Business & Financial Markets (Moscow) – March 26, 2008

Media holding places stock exchange bonds

Media holding RBC Information Systems has become the first company to use a new financial instrument – stock exchange bonds. RBC placed an issue of RUB 1.5bn, and the investor demand exceeded the volume of the offering by 59 percent. The coupon rate is fixed at 12.25 percent per annum. Analysts believe that RBC had to pay extra for being the pioneer and in order to fuel investor interest.

The RBC flotation is the first issue of stock exchange bonds worth RUB 1.5bn which is part of the RUB 12bn registered issue program. Stock exchange bonds are the new instrument on the Russian market, and their primary advantage is the simplified access of bonds to trading. According to Cbonds data, the Russian debt market currently has about 55 potential stock exchange bond issuers. So far, aside from RBC, Pharmacy Chain 36.6 and Avtovaz issues have also been admitted to trade.

Alfa Bank (the lead manager for the offering) forecasted the yield to maturity at about 12-12.5-percent per annum. As it turned out, the coupon rate was fixed at exactly the mean value of the forecasted figure – 12.25 percent. The demand significantly exceeded the announced size of the issue: a total of 86 bids for a total of RUB 2.373bn (159 percent of the issue) were made during the auction.

Despite the obvious success of the flotation and the high potential of stock exchange bonds, however, debt market analysts point out that such a coupon rate fully compensates the risk of these securities in the current situation. “This is why such a considerable oversubscription came as a surprise to us. RBC already has a rather significant debt burden. Based on our data, as of the end of last year, the total amount of the company’s liabilities stood at nearly $150m, and the debt/ EBITDA ratio was equal to 6, which is a high figure,” Yekaterina Sidorova, Troika Dialog Investment Company’s debt instruments market analyst stated.

Experts also indicate that it is impossible at this point to pledge stock exchange bonds in order to refinance debt, which makes it a disadvantage of this debt instrument. “The thing is that thanks to RBC’s credit rating of B+, the Central Bank could have accepted stock exchange bonds as a pledge for refinancing transactions. Unfortunately, for a number of reasons, it is impossible to make repo transactions with these securities in the Bank of Russia,” MDM Bank bond market analytical department head Mikhail Galkin reiterated. What is more, RBC had to pay extra for this instrument that is new to investors, but at the same time the company is now officially the first-ever issuer of stock exchange bonds, Galkin observed. He indicated that a 12.25-percent annual coupon rate is still too much for RBC’s one-year ruble risk. ‘I think that if the company placed traditional bonds instead of stock exchange bonds, the coupon rate would have been 10-10.5 percent,” he stressed.