NorvikResearch 30.03.2017

31/03/2017 02:03

Global developments

Global stocks declined led by Asian shares. Nikkei 225 and CSI 300 are both 0.8% down. S&P futures are 0.1% lower, while Eurostoxx 600 is marginally higher. The dollar index is up 0.1%, US 10Y Treasury yields are flat.

Oil prices increased yesterday due to a decline in production in Libya amid signs of growing demand in the US while inventories rose less than expected. Libya’s crude oil production reportedly dropped to about 0.5mn bbl/day from about 0.7 mn bbl/day last week because of disruptions at the country’s second largest terminal at Zawiya. Russia’s Energy minister Novak said that Russia had lowered crude oil production by 0.2 mn bbl/day and would reach the agreed 0.3 mn bbl/day cut by the end of April. Brent prices rose 2.0% yesterday and are 0.7% lower today at $52.1/bbl.

Russia and CIS area developments and market colour

Russia's Finance Ministry announced yesterday that the High Court in London has ruled in its favour in the dispute with Ukraine over the missed $3bn 2015 Eurobond payment. The court has reportedly decided to accept Russia's demand for a summary judgement and thus rejected Ukraine's arguments in favour of a detailed consideration of the matter. The court has yet to rule on applicable past due interest. The Ukrainian side has asked for a possibility to appeal the ruling in a different UK court, this was reportedly granted.

As we argued earlier, implications of this case's outcomes were not symmetric for the two sides. The significance of a negative outcome for Ukraine is primarily in the risk that the government will not get approval from either parliament or its own legal advisors (due to earlier restructuring deal involving privately held debt) to repay the amount on original terms. This would make it likely that Russia may seek to seize Ukraine's assets in lieu of the claim. In practical terms, the loss of the litigation would force Ukraine to ask the IMF to amend parameters of the current program, allowing for this year's funding gap to increase. In view of the possible further delay of the IMF's approval of the next tranche and the risk that Ukraine's government may not be in position to implement the court's decision against it we believe that investors will likely demand a higher yield compensation for holding the existing Ukrainian sovereign debt. On the other hand, the summary judgement, if upheld on appeal, might lead to a relatively quick solution to the dispute over the $3bn payment.

The rouble is 0.5% stronger at 56.3 against the dollar. OFZ yields are 2-8 bps tighter today. Russian longer-term Eurobonds yields are about 1-2 bps tighter.

Corporate news

Fertilizer producer PhosAgro presented financial and operating results for 2016 at an investor meeting in London. In 2016 PhosAgro’s EBITDA declined 20% YoY to $1.08 billion (12% in rouble terms). Despite a decrease in EBITDA, the company expects that taking into account the current fertilizer prices and start of new production in Cherepovetz region, will add around $150 million to yearly EBITDA.

Net Debt/EBITDA ratio rose to 2.45x last year compared to 1.28x in 2015. This year PhosAgro is completing a sizeable investment program and will keep reducing the debt burden, lowering Net Debt/EBITDA to 1.0x. The company has no plans to issue new debt, and with EBITDA staying at stable levels, on this metric PhosAgro is standing firmly on its ground.

Because of higher production capacity, PhosAgro plans to boost fertilizer production from the current level of 7.4 million tons to 8.7 million tons in 2020, or even 9.0 million tons. Higher production will be accompanied by a rise in exports volume. The company plans to build up exports by 20% to 6.1 million tons by 2020. The main markets will be Latin America and Europe. Accumulation of PhosAgro’s exports should happen mainly due to a sharp decline in exports from China, because exporting tariffs were dropped and new environmental policies were introduced.

PhosAgro’s Eurobond maturing in February 2018 and a coupon of 4.204% trades at YTM of 2.226%. After a bounce in yields of PhosAgro’s Eurobond in November 2016 up to 2.961%, yields started to fall gradually to the current levels.

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