The bank market has quickly forgotten the losses incurred after a moratorium on $4bn of commercial bank debt was declared in 1998 and Russian borrowers have discovered a new found popularity. Top oil and gas borrowers are negotiating five year tenors, less complex structures and tighter margins; financial institutions are enjoying looser terms and a diverse range of corporates are edging closer to the market. Ruth Lavelle and Colette Campbell investigate the changing perceptions of Russian risk.
The announcement on August 17, 1998 of the devaluation of the rouble, the freezing of $40bn of GKO/OFZ government bonds and a 90 day moratorium on $4bn of commercial bank debt was a rude shock. But with the world's largest natural gas reserves, the second largest coal reserves, and the eighth largest oil reserves, Russian risk has not been ignored for long.
Bankers have recognised that Russia's economy has improved sharply since 1998 and are once again willing to lend to Russian borrowers. "The main reason for Russia's rapid recovery is attributable to its highly successful macroeconomic performance over the last three years," says Peter Kennedy, head of origination, syndications and new issues at Standard Bank London. "The impressive growth of the economy, improving liquidity position and reduction in external indebtedness are evidence of this recovery."
The depreciation of the rouble has increased the competitiveness of Russian exports, a sharp rise in oil prices has buoyed export revenues and Russia's GDP grew by 9% in 2000 and 5% in 2001. Russia has also cut its net external debt to 44% of GDP in 2001, from 87% in 1999. The improvements have been recognised by the ratings agencies which upgraded Russia in 2001. In October Fitch upped it to B+, Moody's upped it to Ba3 in November and Standard & Poor's lifted it to B+ in December.
All of this has encouraged bank lenders to venture back into Russia and has enabled Russian borrowers to push for more favourable terms.
Pricing level, tenors out
HVB Group launched the biggest and longest syndicated loan for a Russian borrower into the market at the end of March 2002 - a $300m six year facility for Gazprom.
However, the margin has not moved in comparison to Gazprom's more conservative deal in November 2001 - a $200m five year credit facility. Both deals carry a margin of 375bp over Libor.
ABN Amro, Moscow Narodny Bank, Bankgesellschaft Berlin and Commerzbank arranged and underwrote the smaller and shorter deal for Gazprom in November 2001.
But the margin on both deals is significantly lower than Gazprom has previously paid. A $200m five year term loan in August 1998 offered a margin of 400bp over Libor. The loan was cancelled following the advent of the Russian financial crisis. And a Eu250m five year deal signed in March 2001 carried a margin of 390bp over Euribor. The success of that transaction enabled banks to cut the margin on its latest deals.
However, Gazprom has not yet managed to secure money below the 300bp mark and bankers do not expect pricing to drop much in the near future. "With the comfort of underlying structures, tenors have stretched to three years and over," says Emaad Siddiqui, a director of syndicated debt at ABN Amro in London. "But because of the widening of tenors and to retain a reasonable return on Russian risk, pricing has remained between 3% and 4%. As confidence improves, pricing will eventually tighten, but lenders may then decide to diversify their client base to maintain reasonable returns."
Both of Gazprom's recently signed deals were oversubscribed, proving the popularity of the world's largest gas company which accounts for 94% of Russia's gas production, 8% of its GDP and 23% of global gas output.
The gas group is not the only Russian corporate to enjoy a warm reception in the loan markets. Slavneft, Sidanco, Lukoil, Tyumen Oil Company, Tatneft, Yukos, Sibneft, Transneft and Rosneft have all also successfully tapped the market since 1998.
Many of those names pushed their way into the market early in 2002 and Citigroup/SSSB was quick to test appetite when it launched a $250m three year term loan for Slavneft on January 8. With an average life of one year and nine months the amortising deal pays a margin of 450bp of Libor. The deal was launched to a select group of banks for an underwriting amount of $40m for 40bp with a final intended take of $25m. The deal marked Citigroup/SSSB's re-entry into the Russian syndicated loan market.
SG and Natexis Banques Populaires were quick to follow and launched a $140m 18 month credit facility for Sidanco on January 16. The deal offered a margin of 380bp over Libor. Tickets ranging from $9.9m to $20m were on offer to banks.
