Russian banks should follow Turks into MTNs
Russian banks would do well to follow the example the Turkish banks set this year in the MTN market.
The pressures faced by Russian financial institutions are similar to those by their Turkish counterparts. Under Basel III many of them will need to issue subordinated bonds in 2014 to maintain their capital ratios as well as senior debt. That will put their investor bases under pressure as they are asked to participate in a variety of instruments.
Most Russian bank borrowers already use MTN programmes for their benchmark funding, so already have the documentation in place required to tap this market. As well as VTB — which was the exceptional early adopter of this market and has been printing small reverse enquiry-led notes for years — Sberbank, Russian Standard Bank, Petrocommerce Bank and Ak Bars Bank are among the Russian issuers that already have MTN programmes in place.
There is certainly appetite for Russian MTNs. The country carries investment grade ratings of Baa1/BBB/BBB, which is one of the main requirements MTN investors have when considering new issuers. Bankers say that MTN investors in Asia, Europe and the US are increasingly including Russia on their lists of countries they want to invest in, lured into the emerging markets by the high yields on offer.
And there should be a willingness on the issuers' side too. Regular users of the MTN market typically benefit from those deals being priced inside benchmark curves, which should prove alluring. Any half decent CEEMEA banker is more than aware of how price sensitive Russian borrowers can be.
Perhaps even more importantly, many predict that 2014 will be a year of high volatility in emerging market credit if — or rather when — the US Federal Reserve begins its tapering of quantitative easing.
The Turks made especially good use of the MTN market during the summer when yields rose in traumatic fashion. Although benchmark issuance hit a roadblock, the banks carried on printing private placements in a variety of different currencies. Around $2bn was placed in MTNs from Turkish banks this year.
Preaching the need for funding diversity should be easy work for bankers next year. And it seems most big Russian banks are already well aware of the need for it, having tapped Swiss franc and Asian markets in 2013.
MTNs are another step in the right direction but they are well known to be hard work. Printing regularly in this market requires flexibility and responsiveness for a number of small transactions that only over time come to form a substantial funding base. But now that Russians are welcome in this market and are well equipped to use it, they should grab the opportunity.