=DJ Germany To Sell Russian Paris Club Debt In Bond Market

(This story was originally published Thursday)

By Emily Barrett and Martin Baccardax

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--Germany plans to sell EUR2 billion of its Russian debt exposure, bringing some relief for its deficit, but causing grief in Russia's bond markets.

The complex deal, launched Thursday, will allow the German Federal Ministry of Finance to sell a portion of the EUR20 billion owed by Russia under Paris Club agreements to a separate legal entity, which will issue a series of bonds backed by the debt payments.

"Germany needs the money - and the deal makes sense" said Daniel Pfaendler, a director in debt strategy at Dresdner Kleinwort Wasserstein's Frankfurt office. "They don't need this debt on their balance sheet and instead of increasing bund issuance in the future they can look to this kind of deal as a new source of financing."

The offering will be fairly small in government borrowing terms - market estimates point to about EUR2 billion - but it could be a test of investor appetite for future deals.

The transaction, to be sold in maturities of three-, five- and 10 years, will be a quick source of financing for the German government and shouldn't hurt its debt-to-gross domestic product ratio. Most importantly, it will help reduce Germany's EUR10 billion deficit, and will be included as privatization revenue in this year's budget.

The Russian government has no objection to the deal, according to Goldman Sachs and Deutsche Bank, the banks bringing the bond issue to market.

Aries Vermögensverwaltungs GmbH, the special purpose vehicle that will issue the new bonds, will itself be backed by KfW, the German development bank, through a 20% "fixed recovery" in the event of a default by Russia on the Paris Club payments.

News of the transaction took investors in Russian debt by surprise and shaved points off the price of its sovereign and top corporate bond issues.

"Initially it was doomsday, with people saying all countries are going to do what Germany's doing," said a London trader. Most five-year Russian corporate bonds dropped about a point on the news, and traders quoted Gazprom debt due in 2034 down 1.5 points at 99% of face value, and Russia's 30-year issue at 92% from 93.5%.

German finance ministry spokesman Joerg Mueller said that the revenue from the bond offering would be booked as privatization proceeds in the 2004 budget, which forecasts privatization volume of EUR10 billion.

The German government is looking for ways to plug its EUR10 billion to 11 billion budget hole.

Mueller declined to say how much cash the entire scheme would generate.

The transaction emerged one day after the German government announced its 2005 budget plans, including a record privatization volume of EUR15.45 billion. The bulk of the asset sales is expected to come from the government's remaining stakes in Deutsche Telekom AG (DT) and Deutsche Post AG (DPW.XE).

The move to sell Russian debt to private investors could mean that the government won't have to sell some of its stakes in Deutsche Telekom and Deutsche Post this year to generate privatization proceeds.

The government has stakes in over 100 companies, the most valuable of which are a 26.1% holding in Deutsche Telekom and a 20% stake in Deutsche Post.

In the past, the government has sold stakes in the two companies not directly to investors but to Frankfurt-based KfW, which currently owns 16.7% of Deutsche Telekom and 48.3% of Deutsche Post.

-By Emily Barrett and Martin Baccardax, Dow Jones Newswires; +44 (0)207 842 9314; emily.barrett@dowjones.com

(Andrea Thomas in Berlin contributed to this article.)

(END) Dow Jones Newswires

June 25, 2004 01:30 ET (05:30 GMT)