On July 31, Russian state owned oil pipeline company Transneft launched a dual tranche $1.65bn five and 10 year bond. The spreads at re-offer on that deal were 444bp over Treasuries for the five year and 473bp over for the 10 year and the coupons 7.7% and 8.7% respectively.
Oh to achieve such pricing any pricing for a Russian Eurobond today.
Market participants had little idea that Transneft would be the last Eurobond in the public markets from a Russian borrower this year.
The Eurobond market for Russian and CIS borrowers is closed, say bankers, at least until the beginning of next year. Given that Russian sovereign CDS is over 1,000bp and the EMBI+, the benchmark index for emerging market debt, has blown out from 400bp three months ago to about 800bp (as of late October), that is no surprise.
The key question now is when will they return? That depends on how the global financial system stabilises in the run up to year end. Two outcomes are probable. "While nobody knows for sure how the crisis will evolve in 2009, if some of the better-known EM sovereigns are able to issue successfully early in the year, then we could see some of the investment grade blue chip corporates able to look at the market in late Q1 or Q2," says Mike Elliff, head of CEEMEA debt origination at Royal Bank of Scotland in London.
After then a group of well regarded but lower rated names like metals and mining firms and telecoms companies may be able to return with a Eurobond, but some in the market dont see them really being able to come in the first quarter rather towards the end of the second quarter.
The negative outcome, one that is espoused more by traders, is that it will be very difficult for any Russian company to come out in the first half of next year. "Both bond market prices and CDS levels are in freefall in our region as well as elsewhere, for one simple reason: we have a lot of distressed sellers. A lot of hedge funds are having to unload assets because they are deleveraging," says a syndicate banker in London.
Same game, new rules
The unprecedented sell-off of Russian assets must abate before the bond market has any chance of seeing a return to normality.
"There are two unknowns," says Jonathan Brown, co-head of European fixed income syndicate at UBS in London. "Firstly how quickly the companies can come to market because were still seeing deleveraging and a sell-off of Russian assets and this needs to stabilise first. Secondly how far down the credit curve we go from those names and that depends on the events between now and the new year and how we stabilise globally as well as in Russia."
Whether it is in the first or second quarter in 2009, or later, these new bonds will be launched into a new, more integrated and competitive marketplace.
"Theres a whole new world of financial institutions with government guarantees, and the FIG base in Europe, when it gets back to unguaranteed funding, is going to pay much wider spreads," Brown adds. "So its not obvious that many of the investors that were in or potentially in Russia, will need to go into Russia again to get the returns that they need."
Indeed, some western European companies are already offering double digit returns and investors will ask why they should take Russian risk when they can stay closer to home for a comparable premium.
Russian companies, including banks, have plenty of outstanding debt. According to the central bank there is $33bn of Russian bank debt redeeming between now and end of the first quarter 2009, and $16.7bn of corporate debt in the first quarter. How will this be refinanced?
The governments $50bn facility to refinance private sector external debt, at Libor plus 500bp, is attractive, says Elliff. "Currently, US dollar swap rates and government bond rates are low and are likely to remain so, meaning that when the market does come back, there is room for hefty credit spreads, while still potentially maintaining coupons in the 10%-11% range."
Although the Russian governments facility may be more attractive on price, it is not clear, bankers say, whether the government wants companies to use it or find unguaranteed funding if they can. "Most of this decision is just pure maths, to look at the breakevens, but the rest is a little bit of politics as well does Putin and Medvedev use this as a chance to stop Russians borrowing as much internationally and try to fund locally?" asks one EMEA syndicate banker.
The bond market might take some business next year from maturing syndicated loans, although price levels will mean new bond issues will not dominate loan refinancings. The syndicated loan market will remain an important source of funding for Russian corporates in 2009, bankers say, although market capacity will shrink. Activity will be focused on the bigger names, and deals will be relationship-driven, in club-style format. "We anticipate corporates will need to diversify their funding sources to cover all of their refinancing and new investment needs, maximising bond issuance where possible, as well as looking at alternative markets such as ECA [export credit agency] financing," says RBSs Elliff.
One source of finance that will see more attention in 2009 is pre-export finance syndicated loans that are secured by export receivables to minimise the risks of the lenders. "Theres going to be more focus on deal structure next year: better security packages; pre-export finance; ECA financing guarantees back to basics in many ways." Elliff says.