MDM Bank analysts noted that the ruble and foreign currency bonds of Evrazholding and Russian Standard Bank are valued differently by investors on the external and internal debt markets. For example, the yield spread of Evraz-09 Eurobonds and Severstal-09 Eurobonds is only 100 basis points, while Evrazholding ruble bonds are traded with a spread to Severstal ruble bonds of about 250-300 basis points. The yield spread of Russian Standard-07 Eurobonds to TNK-7 and VTB-8 Eurobonds is 100-120 basis points, while on the internal market the spread of Russian Standard-2 ruble bonds to bonds of the same issuers TNK-5 and VTB-3 is approximately 350 basis points.

MDM Bank is confident that the reason for the unfair pricing of ruble bonds is that Russian investors in the domestic market are cautious and inert, and the liquidity of the secondary market is an order of magnitude lower than in the Eurobond market. “In Western markets, investors work in the most severe competition and are constantly looking for undervalued assets, which makes pricing fair,” says Artur Arakelyan, head of debt instruments analysis at MDM Bank. He is confident that the difference in the yields of ruble bonds of Russian Standard and TNK, VTB, as well as ruble bonds of Evraz and Severstal, will be the same as that of the foreign currency bonds of these issuers on the international market. This will lead to a noticeable increase in the prices of ruble bonds of Evrazholding and Russian Standard Bank. According to MDM Bank, the growth potential of Eurazholding ruble bonds is 2%, and that of Russian Standard 2 is 3–4%.

Troika Dialog analyst Alexander Kudrin agrees that the reason for the pricing discrepancies is the different levels of liquidity on the Russian and foreign debt markets. He adds that the trading volumes of Severstal ruble bonds have always been higher than those of Evrazholding bonds. According to him, price discrepancies are also observed among the most liquid Russian bonds. “The yield spread between Gazprom Eurobonds and Russian sovereign bonds is traditionally lower than the difference in yield between the gas concern’s ruble bonds and OFZs,” he notes. According to Kudrin, Evrazholding and Russian Standard ruble bonds will grow due to the general revival that has begun on the debt market: “Prices and liquidity of ruble bonds have started to grow again.” At the same time, Kudrin believes that it is incorrect to compare the Eurobonds of Russian Standard Bank with the Eurobonds of VTB and TNK: “VTB is a state bank with a corresponding level of risk, and TNK is an oil company, part of whose risks are borne by the international oil holding BP.” Boris Ginzburg, Head of the Debt Analysis Department of FC UralSib, gives another example: “On the Russian market, the yield of similar bonds of ALROSA and Gazprom is practically the same, and their Eurobonds are traded with a large spread.” At the end of last week, the yield of ruble bonds of Gazprom and ALROSA maturing in 2005 was 7.4% and 7.3% per annum, respectively, while the yield of ALROSA Eurobonds maturing in 2008 was 8% per annum, and that of Gazprom Eurobonds maturing in 2007 was 5%. Ginzburg believes that the discrepancy in pricing on the Russian and foreign markets for Russian debt instruments will remain: “Russian and foreign investors have different assessment systems and approaches to credit risks.”

Senior Vice President of Russian Standard Bank Levan Zolotarev notes that many investors who bought Russian Standard 2 bonds during the placement do not intend to actively trade them yet. “Buyers are satisfied with the yield on the bonds, and they are ready to wait for their redemption,” he says. In his opinion, this can explain the low liquidity of these bonds, and therefore the different pricing of the bank’s bonds on the Russian and Western markets.

Same companies, different risks