LONDON: Russia's first US dollar bond since 2013 has generated demand of US$3bn, according to a source away from the deal, but very few details have emerged since the sovereign announced the transaction earlier on Monday.
Sole lead manager, VTB Capital, has yet to send an update since Russia announced initial price thoughts of 4.65-4.90% for the 10-year offering.
The state-owned bank, which is subject to Western sanctions, declined to comment on the size of the order book and has not put out an official level. Bankers away from the deal think there's little doubt the deal is well anchored.
"I would have thought success would have been pre-assured even before putting it up on the screens," said one capital markets banker. "They can ill afford announcing a trade and then having the perception of it struggling."
Although, Russia is not sanctioned and the bond's prospectus states that proceeds will not be used to finance sanctioned entities, some international investors are wary about buying the deal as there is no way in determining where the money goes.
Two investors in London told IFR after initial pricing levels were released that they were undertaking due diligence before deciding whether to buy the bond.
"We're very happy trading [the security] in the secondary with, for example, JP Morgan acting as a counterpart. But buying in the primary from VTB is a lot more problematic," said one of the investors, who added his firm's compliance team was analysing the transaction.
He said the potential costs or benefits of the deal were "massively skewed" towards the former.
"The benefits are a couple of basis points in performance. The cost is trying to explain to your CEO why you've bought this deal."
Although US regulators have pressed mostly on Western banks to avoid working on any Russia sovereign transaction, investors will have to be careful too, he added.
QUIRKS
There are also a couple of technical quirks that could put off some accounts. First, the bond is not directly cleared through Euroclear but are held via Russia's National Securities Depository. "No assurance can be given as to whether interests in the Global Bonds will be eligible to be held through any clearing system other than NSD," the prospectus said.
Tim Ash, senior credit strategist at Nomura said: "They are more akin to external OFZs [Russian government bonds]. So you buy them on the assumption that eventually issues with Euroclear are resolved." Another issue is that Russia is the paying agent on its own deal, according to Ash.
"I understand that the paying agent is the issuer, which is very strange and I think will deter many Western investors. Again I assume that western banks declined to be the paying agent, hence the stop gap measure herein."
Russia's intention to raise money in the global bond market has been shrouded in controversy from the outset. Earlier this year, the sovereign sent a request for proposals to 28 international and domestic banks for a potential bond.
However, international banks quickly came under pressure from US and EU regulators to desist with any plans to work on a deal. "Everyone assumed they could get a deal done without Western banks being involved, but only with all the big Russian state owned banks and perhaps a few Chinese banks, so it's very interesting to see VTB as sole lead," said a second banker away from the deal. Russia has a US$3bn bond due in September 2023 outstanding, which is the closest reference point for the new transaction.
That bond closed on Friday at a yield of 3.96pc, according to Eikon. It is currently trading at a yield of 3.99pc or spread of 246bp over mid-swaps.
Russia last sold debt in the US dollar market in September 2013 when it raised US$7bn-equivalent through a four-tranche transaction. Demand for that deal was more than US$16bn.
Russia is rated Ba1 by Moody's, BB+ by Standard & Poor's and BBB- by Fitch.
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