Russia in the Capital Markets
'All systems go' for Russian loans
The Russian lending market has seen a sharp turnaround this year from the crisis days of 1998, but in the past few months the pace of recovery has accelerated to amazing rates. The next step is for unsecured lending and longer tenors. Taron Wade reports.
Pricing for Russian borrowers has come screaming in over the last six months as the supply and demand balance has tipped in favour of the borrowers.
"Russian commodity finance transactions have changed almost beyond recognition: they are bigger, have longer maturities with more aggressive structures and are more finely priced," says Chris Baines, head of European loan distribution at SG in London.
"The universe of banks willing to lend to Russian names has expanded substantially and these facilities are therefore heavily bid."
Indeed, Yukos, the Russian oil company, recently launched syndication of a $1bn facility, one of the largest Russian loans seen since 1998. The deal has pricing of 150bp on the $500m three year tranche and 175bp with a step up to 200bp for the last two years on the $500m five year tranche.
This compares with a $300m three year loan in January for Sidanco, another oil company, which achieved what was then considered very tight pricing of 300bp through arranger Citigroup. Sidanco's previous loan was a $30m three year term loan via Citigroup in December priced at 375bp over Libor. The loan in January never materialised, however, because of its merger with TNK.
Lukoil, another large Russian oil company is also out in the market with a finely priced facility. The $500m deal is split between two tranches, a five year $200m facility paying 200bp and a seven year $300m portion which pays 250bp.
Incredibly, in only March of this year, bankers were saying there was still a clear resistance to lend to Russia below Libor plus 300bp. They did expect that the pressure from borrowers to push down margins and lenders would be compensated by increased fees on deals. However, bankers say this has not happened because it is very difficult to increase fees even if borrowers are pleased that pricing has dropped.
It is not only pricing that is under pressure: the structure of secured loans in Russia is loosening as well. One example is the presence of longer grace periods. The market is also starting to see facilities based on spot contracts for the sale of a commodity, whereas in the past fixed price contracts were required.
Lenders think it is simply the supply and demand dynamics that have caused the quick compression in spreads and the loosening of terms for loans in Russia.
On the demand side, there has been renewed international interest from overseas banks in Russia. "With continued turmoil in Latin America and the Middle East, from a risk perspective Russia is seen as a relatively safe haven for bank investors," says Peter Kennedy, global head of debt execution and distribution at Standard Bank in London. "From a return perspective, although pricing continues to fall, Russia still offers emerging market investors a decent return when compared to other countries."
Banks are also trying to get into the market ahead of the rating agencies' predicted upgrade of the Russian sovereign to investment grade, which is expected to happen after the presidential elections in March 2004. "Russia is performing quite well as a credit - it could reach investment grade status and the market is anticipating this," confirms Christian Eberl, vice president in loan syndications at HVB in Munich.
On the supply side, the oil industry has started to consolidate this year, first with the BP-TNK merger, then the merger of Sidanco and TNK, the takeover of Slavneft by TNK and Sibneft and now the merger of Yukos and Sibneft. "There has been massive consolidation in the oil industry and this creates a situation where more banks are interested in assets but there are fewer borrowers," says Georg Feldscher, head of syndications at RZB in Vienna.
And it is the oil sector that is the spearhead of all the corporate sectors in Russia. The gas industry is the other dominant sector, with metals, mining and diamonds also important sources of issuance.
Aside from financial institutions, commodity-based companies have been the only type to tap the loan market recently, the only corporate exception being Aeroflot-Russian Airlines, which brought a $38.7m deal to the market at the end of last year. The one year facility was priced at 325bp.
Stability brings rewards
The loan market in Russia has benefited from the increasing focus from overseas on the country and the growing confidence in the credit of the sovereign state. "It is a far more stable country and economy than before - many of the growing pains have been overcome," says Ahmet Bekce, director and head of the emerging markets loan origination team at Citigroup in London.
BP's decision to merge with TNK earlier this year through the purchase of a $6.75bn stake was a prominent example of foreign confidence in the country. "There is a general increase in the level of trust," says David Bassett, head of European loan distribution at Citigroup in London.
This trust brought immediate results during syndication of TNK's $400m loan in April. Elena Ivanova, director at ING loan syndications in London, said the merger affected the attitude of banks toward the market in general. The syndication of the loan launched at $200m resulted in a 100% oversubscription, she pointed out.
And shortly after Yukos announced its loan, ExxonMobile and ChevronTexaco began to make noises about submitting rival bids to purchase a 25% stake in the newly merged Yukos-Sibneft.
This new-found trust is already being put to the test. Yukos is going into the capital markets with an eye to raising $3bn - which includes the $1bn loan - for its merger with Sibneft while Planton Lebedev, chairman of MFO Menatep, the majority shareholder in Yukos, sits in jail on allegations of stealing state property and tax evasion.
