Vimpelcom has traditionallty relied on the US dollar for its financing needs. However, as the rouble continues to gain ground against the dollar and as the local bond market deepens the telecom company is increasingly looking to the domestic market. Joanne O'Connor reports.
In May 2006, amid a flurry of issuance from Russia and Kazakhstan, Russian mobile telecom company Vimpelcom blazed a trail when it brought investors Russia's first voluntary corporate bond exchange.
Bookrunner UBS priced the $600m 10 year deal — the company's first 10 year print — in line with guidance of 8.25%. Some $230m was issued in exchange for some of Vimpelcom's $450m 2009 10% notes and $370m sold for new money.
The deal came amid an unprecedented flurry of issuance from the eastern Europe, Middle East and Africa region, when 15 borrowers priced deals in the space of just 14 days.
Despite the glut of paper in the market, Vimpelcom chose the right time to borrow: in a market saturated with deals from Russian and Kazakh banks, the mobile company shone as a rare corporate issuer.
Vimpelcom has long enjoyed its status as a trailblazer — in 1996, it became the first Russian company to list on the New York Stock Exchange. In 2002, the company sold a $250m three year bond at 10.45%, attracting a book of $850m at the tight end of guidance. In 2003 it again issued just once — a Rb3bn hybrid deal. By 2004 however, its expansion plans made Vimpelcom hungry for funds and it came to the capital markets twice — to sell a $450m five year bond at 10% and later to bring a $300m seven year deal at 8.375%. Last year, Vimpelcom tapped the Eurobond market just once when it brushed aside concerns over a $157m tax bill levied by the Russian government to price a $300m five year issue. The deal attracted $2bn in demand.
This year's groundbreaking bond exchange has been Vimpelcom's only major entry into the international capital markets this year. The company — Russia's second largest mobile firm — has a borrowing target for 2006 of $700m. Of this, $370m has already been raised in the May liability management deal. Vimpelcom's head of treasury, Dmitry Afinogenov, says the company may tap both the rouble and Eurobond markets by the end of the year.
The company's motivation for borrowing in 2006 remains the same as for last year: to support its rapid growth.
However, Afinogenov points out: "There is one major difference in the borrowing strategies for 2005 and 2006.
"This year, Vimpelcom will become cashflow positive in Russia, so that it now needs funds to finance M&A rather than greenfield projects. M&A is now a major driver of our borrowing."
The company has a stated ambition of expanding across the CIS. In 2004, it acquired operations in Kazakhstan and last year entered Ukraine with the acquisition of URS, and a month later, Tajikistan with the purchase of TaCom. Last year, the company spent more than $1.6bn on investment in infrastructure, support systems and networks and $314.5m on acquisitions.
Earier this year, the rouble became a fully convertible currency. Afinogenov predicts that the capacity of Russian borrowers to finance themselves in roubles will increase quickly. And as the rouble continues to gain ground against the dollar and the local bond market deepens, more Russian borrowers are looking to the local market for ever bigger, longer and cheaper deals. Afinogenov admits that while the capacity of the dollar market is still greater than in the rouble market, Vimpelcom is borrowing more and more frequently in the local currency market. Vimpelcom's primary borrowing currency is now roubles.
"We used to stick to US dollars as our currency of borrowing primarily because it has been our functioning currency. But now we are changing and becoming more rouble-centred. Our prices are now fixed to roubles and our functional currency will most likely change to roubles," Afinogenov says.
"Now we look to borrow in roubles first, then in US dollars."
Next year, Vimpelcom's borrowing plans will be driven both by a need to fund expansion and to maintain the company's debt/equity ratios. "We're not looking to reduce debt," says Afinogenov. "We keep our debt/equity ratio at a safe level, but our equity is growing so we will be borrowing to maintain our debt/equity ratio."
In terms of pricing and performance of its bonds, Vimpelcom benchmarks itself against Russia's largest mobile company, MTS. It is an achievement for a young credit like Vimpelcom. "We normally compare ourselves to their level and trade at approximately the same level as they do."