hedge fund Finisterre Capital LLP. The Moscow-based company’s cash flow will rise 15 percent this year and 6.9 percent in 2011 after energy prices climbed, according to more than six analysts’ estimates compiled by Bloomberg. Gazprom has $6 billion of debt due in 2011, down from $14 billion in 2010, according to Standard & Poor’s.
“Gazprom’s maturities next year are moderating” and higher fuel prices are giving the company more cash to meet its obligations, said Elena Anankina, a Moscow-based analyst at S&P, said in a telephone interview yesterday. Gazprom’s link with the state is “quite strong,” she said. S&P revised its outlook on Gazprom’s debt to stable from negative in a report dated Aug. 18. Both the government and Gazprom are rated BBB, the second- lowest investment grade, by S&P.
Stable Outlook
The spread between default swaps for Gazprom and the government has narrowed from a record high of 664 basis points, or 6.64 percentage points, in October 2008 as oil rebounded from its lowest level since 2004 and Prime Minister Vladimir Putin’s administration set aside $50 billion to refinance companies’ international debt. Oil, which the company uses to calculate its long-term gas supply contracts, has averaged $78 a barrel in New York in the past six months, up from $32.40 in December 2008.
Yields on Gazprom’s dollar-bonds due 2037 dropped to 6.5 percent yesterday from a three-month high of 8.2 percent on May 25, while yields on Russia’s dollar bond due 2030 sank to 4.3 percent from 5.8 percent in the same period, according to prices compiled by Bloomberg.
S&P’s Anankina cited the government’s support for companies in the global financial crisis for the increase in the outlook on Gazprom’s debt rating. The government holds a 50 percent stake in Gazprom, according to the company’s website.
Higher Taxes
The possibility of higher taxes may hurt Gazprom’s cash flow, Morgan Stanley wrote in a report Aug. 18. Russia plans to increase gas extraction taxes while maintaining tax breaks in 2011 for producers developing new oil and gas deposits that require large capital outlays, Putin said in Moscow on July 28.
Gazprom had total debt of $54 billion as of December 2009, more than twice the $23.5 billion at OAO Rosneft, the country’s largest oil producer, according to data compiled by Bloomberg. Gazprom’s total debt to common equity, a measure of indebtedness, was 30.5 percent at the end of 2009, up from 29.7 percent the previous year, the data show.
“We try to keep our debt ratios within a corridor, without going higher or lower,” Sergei Kupriyanov, a Gazprom spokesman, said by telephone yesterday.
Russian government spokesman Alexander Smirnov didn’t answer calls to his mobile telephone seeking a comment.
The ruble weakened 0.2 percent to 30.4225 per dollar yesterday. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble at 30.74 per dollar in three months.
The yield on government dollar bonds due in 2020 fell 1 basis point to 4.49 percent yesterday, the lowest level since they were sold in April.
Yield Spread
The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 3 basis points to 220, according to JPMorgan’s EMBI+ indexes. The difference compares with 135 for debt of similarly rated Mexico and 201 for Brazil, which is rated two steps lower at Baa3 by Moody’s.
The yield spread on Russian bonds is 48 basis points below the average for emerging markets, down from a 15-month high of 105 in February, according to JPMorgan indexes.
Gazprom’s credit-default swaps fell 5 basis points to 226.5 yesterday, while the Russian government’s dropped 0.5 basis point to 159, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Russian swaps are 2 basis points cheaper than contracts for Turkey, which is rated four levels lower at Ba2 by Moody’s Investors Service. The difference has narrowed from 40 basis points on April 20.
Most-Heavily Traded
Gazprom’s default swaps are the most heavily traded of any emerging market credit insurance, the Emerging Markets Trade Association in New York, wrote in an e-mail on Aug. 10. Gazprom accounted for $54 billion of the total $658 billion traded in all developing-nation credit-default swaps in the second quarter, EMTA said.
Finisterre’s Crean said he’s selling Gazprom’s five-year default swaps and buying contracts linked to Russia, betting that the perception of the company’s debt will improve relative to government bonds.
“Gazprom will always trade at a wider spread than Russia, but I think that that spread differential is too wide and will narrow,” he said.
To contact the reporter on this story Jason Webb in London at jwebb25@bloomberg.net.
From Bloomberg published on Aug 20, 2010 4:29 AM GMT+0800