Before last August, the rouble bond market was having an excellent year, with an average or Rb60bn ($2bn) in new deals every month.
Foreign investors were more and more attracted by the market, because of the appreciation of the rouble. Banks like Standard Bank structured several Eurorouble deals, for single-B issuers like Locko Bank and Orient Express Bank, which were structured specifically to attract international investors. Foreign bookrunners like Barclays Capital were winning a growing amount of market share in the rouble bond market as it became more internationalised.However, when the US credit markets turned ugly in August, international investors exited the rouble bond market en masse. Alexander Kudrin, fixed income analyst at Troika Dialog, says: "There was a very sharp capital outflow out of the rouble bond market by foreign investors. They preferred to be in their home market. This completely stopped the primary placement market."
Russian banks, unable to access either the rouble or the Eurobond market, also exited some of their rouble bond positions, in order to create emergency liquidity against the crisis. As a result, spreads widened by around 150bp on first tier names, and by 300bp or more on lower tier issuers.
However, the market was helped by the pro-active intervention of the Bank of Russia, which pumped over $2bn of liquidity into the market, and which lowered the repo rate for Russian banks. Several banks issued rouble bond deals that were then bought by the Bank of Russia.
Gradually, the proper rouble bond market re-opened. One of the first new deals to come to market, ironically, was a CDO. Troika Dialog Asset Management issued a Rb5bn ($203m) synthetic CDO that repackaged rouble-denominated corporate debt. The deal, which was lead managed by Troika and Deutsche Bank, was the second ever Russian synthetic CDO, after Troika issued an Rb8.95bn first deal in August 2007.
Another securitisation deal to come to market this year was an Rb8bn ($360m) securitisation of factoring receivables by Eurocommerz. The deal was the first of its kind in Russia, and was lead managed by VTB and Deutsche Bank. The offer was privately placed among emerging market investors.
Other securitisations have had to be pulled this year, however, with even established and well rated names finding it difficult to do deals. The state owned Agency for Home Mortgage Lending had to buy and hold the latest MBS issue from its securitisation programme in March, in the hope it would be able to sell it in the secondary market when conditions improve.
A few other deals have come to market Sistema issued a Rb9bn ($380m) five year deal, lead managed by VTB and Rosbank, which was sold for a coupon of 9.45%. Wimm-Bill-Dann, Transcontainer, TGK-10 and the Russian Agricultural Bank also closed deals in the first quarter.
Kudrin of Troika Dialog says: "The situation is not too bad, and theres still demand among Russian banks for deals. But its bad compared to the market in 2007, with only Rb42bn issued so far this year, less than was issued in the average month last year."
Kudrin is cautiously optimistic about the markets prospects, however: "Borrowers realise now they will have to pay more. Investors realise there will be occasional volatility."
But the market may go through a baptism of fire this year: "The question is what will happen when an issuer defaults. The corporate rouble bond market still has not had a single default, and we believe there could be five or six defaults this year."
When these defaults occur, it will be a legal challenge for Russian bondholders. Rouble bond prospectuses dont include any covenants, unlike Eurobond deals. The legal structures of securitisation deals are also sometimes unclear. So a default will "establish new rules of the game" according to Kudrin.
Not every analyst is pessimistic about the default situation. Mikhail Galkin, head of fixed income research at MDM Bank, says: "We saw a rapid rise in distressed rouble debt in the second half of 2007 [Galkin defines distressed debt as yielding 10 % or more over the benchmark curve]. But not all of these bonds are really distressed, and some of them present clear buying opportunities."
Galkin suggests that the number of distressed bonds is actually artificially inflated by inefficient risk management and poor credit analysis of third tier names by rouble bond investors, meaning these investors over-sell in volatile conditions.
He adds: "We believe incentives for borrowers to avoid defaults are high. The economy is booming, equity valuations are high, and reputation-wise, it would be a killer to be the first default in a no-default environment. So we think we will live through the current shake-up without massive defaults. Of the few that will take place, the majority will be related to adverse regulatory actions, rather than natural blow-ups of businesses."
Other investors see opportunities in the distressed debt market. Renaissance Capital, for example, recently raised the first ever Russian distressed debt fund.
In the mid-term, much is expected of the rouble bond market. The Russian government is hoping it can provide billions of dollars in financing for up-coming infrastructure deals, which require financing in roubles. Georg Zinecker, a director of syndication at the EBRD, says: "The government wants to raise tens of billions of dollars in 30 year rouble debt. This is going to be a challenge, when the longest maturities at the moment are 10 years or so."Multilaterals are playing their part in trying to develop the market. The EIB and Rabobank both bought Rb2bn ($77m) 10 year deals last year, and the EBRD issued the first ever rouble bond in a global format in December, an Rb2bn ($77m) three year deal.