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Emerging Markets

Emerging Markets: Private bank woes continue but strong outlook for Russian corps

The fall-out from the failure of private lender Otkritie continues to weigh on Russia’s financial sector, but heavy bond redemptions and higher oil prices are expected to support corporate issuance in 2018. Virginia Furness and Bianca Boorer examine the outlook for Russia’s capital markets.

Last summer Russia’s banking sector was rocked by the first bail-out of a systemically important bank in the country’s history, when privately owned lender Otkritie was rescued by the Central Bank of Russia in August. The failure of Otkritie prompted a sharp widening of other Russian privately owned bank bonds. Investor fears of sector contagion seemed to be justified when fellow lender B&N collapsed shortly afterwards.

Otkritie was one of Russia’s largest banks. It had suffered from a run on deposits after a downgrade by local rating agency ACRA in June. It lost some $7.4bn of deposits in June and July alone.

While the trading levels of Russian banks’ senior bonds have since recovered, the subordinated notes of Promsvyazbank, Alfa Bank and Credit Bank of Moscow are still way off their highs. In addition, concerns about whether the Central Bank of Russia will override the contractual terms of Otkritie’s old style tier two capital — which does not have a writedown feature — by writing down the bonds is weighing on general investor appetite.

“There has been a reduction of confidence in the sector as a whole,” says Ranko Milic, head of CEEMEA debt capital markets at UBS. “It is difficult to speculate what will happen, but a lot of Russian banks would like to access the capital markets but are holding back until levels of confidence improve.”

B&N Bank, now under the ownership of the central bank, and Sovcombank are said to be among those banks that would like to issue subordinated debt. 

A second DCM banker points to Promsvyazbank as another source of concern. 

Thin capital ratios, poor profitability and an underwhelming capital transaction by the bank in July last year hint that it may run into problems in the future, he says. 

“If you look at the interbank liquidity statistics published by the CBR, they seem to be having trouble accessing cheap liquidity in the market, so they are having to borrow a lot more from the CBR,” the banker says. “This is a sign that everything is not right.”

Henrique Morato, a credit analyst at Aberdeen Asset Management, says the issue has piqued the interest of investors, but notes that it is “specific to the private banks,” which make up only a small portion of the Russian financial market. 

“People are watching, and will reflect whatever happens in their appetite for future issuance,” he says. “It is hard to see what is going on with Otkritie and Credit Bank of Moscow as systemic to the system.” 

While the DCM banker says it would be difficult for some of the smaller, less well known banks, to issue capital before the Otkritie issue is cleared up, other bankers are more positive on the sector. 

Yury Kiselev, head of Russia and CIS DCM at Société Générale in London, says that although the financial sector struggled slightly in the last quarter, judging by the secondary performance of outstanding bonds, he expects new capital transactions to hit the screens. 

In addition, some banks are undertaking liability management exercises, which should go some way to reassuring investors. Credit Bank of Moscow in 2017 bought back some of its $500m 8.7% 2018 old-style tier twos, replacing them with new-style Basel III-compliant 2027s. The bank also published stronger third quarter results in November, showing net revenue up 93% year-on-year to Rb16bn ($276m) and its loan portfolio increasing 24% over the same period.

“CBM actively stepped in and did the buy-backs, which is showing leadership, but we still need time to pore over the changes to understand how the new agency [the BSCF] will be running the banks it has taken over,” says Dmitry Gladkov, head of the financing group at Renaissance Capital in Moscow. “By the end of the year [2017] banks will be testing the water with investor work.”

Senior debt is more straightforward, and Kiselev predicts that, subject to market conditions, banks will have little difficulty raising funding.

Big refi year for corps 

In addition to bank financing, bankers are expecting another strong year for corporate issuance. Of the $26.8bn of bonds issued by all Russian entities in 2017, the lion’s share has come from industrials, with privately owned industrials firms accounting for $9.2bn via 18 deals, and public sector firms bringing some $4.9bn of deals, according to Dealogic. 

“We expect the supportive dynamics to continue in 2018,” said Kiselev. “[This will be] driven by a stable outlook on oil prices and economic recovery in the region, supporting the growing capex and M&A needs of corporates, and by a heavy Eurobond redemption schedule.”

