Following Russia's debt default a decade ago investors were lured back to Russia on the basis of put options giving them the right to redeem debt. Just this sort of option has forced Khanty-Mansiysk-based auto-leasing firm Ugra Leasing to raise the yield in April on 1 billion rubles ($42.4 million) of three-year notes sold last year to 16 percent from 14 percent, according to Bloomberg data. Moscow-based supermarket chain Mosmart also was forced to increase the coupon on 2 billion rubles of bonds from 11 percent to 15.5 percent.
According to the article hedge fund Argo Capital Management (which oversees around $1 billion of emerging market debt) rejected an offer from Moscow-based retailer Samokhval last month to increase interest to 14.5 percent from 11.4 percent, choosing instead to redeem bonds due in 2009.
Even with record oil prices pumping the economy, the global credit crunch is penalizing Russian borrowers as the put options leave companies liable for refinancing nearly a third of their 1.5 trillion rubles of bonds at higher rates by yearend according to Bloomberg.
Put options give bondholders the right to demand payment at face value on a set date. They became more common in Russia than anywhere else after the Russian government's $40 billion default in 1998 led to almost $4 billion of losses for Long-Term Capital Management, a development which effectively forced the Federal Reserve to organize a rescue of the fund.
Investors rarely exercised the puts until last year because the interest they received was higher than what they could get on new bonds. The oil-led economic boom drove down the average corporate yield to 7 percent from 12 percent between 2004 and the middle of last year.
Alfa Bank, Russia's biggest private lender, had to raise the annual rate on 2 billion rubles of bonds due in 2010 by 3.6 percentage points to 9.5 percent last month to prevent holders from using puts to redeem the debt, according to Bloomberg. State-owned VTB Group, Russia's second-largest bank, lifted interest on 15 billion rubles of notes maturing 2013 to 8.6 percent from 5.9 percent last month.
Soaring oil prices have helped Russia win back investors as the government built up the world's third-largest pool of foreign- currency reserves at $540 billion. Companies followed with 518 billion rubles of bond sales in 2006 and a record 520 billion rubles last year, according to Bloomberg data.
As investor confidence improved, companies began selling bonds lacking put options. Citigroup Inc. arranged a sale of 3 billion rubles of 10.05 percent five-year debt without the feature for regional lender Ursa Bank in 2006. Since then, worsening credit conditions meant that Russia's 17th-largest lender by assets last month had to offer a one-year put in a sale of 10 billion rubles of seven-year notes yielding 11.19 percent. Ruble bond sales slowed 15 percent in the first quarter to 111 billion rubles as hedge funds and others reduced holdings of riskier assets worldwide, Bloomberg data show. The ruble strengthened today to 23.6193 per dollar, compared with 25.8889 per dollar a year earlier.
``We are back to 2004,'' when Russian corporate debt sales surpassed 100 billion rubles for the first time, said Nikita Gusakov, head of ruble bond origination at Citigroup in Moscow. ``Appetite for risky investment has fallen and companies are once again luring investors by high yields and put options.''
Companies have 420 billion rubles of bonds with put options due between May and yearend, Bloomberg data show. Investors may redeem as much as 80 percent of so-called junk bonds on the put dates, said Nikolai Podguzov, a fixed-income analyst at Moscow- based investment bank Renaissance Capital. Investors may demand repayment of as much as 40 percent of bonds rated investment-grade, or Baa3 and above by Moody's Investors Service and BBB- by S&P.
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