Steelmakers led gains in U.S. corporate bonds in Russia for the second consecutive year

Steelmakers led gains in U.S. corporate bonds in Russia for the second consecutive year as OAO Severstal and Evraz Group SA has benefited from a rise in metal prices and demand for construction projects.

Debt sold by two largest steelmakers in Russia returned more than 20 percent this year compared with 10 percent for the benchmark sovereign bonds. The performance difference between 2013 Severstal notes and public debt fell to 12 basis points on December 16, the narrowest spread since it sold in 2008.

"Steel makers were the hardest hit during the crisis and had the most runs well with market growth and recovery of the industry performed better," said Nikita Gusakov, head of capital markets debt Citigroup Inc. in Moscow, by email.

The export prices of hot rolled coils, a benchmark steel product, rose 13 percent to $ 619 per ton this year, according to Metal Bulletin. Orders in Russia will increase due to projects related to the Winter Olympics and World Cup, both taking place in the country in the coming years, said Giacomo Baizini, chief financial officer of Evraz in Moscow.

"We have greatly improved our liquidity position," said Baizini in an e-mailed response to questions. "Business Outlook for 2011 and beyond is also good, given the expected demand for various construction projects in Russia."

Change of Fortune

The 2018 dollar bonds Evraz returned 22 percent this year, while bonds returned 2,013 Severstal 20 percent. Returns to both surpassed 100 percent in 2009. The notes fell 43 percent in 2008, the price shown.

"This rally may have run out and steel makers are likely to perform in line with the market next year," said Gusakov. "The spreads may tighten Reprice only if the entire market."

Russian metals companies spent 18.2 billion U.S. dollars in foreign acquisitions between 2006 and 2008, according to data compiled by Moody's Investors Service. That left struggling to pay and refinance its debt during the financial crisis after a fall in revenues due to falling prices of metals.

Evraz, the second-largest steelmaker in Russia, was forced to renegotiate loan terms with international lenders and became the Russian state bank VEB and development of the domestic market for refinancing ruble last year.

The Moscow-based company has cut the short-term debt to 22 percent in June this year 46 per cent in June 2009, while its cost of capital was reduced to 6 percent from about 10 percent in October 2009, according to a November 23 filing the company's Web site.

"Top Picks"

A "significant improvement in credit metrics" allow companies to outperform metals in the debt market, Dmitry Dudkin, a bond analyst at UralSib Financial Corp. in Moscow, said in an email response to questions sent. "They remain our best options as we expect more deleveraging."

The exchange rate has changed little to 30.6100 per dollar at 17:00 Moscow closure, its strongest level since 11 November. non-deliverable, or opinions that provide guidance to the expectations of currency movements and interest rate differentials and allow companies to hedge against fluctuations show the ruble 30.8795 per dollar in three months.

Russian bonds in 2020 the dollar rose, pushing the yield 13 basis points below 5.01 percent. The price of ruble notes maturing in August 2016 the country increased, with the yield down a basis point to 7.62 percent.

The cost of protecting Russian debt against default by five years using credit-default swaps fell 2 basis points to 147, below the peak year of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to its debt agreements.

Swaps, differential

Swaps credit-default for Russia, rated Baa1 by Moody's Investors Service, the third lowest investment grade, cost of 6 basis points more than the contracts in Turkey, classified as four levels lower than Ba2. Russia swaps cost as much as 40 basis points less on 20 April.

The extra yield investors demand to hold the Russian debt rather than U.S. Treasuries fell 4 basis points to 196, according to JPMorgan EMBI + index. The difference compared to 141 for Mexico's debt with similar qualifications and 179 for Brazil, two steps that is rated below Baa3 by Moody's.

The yield of Russian bonds is 43 basis points below the average for emerging markets near lowest since September 2009 and below a maximum of 15 months from 105 in February, according to JPMorgan rates .

2008 Collapse

The difference in performance between Severstal dollar bonds due in 2014 and Russia's dollar bonds due 2030 rose to 27 percentage points in November 2008, the widest spread since the bonds were sold in 2004. The difference between 2011 pipemaker OAO TMK notes and Russia's foreign debt jumped to a record 54 percentage points in the same month, the data show.

Russia's successful bid for the 2018 months of hosting the soccer World Cup last has also helped drive the biggest bond rally in five months and forced the steel shares' more as the government prepares to spend 3.8 billion in stadiums, airports and roads.

Severstal Cherepovets based in Moscow doubled this year, making it the biggest winner in the benchmark Micex in 2010. OAO GMK Norilsk Nickel, the world's largest manufacturer of metal, added 60 percent and OAO Novolipetsk Steel rose 50 percent. That compares with an increase of 6.7 percent for OAO Gazprom gas exports and a decline of 13 percent of OAO Rosneft, the country's largest oil company.

20 percent of Severstal bond rally this year compared to 16 percent return for 2011 dollar bonds of the Moscow-based consumer lender ZAO Russian Standard Bank. Both companies are rated B + by Fitch Ratings, four levels below investment grade.