Rushing to Russia

by | Jun 28, 2004 | Archives

How times and markets change. During other eras Russian bonds would seem a terrible high-risk investment. But with low interest rates and high inflation this Russian investment is worth a look.

Thomas Fischer at Jyske Bank passed this idea onto me and said he is buying some himself. (What more can you ask in a recommendation?) This new issue is in the category of emerging markets bonds and is issued by Vimpelcom in US Dollars so there is no foreign currency risk.

Yet this bond pays about 10% yield!

The details are: Vimpelcom – New 5 year issue in USD

The Russian mobile cell phone company, Vimpelcom, issued this new 5 year bond in USD Wednesday, 9th June. They have an existing issue maturing April 2005. The proceeds from the issue will be used for funding capital expenditures and debt financing.

Maturity is June 2009 the Rating is B1/BB- The Yield Approx. 10%

The Issue benchmark size is in the US$500 million.

This firm’s penetration in Russia is about 25%, but expectations in the period leading up to 2006 are in the range of 50%. Potential is therefore enormous.

Vimpelcom is the 2nd largest mobile phone company in Russia after Mobtel/MTS. VIP has a market share of 32% in all of Russia, while MTS has a market share of 38%. In terms of organic growth Vimpelcom has shown a strong development over the past years, while the competitor MTS has taken the opportunity to acquire companies in both Russia and Ukraine.

Vimpelcom is rated one notch higher than Mobtel, and the reasons for the lower rating on Mobtel are: Majority owned by Sistema (only B-rated). Vimpelcom is 25% owned by Alfa Group from Russia and 25% Telenor from Norway. Telenor and Vimpelcom have other assets Telenor-Pannon in Hungary, Kyivstar in Ukraine and Alfa Group-Megafon in Russia. MTS remains the larger company and larger than its two nearest competitors Vimpelcom and Megafon.

Since 2001 Vimpelcom’s net income has increased from 47.3 million USD to 234 million. USD in 2003. In the same period EBITDA margin has increased from 35.1% to 45.9%.

Russia is making great advances. Their currency reserves now stand at 79 billion dollars. Moody’s promoted Russian debt to investment quality. Productivity is growing steadily. Now most regional capitals in Russia have a profusion of smart new shops and there is a genuine middle class developing of Russians who make an honest living.

However when buying Russian telecom and specifically Vimpelcom, investors have risks from change in political, economic and social fundamentals, increased competition from Russian mobile companies and international mobile companies, capacity limitations in the mobile industry, and failure to extend GSM-license.

Let's look at the risk closely, but do not look in isolation. Look at the risks of holding low yield US dollar bonds. The dollar can drop and inflation can ruin the capital value of such bonds. Investing in the US stock market over the next months can be risky as well.

Until next message, good investing!