GAZ Group's board approved the issue of RUB 22bn in ruble denominated bonds with a maturity of 9.5 years. Proceeds from the issue will be used to pay down part of the company's RUB 43bn in bank debt.

In our view, the debt swap would be beneficial for two reasons. We believe that the coupon rate on the bonds will be lower than the 12.25% rate (CBR refinancing rate plus 4 ppts) it's paying on restructured debt, thus reducing the company's debt service obligations. The swap will also allow the company to get out from under bank covenants that restrict CAPEX, and increase transparency as well.

However, given current market volatility we believe that the company may be forced to reschedule the issue to 2012 in order to place the issue at an attractive interest rate.

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