Soviet `Red notes' get a chilly reception on Wall Street

Nyet. American portfolio managers are not wild about Soviet bonds.

``Out of principle, I'm not going to help fund Soviet mobile missile launchers,'' says Kenneth Windheim, who runs the Prudential Insurance Company's $2.6 billion international bond portfolio.

Nyet. ``Why provide capital for a system that doesn't work?'' asks Stephen Smith, a manager of the $1.5 billion bond portfolio at Provident Capital Management in Philadelphia.

Nyet. ``I'm not about to buy Russian bonds until they are well tested in the marketplace,'' quips Charles Smith, who manages $380 million in international bonds for T.Rowe Price in Baltimore.

For the Soviet Union, turning around such ``nyets'' will soon become important. Earlier this month, the Soviets borrowed $73 million, their first public borrowing since the Russian Revolution. According to the European underwriters of the bonds, which are traded on the Swiss stock exchanges, buyers lined up for the bonds the same way shoppers wait patiently in Moscow for consumer goods.

``I would guess some crazy dentist in Belgium bought the bonds, or some Swiss guy who thinks the Soviets are going to take over the world and wants to hedge his bet,'' Mr. Windheim says.

The Soviets have already announced they intend to borrow even more, offering a West German issue in a few months. ``I think what they are doing is testing the waters,'' says Craig Erickson, a spokesman for Dresdner Bank in New York. One indication the Soviets want to get into the United States capital markets is a meeting during the December summit between Michael Milken, Drexel Burnham Lambert's junk bond czar, and Soviet leader Mikhail Gorbachev.

To get American bond managers to invest in ``Red notes,'' Mr. Gorbachev will have to turn on his charm, and perhaps resort to some Western business practices.

For example, bond managers have no idea how to evaluate the Soviet securities. ``Where do you get accurate information on the Russians, except the CIA?'' Windheim asks.

Standard & Poor's, the rating service, will only grade a bond issue at the request of the issuer. It might, however, initiate ``a sovereign assessment,'' a broader and less precise look at a country, if the USSR starts to tap the international debt markets more frequently. ``We react to market demand,'' says Philip Bates, a senior vice-president with the international ratings group.

A ratings agency would probably spend about a week in the Kremlin, collecting whatever official information about the Soviet economy it could get. Mr. Bates says the political risk that they might denounce the debt is hard to assess.

Thus, S&P would probably interview academics and experts outside the Iron Curtain. A key question, Bates says, is what might cause the Soviets to halt their trend toward economic integration with the West.

One indication of how East-bloc nations could fare with a rating agency may come soon. Standard & Poor's is considering an assessment of China, which raised $2.4 billion last year in the international bond markets. ``It depends on their willingness to cooperate,'' Bates says.

The Soviets would also have to get used to filing an American-style prospectus. Last week, the Wall Street Journal branded the prospectus for the Swiss offering a ``Red Red Herring.'' The newspaper mocked the report, noting that it never mentioned that the Soviet Union is a communist country.

Some American bond managers believe a prospectus may not be enough. Ken Urbaszewski, a first vice-president at Kemper Financial Services in Chicago, says the Soviets would have to put on a ``road show,'' describing the offering. Also, he might have to travel to the Soviet Union, as part of Western-style ``due diligence.'' And he would like any Soviet collateral, such as gold reserves, moved to a safe site - like a Western bank.

Part of the bond managers' reluctance stems from the Soviet repudiation of the $75 million debt run up by the czars. For some time, the chief value of these securities was as wallpaper.

In fact, this is the chief image of Soviet debt to some managers. Bill Huestis, a bond manager at Prudential-Bache Securities, says his wife collects antiques. ``I've seen too many Russian bonds in that category to want to buy them,'' he says.

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