One of the main reasons for the market looking so attractive is the high price of oil, which has traded above $30 per barrel recently and is now trading at $27.48. And although it is expected to stay high for quite some time due to the difficulties in the Middle East, Russia does need to diversify out of natural resource businesses to stay competitive with Western Europe in the long run, bankers say.
Consolidation will continue to benefit the loan market, however. "Consolidation activity requires new capital and refinancing," says Citigroup's Bekce. And as margins come down for borrowers, they are likely to want to refinance their relatively expensive deals.
This has already begun to happen as BNP Paribas, Citigroup and WestLB amended pricing on a facility for Siberian Oil Company (Sibneft) from 2002. The $510m loan was split between a $360m 3-1/2 year tranche paying Libor plus 350bp and a $150m five year tranche paying Libor plus 410bp. Pricing was amended to 215bp on the 3-1/2 year tranche and 300bp on the five year portion. Almost all the lenders recommitted to the facility.
Baby steps for bank credits
The other big group of borrowers in Russia are the financial institutions. Although the number of loans made to the banks is growing and terms are improving, progress is not being made as quickly as for the commodities-based industries.
Banks suffered much more severely after the crisis of 1998, causing more of the bank-to-bank loans to default than loans made to oil or gas companies. "The Russian crisis had to do with the bubble bursting and part of that had to do with the banks," says RZB's Feldscher. "Oil companies had real assets behind them, but the defaulting bank players obviously didn't have sufficient assets backing them. Therefore Western banks are much more suspicious with loans to banks."
There are some small changes happening to these facilities. For example, Vneshtorgbank (VTB) came to the market with the first broadly syndicated loan for a financial institution in Russia to include a tranche of over one year. It is a sign of progress that some financial issuers have been able to extend the maturity curve - albeit by just months - in this way.
VTB's $240m loan last November led by Citigroup and Deutsche Bank had a $112m 18 month tranche alongside a $128m 12 month tranche. The tranches paid 265bp and 250bp, respectively. VTB is back in the market with a $175m 12 month term loan that is believed to be planned as a club syndication with 12 banks.
Industry and Construction Bank of St. Petersburg (OJSC) did the first deal of 18 months for a non-state owned bank in July. RZB and Raiffeisenbank Austria were the mandated lead arrangers.
There has also been a slight reduction of margins. In August of last year Ural-Siberian Bank did a $33m one year loan with a margin of Libor plus 350bp and a one year extension option. In August, the bank extended the facility and was able to cut its pricing by 50bp.
Alfa Bank, MDM and Bank Petrocommerce all brought deals to the market as well. Bank Petrocommerce tapped the market for a debut $20m transaction with a margin of 375bp. Alfa Bank completed a $50m term loan at the beginning of the year with pricing at 300bp, while MDM was able to achieve a margin of 295bp on its $50m loan. Bankers say these borrowers are all trying to push their pricing below Libor plus 300bp and to extend facilities further than one year.
But they must be patient, say bankers. "There needs to be further consolidation and regulation for the banking industry, it is still very fragmented," says Feldscher. "The sector needs to demonstrate that it is tight and international - there are too many small banks where you ask yourself where they get their business from."
Paving the way to unsecured debt
As part of the ever-growing confidence in Russia, lenders are growing comfortable with the idea of lending on an unsecured basis. In June, Gazprom was the first Russian corporate to secure such financing. Banks in Russia have been able to complete six month unsecured facilities, but for a corporate to tap the market for a two year unsecured loan was unprecedented.
The B+ rated company was able to raise $215m paying a margin of 400bp over Libor via sole mandated lead arranger WestLB. And the borrower did not just scrape through. The deal size started at $150m and raised $240m in an oversubscription before Gazprom decided to take an increase to $215m.
"Gazprom is a very well known borrower as it has recently been issuing unsecured debt in the Eurobond market and secured loans for many years," says Penny Smith, director in debt origination for central and eastern Europe at WestLB in London. "Lenders tend to view Gazprom as almost Russia, Inc. - although it is not 100% government owned, banks take huge comfort from its blue chip nature and its importance to the Russian economy."
Lenders do feel that borrowers will continue to push for unsecured financing. "Their financing needs will grow beyond their export capacity," says Citigroup's Bekce.
Transneft, one of the world's largest oil and gas pipeline companies, also attempted a $130m unsecured facility this year. It was cancelled in May, however. There were conflicting stories in the market as to why the transaction was dropped, but bankers were pointing to the fact that the Russian government was trying to limit the amount of Transneft's external borrowings and also that some big domestic banks are highly liquid.
The introduction of unsecured corporate borrowing will widen the capacity of the market. "Some investors will be looking for that pick-up in pricing - there will be appetite for both types of deals," says David Bassett at Citigroup. |
