Banking & Finance

ICBC and Bank of China to help underwrite Russia’s issuance of largest yuan-denominated foreign sovereign bond

6b yuan deal will mark Russian government’s first return to bond market since 2013

PUBLISHED : Wednesday, 27 April, 2016, 2:38pm
UPDATED : Wednesday, 27 April, 2016, 2:38pm

Industrial and Commercial Bank of China, Bank of China and Russia’s Gazprombank are set to become the key lead managers helping the Russian government underwrite a six billion yuan (HK$7.1 billion) bond, a source said.

The deal, poised to become the yuan bond market’s largest foreign sovereign issue, will also mark the Russian government’s first return to the bond market since 2013, an investor with knowledge of the deal said.

ICBC and Bank of China are in the process of acquiring brokerage licences in Russia to enable the issuance. Pending their approval by Russian regulators and the People’s Bank of China, the mainland’s central bank, restarting the Renminbi Qualified Domestic Institutional Investor (RQDII) programme, which allows yuan funds abroad, the banks aim to launch the deal targeting mainly Chinese investors’ money before the end of this year, although there is a chance regulatory procedures could delay it to early next year.

The government is targeting Chinese investors. The preference is Chinese investment banks
Andrei Akopian, Caderus Capital

If successful, the Russian government deal will establish a benchmark price and credit terms for big Russian companies to follow in future yuan issuances. It will diversify Russia’s access to capital away from the West, which has been complicated by sanctions imposed since 2014 following Russia’s annexation of Crimea and backing of rebels in eastern Ukraine.

The Chinese government supports commercial ties with Russia and is keen to develop the yuan into a funding currency, making yuan bond issuances a potentially lucrative market that Chinese and Russian players can develop.

Kun Shan, director of flow credit trading at BNP Paribas (China) said it was “a really difficult call”, because there had never been a precedent.

“You can’t use Chinese pricing mechanisms to price the issue,” Kun said on the sidelines of the Asia Securities Industry and Financial Markets Association’s China capital markets conference in Singapore on Wednesday. “How do you build the cross reference? If the issue does go through, it will be the risks of the sovereign, rather than currency risks.”

Andrei Akopian, managing partner at Caderus Capital, a top Russian fund and boutique investment bank, said 6 billion yuan would be the biggest sovereign issue, topping Britain’s 3 billion yuan issue.

“I think it is realistic,” he said. “This amount will easily be distributed between ICBC, Bank of China and Gazprombank.

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“The government is targeting Chinese investors. The preference is Chinese investment banks. ICBC and Bank of China have contributed a lot to the whole process. So they are the natural first choice.”

Akopian was present in early stage roadshows in China organised with the Moscow city government and Moscow Exchange – whose National Settlement Depository arm is developing a bond connect programme with the PBOC’s China Central Depository and Clearing Company this year that will aide future bond distributions.

He said Chinese investors at the events were keen on the prospects of higher returns from the bonds as domestic yields had been damped by successive PBOC rate cuts. Two-year mainland government bonds currently yield only 2.9 per cent, versus Russia’s benchmark lending rate at 11 per cent. But they also have questions.

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“The liquidity situation changes a lot,” Akopian said. “Right now, there is a lot of dollar liquidity in Russia. It may change very quickly. The key provider of liquidity right now is the Russian central bank. They may stop providing liquidity anytime. They started providing this when crisis hit hard in December 2014 currency crisis when the rouble collapsed.

“The main questions relate to currency risk. Yuan to rouble is very unsteady and the swings are very wild. It’s a little bit like oil.”

The rouble traded at 12.5 per yuan in January but has since fallen back to 10.1.

“There’s also the question of the cost of trading on the Moscow Exchange,” Akopian said. “Moscow Exchange needs to work on streamlining the process for Chinese investors to get access. And they are willing to do it.

“All Russian blue chips – they all want Chinese companies to know them. They are all trying to solve this problem. One of the very efficient ways to let Chinese investors know them is to issue a Baikalbond (a yuan bond issued in Russia) – because in this way, you get direct access to investors. And you get airtime and recognition. And after that they can look at your stocks.”