There is no better example of how crucial timing has become in the bond market than to look at the fate of Russian corporate issuers this year.
Those that seized those all-important windows of opportunity earlier this year will be thanking their lucky stars that they came to market when they did, with the bond market for emerging market issuers now all but shut.
Transneft, the A2/BBB+ rated Russian state-owned oil pipeline company, was one of those that came at just the right time. After a flood of Russian corporate issuance in July, Transneft priced $1.65bn of five and 10 year bonds on the last day of the month the second biggest issue by a Russian corporate borrower so far this year, after telco Vimpelcoms $2bn dual tranche 10 year in April.
Transneft needed the money to execute some of its pipeline projects and took its chances, fearing that conditions would deteriorate. "We knew money was becoming considerably more expensive in 2008 and this was only going to get worse in the autumn," says Vladimir Kushnarev, first deputy chief executive officer at Transneft. "So we decided to strike out in the summer."
In line with other Russian corporate issuers this year, Transneft had to pay a premium much like Russias top blue chip company, oil and gas champion Gazprom which, only one week previously, had set the tone with its new 2013 bonds, coming at a 65bp premium to its cash curve. Transnefts five year tranche represented a 50bp premium to its own cash curve equivalent to 125bp over Gazproms five year CDS.
"We were able to keep a reasonable balance between the companys need for financing on better terms, and investors appetite for high returns on their investment," says Kushnarev.
Transnefts attitude dispelled any reservations about its previous reputation for price sensitivity, and helped get the deal away. The funding team, under new management since October 2007, showed that it was willing to be flexible. It was an important concession, as there had been worries among market participants that the issue might suffer because investors at the time were already full on CIS corporate debt.
But the issue was three times oversubscribed, "and showed a secondary curve premium below those who had floated a week or two before us," says Kushnarev.
Some 50%-60% of orders for both tranches came from the US. UK investors took 15%-20% of supply, and about 12% from the rest of Europe, with around 8%-10% of the issue going to Asian investors. According to bookrunner Credit Suisse, funds dominated, taking 80%, and a good number of investors bought Transneft for the first time.
Transnefts timing has been proved to be far-sighted now that market conditions have taken a sharp turn for the worse as one banker told EuroWeek, "the borrowers that didnt seize their chance earlier this year must be kicking themselves." Transneft has bought itself some time before it next needs to come back to capital markets, and it is certainly unlikely to be coming back this year.
"Where the market is now, any reasonable premium is out of the question amid global risk reassessment and search for new, better debt instruments," says Kushnarev.
No issuer has escaped the pain completely. Although at first Transnefts bond was trading just above par in the secondary market, when the global financial meltdown dragged all emerging market instruments down, Transnefts bonds were no exception, says Kushnarev.
But the company may be in a much better position to weather the storm than many other Russian companies.
Firstly, it has a Rb145bn credit line from Sberbank until 2014, of which it has only drawn down less than 50%, and the company says it is discussing financing options with other quasi-sovereign Russian banks. Some of its investments will also be covered by tariff proceeds.
And while Kushnarev concedes that Transneft cannot remain completely immune to the financial crisis as a big percentage of its plans are financed with borrowings, it has one crucial advantage: it can count on support from the state.
"There is an understanding that Transneft, as an owner of strategic projects in a key industry, can count on government support," says Kushnarev. "The government is considering some steps to minimise credit costs to the company, and so minimise the impact of higher credit costs upon the companys tariffs, which means we will be able to cut our customers Russian oil companies some slack."
Lenders that are worried about the looming refinancing crisis in Russia next year will also be reassured by Kushnarevs assurance that Transneft will always be able to honor its liabilities.
"We are entitled by Russian law to factor our debt service and repayment costs into our tariffs, and this is done by default," he says. "Our creditors will never be exposed to a higher risk because of the crisis: Transneft will always have the money to pay them back."