Lukoil managed to negotiate more favourable terms from its arrangers. ING and RZB launched a $300m facility 4-1/2 year deal into syndication in February with a margin of 350bp over Libor. A ticket of $25m was offered to banks invited to join the deal.
Arranger ABN Amro is optimistic about the range of banks willing to buy Russian risk and has invited 20 houses to join Rosneft's $150m three year facility for takes of $20m and $15m. The deal offers a 380bp over Libor margin. "There has been a net net increase for certain Russian borrowers in the bank market," says Siddiqui at ABN.
"And depending on the general economic sentiment and the maintenance of Russia's positive macroeconomic performance, we expect to see an improvement in investor appetite. However, there is not a doubling or a tripling of bank market appetite and country limits are still filled with top tier borrowers."
Also confident of bank market appetite for Russian risk, BNP Paribas brought two Russian oil and gas deals to the market in March.
With HypoVereinsbank, BNP Paribas is arranging a $150m three year deal for Tyumen Oil Company (TNK), which is the second tranche of a $300m loan facility signed in July 2001. The $300m deal is far larger than TNK's previous loans. In March 2001 it secured a $100m 1-1/2 year dual tranche deal via ING Barings. That deal paid a margin of 600bp over Libor. BNP Paribas also launched a $100m 2-1/2 year oil pre-export financing for Tatneft.
The deal was mandated in November 2001 and is backed by crude oil offtake contracts with Tatneft Europe, based in Switzerland.
The ease with which arrangers have launched, syndicated, closed and signed deals for Russian oil and gas companies in 2001 and 2002 is oiled by underlying contracts between the borrower and a highly regarded offtaker. "Asset takers still prefer structured deals," says ABN's Siddiqui. Bankers recognise that there will be limited investor appetite for unstructured deals. Tenors will have to shorten to one year and because asset takers would need a solid return, pricing could be anything north of 300bp.
Gazprom's latest deal is secured by receivables from state owned Public Gas Corporation of Greece (DEPA).
The contract with the Greek offtaker has perked the interest of local banks and Agricultural Bank of Greece has joined the deal as a lead arranger.
Gazprom's deal in November 2001 was supported by an offtake agreement with Transgas of the Czech Republic and its loan in March 2001 was backed by the sale of gas to Austria's OMV.
All of the deals are based on trade agreements and have been launched to a fairly wide group of banks. Small short term bilateral trade financings quietly arranged between bank and borrower have been eclipsed by larger, medium term structured loans which are widely syndicated - although bankers concede that the universe of lenders to Russia remains limited.
"Oil and gas companies are keen to start clean borrowing, although these deals will have to have much higher pricing to reflect higher risk," says Siddiqui. "And the first unstructured deals will have to be tried and tested before clean borrowing becomes the norm."
Beyond oil and gas
Russia's new found popularity in the bank market has encouraged corporates outside the the oil and gas sector to re-enter the loan market. Trust in these corporates has improved as borrowers recognise the importance of corporate governance and financial transparency. "The established borrowing track record of Russia's big corporates has instilled confidence in lenders and now, the type of Russian borrower is changing," says David Taylor, head of corporate banking at Moscow Narodny Bank in London.
"It is no longer just the natural resource giants. And although there are some parallels between the market today and the market in 1997, there are no huge problems on the horizon. Lenders are exercising caution, but are quietly optimistic about Russia's future."
Bankers expect oil and gas companies to be joined by chemicals, aviation, brewing, pulp and paper, shipping and metals companies.
"There is talk of companies in other sectors tapping the market because of the complementary business and the higher returns on offer," says Siddiqui at ABN. "Although the big oil and gas companies are where lenders remain focused."
National flag carrier Aeroflot and diamond company Alrosa are two non-oil and gas corporates that have refamiliarised themselves with the loan market since 1998. Moscow Narodny and WestLB recently signed a $40m one year facility for Aeroflot. The deal is not clean risk and is secured by payments due by the International Air Transport Association (IATA). Aeroflot also secured a $30m one year bullet loan in 2001 secured by overseas ticket sales through the BSP sales system.
Alrosa has mandated SG to arrange a small $50m short term loan that is backed by diamond sales to De Beers. The deal matures in December 2002 and offers a margin of 450bp over Libor.
