MOSCOW Foreign investors put $1.25 billion into a Russian sovereign Eurobond top-up on Thursday in a deal more than six times oversubscribed, showing Moscow can readily tap global markets in spite of Western sanctions.
The top-up, which allowed the finance ministry to fill its external borrowing needs for this year, was different from the initial offer of $1.75 billion in May, when it was carried via Russia's National Settlement Depository (NSD) only as major Western financial institutions chose to steer clear.
"We saw a huge demand from investors... Around 200 investors from the United States, Britain, Europe, Asia and Russia submitted their bids," Finance Minister Anton Siluanov said in a statement. "Placement was done in less than 10 hours."
One of world's biggest settlement houses, Euroclear, started servicing the initial issue of 10-year paper in July, and it and NSD are both handling the $1.25 billion top-up. Russia's VTB Capital was acting as a sole arranger of the whole issue.
The demand, which was over $7.5 billion, allowed the yield to be cut to 3.9 percent from initial guidance of 3.99 percent and 4.75 percent offered in May. The top-up was priced at 106.75 percent of par, Siluanov said.
Investor appetite for the issue was driven in part by a search for returns, especially after the U.S. Federal Reserve's decision to keep its rates unchanged rather than raise them on Wednesday.
"The combination of a global hunt for yield and the lack of Russian securities after 2 years of sanctions is creating a very strong technical backdrop so I wouldn't be surprised if this or any other Russian issue triggered a lot of interest among investors," said Michael Bolliger, head of asset allocation for emerging markets at UBS Wealth Management.
Russian Eurobond issues are not directly covered by the Western sanctions imposed on Moscow over the conflict in Ukraine, but the sanctions have cast a shadow over Russian debt-raising efforts.
"Moscow will be eager through this tap to send a message that it can still finance itself in the market – circumventing or eroding the impact of Western sanctions," said Tim Ash, senior credit strategist at Nomura.
In May, the finance ministry blocked Russian state banks from participation in the Eurobond issue, aiming instead to encourage foreign and private investors.
Siluanov said on Thursday that the additional issue was placed among foreign investors only, of which the United States accounted for 53 percent, Europe - 43 percent and Asia - for 4 percent.
Russia's external borrowing plan calls for raising $3 billion in 2016. The government is trying to prevent the budget deficit from widening beyond its target of around 3 percent of gross domestic product.
Its plans to raise extra revenue via privatizations were knocked off course when the government postponed the sale of shares in mid-sized oil company Bashneft (BANE.MM) last month.
"The budget will benefit from any extra money after the decisions to postpone the major privatization deals and rising risks of having the federal budget get closer to 4 percent of GDP," ING said.
Russian Economy Ministry Alexei Ulyukayev said on Thursday that the Eurobond top-up and the privatization process were not linked to each other.
So far, Russia managed to privatize part of its stake in diamond miner Alrosa (ALRS.MM) earlier this year and was aiming to reduce its holdings in oil company Rosneft (ROSN.MM) as well as Bashneft.
(Additional reporting by Darya Korsunskaya, Elena Orekhova, Alexander Winning and Polina Devitt in MOSCOW, Sujata Rao in LONDON; writing by Katya Golubkova; Editing by Mark Trevelyan and Toby Chopra)