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Norvik Research 20.07.2017

20/07/2017 17:45

Global developments

The euro strengthened while ECB retained interest rates and refrained from making steps toward policy normalisation. EURUSD weakened as ECB’s Governing Council reiterated its readiness to extend asset-purchase program if the economy will get worse. However, EURUSD reversed the drop (+0.4%) after Draghi said macroeconomic data give evidence of Eurozone’s economy strength. Bloomberg commodity index is 0.3% higher today. Futures on S&P 500 are 0.1% higher after the index rose 0.5% on Friday. Euro Stoxx 600 is up 0.1% today. CSI 300 is up 0.5%. The dollar index is 0.1% weaker. US 10Y yields are 3 bp lower at 2.24%.

Oil prices are up supported by further decline in crude oil stockpiles. Crude oil inventories fell by 4.7 mn bbl while gasoline stockpiles dropped 4.5 mn bbl. Brent prices are up 0.8% at $50.1/bbl.

Russia and CIS area developments and market colour

Russia’s consumer demand data for June indicate a gradual improvement. Real retail sales rose 1.2% YoY in June, after a 0.7% YoY growth in May (consensus was for a 1.1% YoY growth). Real wages rose 2.9% YoY after going up 2.8% YoY in May (revised lower from a 3.7% YoY increase); consensus: +3.5% YoY. Real disposable income was flat in June after falling 0.1% YoY in May (revised from a drop of 0.4% YoY). This slight rebound in consumer demand indicators may be viewed as favourable for CBR for cutting the key rate by 25 bps on 28 July.

The rouble is 0.2% weaker against the dollar at 59.1 despite rising oil prices. OFZ yields 2-3 bps higher today. Russia’s and Kazakhstan’s longer term sovereign yields are 2-3 bps tighter today.

Corporate news

On July 17, AFK Sistema announced a technical default on obligations of 3.9 billion roubles ($60 million). The event of technical default was triggered after Rosneft won an injunction to freeze shares in three of Sistema’s subsidiaries including MTS, Medsi, and BPGC.

Later, company’s representative stated that the technical default was caused by the fact that the freeze was imposed on a substantial part of AFK’s assets, which was not lifted within 21 days. Company’s attempts to appeal the freeze did not lead to any results, which lead to technical default on two loans. It was also noted that Sistema diligently services its obligations, and covenants on its Eurobonds and rouble bonds were not broken.

There is a cross-default arrangement in the offering memorandum of $500 Eurobond maturing in 2019, which is triggered if outstanding obligations of $50 million are in default. It is critical to note that the 3.9 billion rouble ($60 million) debt is not represented by a single credit facility, and hence a cross-default condition for the Eurobond is not triggered. For now, Sistema has 30 days to reach a formal agreement with creditor banks to settle the debt.

In 1Q 2017 Sistema’s net debt stood at 73.8 billion roubles. Short-term debt represents 12.5 billion roubles. The highest amount of debt repayments will be during the period 2Q 2019-1Q 2020 – 47.9 billion roubles. The company has issued seven bonds, which on aggregate stand at 38.2 billion roubles and $1 billion. Cash and equivalents reached 20.5 billion roubles ($347.5 million) in 1Q 2017.

The $500 million Eurobond fell sharply since Monday with YTM going from 8.9% to 13-14% since then. Sistema’s stock also depreciated. In London, the stock declined 7% to $3.78 per share, which is the new minimum since 2014.

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