Commento Unicredit Russian Credit
■Following the downgrade of a number of Russian corporates by S&P last week (see next page for details), we reiterate our buy recommendations on GAZPRU 3.85% 2020, LUKOIL 3.416% 2018, CHMFRU 4.45% 2018, GMKNRM 5.55% 2020, VIP 6.2546% 2017, VEBBNK 6.902% 2020 and SBERRU 5.4% 2017 issues. On the euro-denominated curves, we add GAZPRU EUR 3.389% 2020 and VEBBNK EUR 3.035% 2018 issues to the buy recommendations. On the back of a combination of rich cash price/tight spread vs. peers, YTD strong performance and credit fundamentals, we recommend selling VTB 6.315% 2018, GPBRU 5.625% 2017 and RSHB 6.299% 2017 issues.
■We think that most of the pressure from forced sellers following the S&P downgrade has dissipated, as a large part of real-money high-grade investors sold their Russian positions over the past few months and/or had to sell when S&P downgraded as the first agency to reduce the sovereign rating to below investment grade. However, although the risk of another downgrade has been well communicated, another negative reaction cannot be excluded, as some real-money investors are tempted to hold positions until the actual downgrade takes place and issues drop out of indices. The latter will take place, in most cases, when a second rating agency cuts the rating, which should cause Russian issues’ ratings to drop, on average, below investment grade. In terms of future rating agency action, investors’ focus is on Moody’s and Fitch. Moody’s downgraded the Russian sovereign and quasi-sovereigns to Baa3 with watch negative on 16 January, which the agency needs to resolve within three months. The step by S&P, however, suggests that Moody’s may downgrade Russia and its quasi-sovereigns earlier than mid-April. Fitch has “only” a negative outlook on Russia and its quasi-sovereigns. In our base scenario we assume that Moody’s and/or Fitch will also downgrade the Russian sovereign and quasi-sovereigns by one notch.
■As they are discounting downgrades into CCC area, Russian credits remain cheap. At 830bp, the Russian JPM CEMBI component is 200bp outside the Argentina component (B rated on average). Moreover, most of the issues trade well below par (see charts on the right). The cheapness comes on the back of low visibility and high political uncertainty surrounding the outcome of the conflict in Ukraine. Although the EU, Russia and Ukraine reached an agreement in Minsk this week, it is not clear how sustainable it will be. As such, our base scenario remains that existing economic sanctions will not be removed this year, and their tightening cannot be completely excluded, which implies that Russian corporates will remain cut off from external markets.
■Going forward, investors’ focus will be on credit fundamentals on a stand-alone basis – a theme we highlighted in our Outlook publication “Russian corporates in 2015: Brace for bottom fishing”, published in January. This is also the approach S&P adopted when it downgraded Russian corporates last week, resulting in four issuers – Lukoil, Uralkali, Norilsk Nickel and Phasagro – currently being rated one notch above the sovereign. Consequently, our buy recommendations reflect our confidence that these credits have the ability to perform in the absence of government support and during a prolonged period with restricted access to external markets.
