With syndicated loans having been excluded from the EU’s sanctions, it is one of the only avenues of international financing potentially open to sanctioned issuers — issuers who are incidentally those that arranging banks are used to bending over backwards for.
Russian borrowers have a long and well known reputation of growling fiercely to get banks in line for lending and for pricing — and in some instances providing the right model of Mercedes to ferry them around London — and we hear that some are taking the same approach this time. But bankers should remember that these borrowers also have a history of forgiving rapidly when it suits them. They are intimidating but not stupid.
In the financial crisis years for example, international lines of lending were cut to many of these issuers, but banks weren’t punished for disloyalty afterwards. There was an acceptance that the international banks needed to help themselves before helping others, as is the case here.
Bank lending is also typically done at non-market risk rates. It is a relationship business designed to entice borrowers into repaying the favour and mandating banks for more profitable bond mandates or other ancillary business. But the prospect of this other business emerging from these borrowers seems a long way off.
There are only three potential scenarios for the Russia-Ukraine situation. It could get worse, get better or stay the same.
If the situation becomes worse and Russia pushes further into Ukraine, the ancillary business will stay non-existent. And no one, not even the loyal banks, will want to be holding Russian risk for fear of not being repaid.
If the situation gets better, the sanctions are lifted at most three months later and the banks immediately start to lend again. The Russian issuers, having been starved of funding for a few months, are unlikely to turn it down out of spite. The banks are then back in the game. At worst they miss the first round of bond mandates. Many bring too much to the table to be punished for long. Will a Russian issuer be happy to sell a multi-billion dollar bond via only European banks that have carried on lending?
At the moment there is no bond business to be done and no ancillary business to win. But that could turn either way. For a bank, right now the decision of whether to lend should be based on whether loans bankers are willing to invest in a particular issuer at this point in time, not the (largely imaginary) risk of losing future business.