By Denis Maternovsky Feb. 19 (Bloomberg) -- Russian companies are likely to sell a record amount of ruble bonds this year after a drop in yields and reduced currency swings. Domestic corporate bond sales will reach at least 1 trillion rubles ($33 billion), up from 814 billion rubles last year and 533 billion rubles in 2008, according to Trust Investment Bank in Moscow and ING Groep NV, the biggest Dutch financial-services company. Yields on bonds sold by Russia’s biggest companies have fallen by half to an average 8 to 9 percent in the past year as the central bank cut its refinancing rate 11 times to a record low of 8.5 percent today, according to data compiled by Moscow- based VTB Capital, the investment-banking unit of Russia’s second-biggest lender. The central bank may lower its benchmark interest rate another 150 basis points by the middle of this year, according to UniCredit SpA. “Companies with ruble-denominated revenue should now think twice before borrowing in foreign currency,” said Stanislav Ponomarenko, a fixed-income analyst at ING in Moscow. Yields on benchmark government ruble bonds due 2036 dropped 4.5 percentage points since August 2009 to an 18-month low of 8.1 percent yesterday. That compares with a 2 percentage-point decline in the yield on Russia’s 2030 dollar bonds to 5.4 percent in the same period. Ruble bonds due 2012 sold by OAO Gazprom, the country’s biggest company, yield 8.2 percent, down 5.4 percentage points from when they were issued in June. The yield on the company’s dollar bond due in 2013 fell 3 percentage points to 5.3 percent in the same period. Hedging Costs The cost of borrowing in dollars may be higher for companies looking to protect themselves against currency swings raising their repayment costs. Three-year non-deliverable forwards, or NDFs, show the ruble weakening by 6.86 percent a year against the dollar. The central bank let the ruble depreciate 35 percent between August 2008 and January 2009, making it more expensive for companies reliant on ruble earnings to service foreign debt. The currency has since strengthened 20 percent against the dollar and its one-month volatility has halved, Bloomberg data show. Bank Rossii helped to spur the ruble bond market since the credit crisis began by accepting a wider range of the securities as collateral for loans. That allowed commercial banks to borrow more cheaply from the central bank by using interest-paying bonds as collateral. Bond Collateral “This is the major reason why ruble debt is so popular at the moment,” said Denis Poryvai, a fixed-income analyst at UralSib Financial Corp., the Moscow-based lender owned by billionaire Nikolai Tsvetkov. “If the central bank stops accepting bonds as collateral we’d see the market collapse and yields surge 4 or 5 percentage points,” Poryvai said, adding that he expects the central bank to retain the program for the foreseeable future. “This will be a record year.” While Russia is seeking to raise as much as $17.8 billion in its first sale of bonds to international investors in more than a decade, the government has cautioned companies against taking on too much foreign debt. Companies led by state-run energy producers OAO Gazprom and OAO Rosneft raised more than $250 billion abroad in the three years before the collapse of Lehman Brothers Holdings Inc. in September 2008, according to Bloomberg data. Foreign borrowing fell to a five-year low of $35 billion last year, with almost all of it used for refinancing. $11 Billion Bailout VEB, the state development bank chaired by Prime Minister Vladimir Putin, stepped in at the height of the crisis in the fourth quarter of 2008 to lend $11 billion to companies deemed strategic to the economy. The government will monitor the foreign debt of state-run companies more closely to limit their exposure to exchange-rate swings, Finance Minister Alexei Kudrin said in December. “The government is trying to limit foreign-currency borrowing for state-run entities,” ING’s Ponomarenko said. OAO Mobile Telesystems, or MTS, the country’s biggest mobile operator, sold 15 billion rubles of 14.25 percent notes in July and is considering more ruble debt sales. “Our policy has changed,” acting Chief Financial Officer Alexei Kornya said in an e-mailed response to questions from Bloomberg. “The company is now much more active raising debt on the ruble market and the significant part of our debt portfolio is now ruble-denominated.” Biggest Issuer OAO Russian Railways, the largest issuer of ruble notes last year, plans to sell 200 billion rubles of the securities this year. It last sold bonds on Feb. 4, when it raised 15 billion rubles of 9 percent notes maturing in 2025. Gazprom, the world’s biggest gas company, said Feb. 12 it plans to sell 300 billion rubles of domestic bonds over the next five years. “Domestic liquidity is very good and there is good demand to both buy and issue at current levels,” said Eugene Belin, the head of fixed income at Citigroup Inc., who has helped manage bond sales for Gazprom, Russian Agricultural Bank and steelmaker OAO Severstal in the last year. “We’ve seen a lot of interest this year and there is more to come.” To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

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