2013 was the busiest year ever for Russian bond issuance, with some $63bn of bonds issued. Milic says there are about $38bn of Russian bonds maturing in 2018.

However, many issuers took the opportunity to prefinance these deals in 2017, and several of the largest bonds maturing this year come from sanctioned entities, which cannot be refinanced in the international markets. This should mean investors have plenty of appetite for new deals.

“The theme for 2018 won’t so much be refinancing, but issuance will be driven by capex needs,” he says. “After sanctions, many people scaled back their ambitions, and companies focused on deleveraging, so there is more debt capacity there.”

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Indeed, with Russian presidential elections scheduled for March 18, Milic expects a busy first quarter as issuers look to avoid getting caught up in any potential volatility.

Another risk is the impact of the US’s new expanded sanctions, the Counter America’s Adversaries Through Sanctions Act, which was signed into law in early August by President Donald Trump.

The new law tightens up the sanctions first imposed in 2014 after Russia’s invasion of the Crimea, in particular extending the restrictions on investing in new Russian oil and gas projects. 

“We are expecting the president’s office in the US to come up with specific names of individuals and companies that will be added to the sanctions list,” says the DCM banker.

“The president’s office has the flexibility in terms of who will be added. It is very difficult to predict and the opinions range from cataclysmic to uneventful. Given Trump’s historic statements about Russia, they may not want to add too many people. There is a very complicated political backdrop in the US which muddies the water. The only thing that is helpful [is that the list] is meant to happen [be signed] by the end of the year. Hopefully that will give some clarity.

“They could add sanctions to the oil and gas sector, mining and the railway transport sector. There are more extreme scenarios, but the market hopes it will be limited.”   

  Western banks rediscover taste for Russian loans   
   

Despite the tightening of US sanctions, demand for Russian loan deals from Western banks is on the rise. Lenders are unclear of the impact of the new law signed in August and, having become confident in coping with the old sanctions, are eager to lend more. Meanwhile, other banks are re-entering the market, having left when the sanctions were first applied in 2014.

“A number of banks that exited in 2014 have come back into the market and we expect this trend to continue into 2018,” says Zvi Wohlgemuth, head of EMEA loan syndications at Société Générale in London. “The sanctions appear to have had less of an impact on the loan market.”

BNP Paribas was first in Dealogic’s Russian loan bookrunner league table for 2012-13, while MUFG was sixth. But neither bank was bookrunner on a single deal for the next three years. Now MUFG, at least, is looking at doing more deals again.

Demand is being felt in pricing levels. “Spreads are not quite at pre-sanction levels, but getting close for the larger issuers,” says Wohlgemuth. “I wouldn’t be surprised if there’s a bit more to go.”

Loan issuance, however, has still not returned to pre-Crimea invasion levels. In 2017, total loan issuance (including club deals) was $10bn through 13 transactions, according to Dealogic. That was down from $36bn the year before, though what Dealogic considers fully syndicated deals swelled from $3bn to $8bn.

Banks are keen to participate in loan deals but face fierce competition from the bond market. Russian bond issuance had hit $46bn by late November, $27bn of it in foreign currencies, compared with $44bn and $15bn for the whole of 2016.

Most recent syndicated loan deals in Russia have been structured as pre-export finance facilities. PXF structures are a way of reducing some of the risk for lenders by securing repayments against obligations of the final offtaker of the product. 

PXF facilities were signed last year up to November, for commodity companies Acron, Metalloinvest, Siberian Coal Energy (Suek), Rusal and Uralkali. Siberian Anthracite was due to sign by year end.

However, as lenders gain more confidence some have started to ease back into unsecured facilities. Russian fertiliser company EuroChem signed an unsecured $750m loan in August 2017, which opened the gateway for more deals.

“The improvement of sentiment towards Russia on the back of higher oil prices, coupled with growing global liquidity and record low interest rates, has helped us re-enter the unsecured market,” Andrey Illyin, chief financial officer of Eurochem, tells GlobalCapital.

In some instances, the PXF structure itself has also been weakened, with the security taken on an offshore subsidiary of the borrower rather than an external final offtaker in some deals last year.

“Three years ago you had a proper PXF structure, where you had contracts with ultimate offtakers, but now you have a trading house that is ultimately the same risk,” says a banker in London.



 
     

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