MARKET SIGNALS 05.26.2020
IDEA #1: VTB
Against the backdrop of Russian Eurobonds yields returning to the range of 3-4%, the segment of securities with high yields from highly reliable issuers is of particular interest. If we take into account the liquidity of the instrument (minimum lot size, availability for an unqualified investor), then the choice essentially becomes no alternative - we are talking about the so-called “eternal” dollar Eurobonds of VTB Group, issued by its subsidiary VTB Eurasia. Now on this paper you can fix the yield to call in December 2022 at the level of 5.8%.
VTB's junior subordinated "perpetual" Eurobonds worth 2.25 billion dollars were placed in July 2012 with a coupon of 9.5% per annum. The main risks associated with it are the issuer's right to not pay the coupon (which will not subsequently be compensated to the holder and which will not entail the issuer's technical default), as well as the possibility of writing off the issue to cover losses. Usually in the prospectus of “eternal” Eurobonds a trigger is prescribed that starts the process of writing off paper. As a rule, this trigger is the first level equity ratio (common equity Tier 1 ratio), the minimum value of which is set at 5.125%. There is no specific trigger level for VTB. Note that since the placement of the Eurobond in 2012, VTB Group's capital adequacy has not fallen below 9% (see chart below).
As for the likelihood that the next call option will be realized in December 2022, it is worth noting that the repurchase of the Eurobonds could put pressure on capital, while VTB still needs it. In addition, in October 2022, VTB Group will have to repay a subordinated issue in the amount of $ 1.4 billion. In this regard, the repayment of the “perpetual” issue in the amount of $ 2.25 billion is unlikely. Nevertheless, significantly increase the likelihood of a call-back withdrawal (if not in December 2022, then, for example, six months after that - call options will follow twice a year) could move on the "sanctioned" field. Recall that, since 2014, VTB has been deprived of the opportunity to attract financing in the Eurobond market. In the case of easing the sanctions, the group could try to replace the “eternal” Eurobonds with a 9.5% coupon with a cheaper issue for servicing, especially since the current market conditions allow this.
Note that in case of non-withdrawal of the paper according to collapse in December 2022, the coupon level will be recalculated according to the formula = ten-year UST + premium 806.7 bp. n. If the new coupon were recounted now, it would be 8.8% per annum, which, obviously, would not give any significant savings in comparison with current payments.
In the first two months of 2020, VTB's issue price approached its historic highs. Having suffered during the March collapse, the Eurobond, nevertheless, was able to recoup about 75% of losses by now, which looks better than the dynamics of the EMUSTRUU index, which tracks the dollar-denominated debt of developing countries (see chart above).
Meanwhile, significant potential for VTB price growth (perp) remains in terms of the z-spread. So, if in mid-January 2020, the premium in yield to US treasury bonds narrowed to 330 bp. p., now it is 570 bp. P.
Due to the issuer's higher credit quality, the VTB Eurobonds are traded with a minimum yield spread compared to their Russian counterparts. Note that although VTB (perp) does not have ratings from international agencies, it cannot be said that it looks cheap against the backdrop of global “eternal” papers (see chart below). The thing is, in general, this segment of high-risk instruments is still far from its "dock" levels. However, the situation is changing right before our eyes - for example, the “eternal” Eurobonds of West European banks have been hastily catching up recently.
Due to the high coupon (9.5%), the level of the current yield of the paper (the ratio of coupon payments over the next 12 months to the current price) of 8.7% looks interesting. As follows from the table below, in terms of this indicator, VTB issue is one of the three in the segment of Russian Eurobonds.
Note that the junior subordinated “eternal” issue of VTB is traded on Mosbirzhe with a minimum lot of $ 1,000. A paper coupon is paid on June 6 and December 6.
Alexey Shternshis
Joint Managing Director
Capital Pi