Russia's oil giant Lukoil's (LUKOY) likely intention to tap the international bond market could go a long way toward showing whether investor sentiment towards Russian debt has improved.
So far this year, there have been only three corporate bond deals out of Russia, all of them from state champion OAO Gazprom (OGZPY). But Lukoil's bond offering - for which investor presentations are scheduled to take place next week - should indicate how much taste there is for debt coming from companies that aren't backed in whole or in part by the Russian government.
While Lukoil has an investment-grade rating, a successful deal would also show that the primary market is generally opening up to companies from Russia and the Commonwealth of Independent States, said Stefan Kolek, a corporate-credit strategist at UniCredit SpA for Eastern Europe, the Middle East and Africa.
Since the summer of 2008, Russian companies other than Gazprom - which had gorged on credit during the boom years - have been absent from the external bond market as investors shunned riskier investments.
But with U.S. oil futures hovering around $80 a barrel, the ruble showing strength and Russian equities continuing to perform well, positive signs abound for Russia, which may help end the dearth of deals.
"The market is ready to take on Russian risk again," said one banker.
Lukoil, 20%-owned by U.S. oil major ConocoPhillips (COP), is expected to offer Eurobonds in two tranches, one in dollars and the other in euros, according to people familiar with the situation.
The Russian company, rated BBB- by Fitch Rating is currently looking to acquire refineries in Europe and most recently bought a 45% stake in Dutch operation Total Raffinaderij Nederland, from Total S.A. (TOT) for $600 million.
Given the lack of bond supply from the former Soviet state, investors will be keen to add exposure, which bodes well for Lukoil's bond plans, analysts said.
The fact that emerging-market bond funds continue to see huge inflows of cash also works in Lukoil's favor, UniCredit's Kolek said, adding "there is scope for this issue to attract hefty demand."
"Moreover, given that the existing two Lukoil dollar issues have a very long maturity (2017 and 2022), there is a vacuum in the medium-term range of the Lukoil credit curve which can be filled," he said.
There seems no doubt Lukoil will be able to place this bond and its success could pave the way for other Russian companies to tap the bond market, according to people in the market.
Russia's third-biggest mobile telephone operator by users, OAO MegaFon, is likely to be one of the next in line after it announced its intentions last month to tap the Eurobond market for financing.
But price could prove the key factor in determining whether bond supply picks up in a meaningful way.
"Most [potential] Eurobond issuers are in sectors considered by the government as strategically important so they are not reliant on international markets for funding. They are selective and won't just pay any price that investors want as they can get support from the government," Kolek said.
That said, even if the price is right, few people are expecting a rush of new Russian corporate bonds before next year and a return of the boom times seems far off.
“Once the Russian sovereign has issued we might see Russian corporate issuance pick up but it won’t return to the record levels seen in 2006 and 2007," said Cristina Panait, a senior emerging-markets strategist at Payden & Rygel.