Syndicated lending has become a perfect source of funding for Russian banks that do not have access to other financial products yet. Transactions are short term and generously priced. At this stage the list of lenders joining Russian bank deals is short, but Russian banks hope that the more frequently and widely syndicated bank deals are, investors will gain more confidence.
"The more Russian bank deals that come to the market the better it will be for those that are keen to secure loans," says a Moscow-based banker. "Also, the more deals that are syndicated on a wide basis - not as club deals - the better. Each successful syndication completed for a Russian banks, is a step towards regaining the trust that the sector lost in 1998."
In 1998 some 20 Russian banks tapped the market for deals ranging from $4m to around $70m. In 1999, the market was empty of bank deals - bar a $26m 20 month deal for Avtobank arranged by Citibank that was priced at a fixed rate of 14%. It was sold down to nine banks and was used to refinance debt.
Bank Zenit and Belvneshekonombank were the only two banks that entered the market in 2000. Bank Zenit's one year $20m export purchase and sale agreement was arranged by the EBRD and Standard Bank London. It paid a margin of 600bp. The deal was the first disbursement of a three year gold export facility. In 2000 the EBRD agreed to provide up to 12 tons of gold export financing in Russia over the next three years to approved gold mines. Some $20m of gold will be bought from Russian mines of which 50% has been prepaid by the first disbursement.
Last year saw a more prominent return of Russian financial institutions to the syndicated loan market. Bank Zenit was the first Russian bank to tap the market in 2001 with a $20m 364 day loan arranged by Standard Bank in May 2001. The deal was secured on Eurobonds issued by the crude oil and natural gas producer Tatneft. The loan carries a margin of 400bp over Libor.
The $20m 364 day deal for BashCreditbank was the first Russian deal with a soft structure to be syndicated since 1998. Dresdner Kleinwort Wasserstein arranged BashCredit's deal, which carries a margin of 375bp over Libor and all-in pricing of around 450bp.
And MDM Bank's $10m six month pre-export financing was the first uncollateralised loan seen in the market since the Russian crisis.
RZB arranged that deal, which has an average life of four months with pricing thought to be around 400bp.
Meanwhile, Alfa Bank raised $20m over six months via Standard Bank London for 375bp over Libor. And Nomos Bank secured $17m for a year via Standard Bank for a margin of 400bp over Libor.
The success of the bank deals syndicated recently is a reflection that lenders have gained more confidence in Russian banks and that larger deals with softer structures could be syndicated. But because the Russian banking sector is still viewed by bankers as higher risk than other sectors of the Russian economy, margins on bank deals are still high - around the 400bp mark.
And some bankers remain lukewarm about Russian bank borrowers: "Confidence is returning, but it is a slow process simply because many credit committees still have vivid memories of the 1998 Russian bank crash," says Standard Bank's Kennedy.
"In general I think that Russian banks will continue to find it difficult to raise finance from both the syndicated loan and bond markets. That is not to say that there has not been good progress, though."
Industry and Construction Bank of St Petersburg has been the only bank to tap the market so far this year. It is in the market with a $22.5m six month deal via Deutsche Bank. The deal has a six month extension option and carries a margin of 350bp over Libor. *
|Russian borrowers banking sector (Jan 1 2001 - April 8 2002)|
|Borrower||Amount $ m||Arranger||Signing date||Date|
|Alfa Bank||20.000||LIBOR:375.00 bp||08 Dec 2005||08 Jun 2006|
|Bank ZENIT||20.000||LIBOR:400.00 bp||16 May 2005||16 May 2006|
|Bashcreditbank||20.000||LIBOR:375.00 bp||15 Dec 2005||15 Dec 2006|
|Belvneshekonombank||4.790||19 Apr 2005||19 Jul 2010|
|Moscow Business World Bank (MDM)||13.000||LIBOR:412.50 bp||27 Nov 2005||27 May 2006|
|Nomos Bank||17.000||LIBOR:400.00 bp||22 Dec 2005||22 Dec 2006|
|Vnesheconombank||94.120||28 Sep 2012|
|Vnesheconombank||51.208||18 Sep 2005||18 Dec 2012|
|Vnesheconombank||4.162||16 Oct 2005||16 Jun 2011|
|Source: Dealogic Bondware|