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Non-call not an issue as VTB flexes issuance muscles

19 Sep 2010

Russian bank VTB is a seemingly unstoppable force in the international debt capital markets, issuing bonds in an ever-expanding range of currencies while harnessing the power of its strong government support. Francesca Young finds out what Russia’s most flexible financial issuer has planned for the next year in the capital markets.

While many other financial institutions in Russia floundered this year, VTB strode on. The bank, which had been a regular in the dollar and Swiss franc markets, used 2010 to branch out into Singapore dollars, becoming the first Russian borrower to do so.

VTB has completed more than half its $5bn debt programme for 2010, having raised around $3bn from various currencies in the international and domestic markets. However, despite all its hard work in the debt markets, VTB’s reliance on the capital markets is declining.

"Our focus on customer deposits has significantly reduced pressure on funding from capital markets," said Herbert Moos, VTB’s CFO.

Moos says VTB is not yet satisfied with its trading levels over the Russian sovereign but hopes these spreads can be tightened in the near future with a new business strategy that reduces VTB’s reliance on the markets.

VTB’s five year CDS stood at 377bp at the start of September, while Russia’s five year CDS was trading around 179bp.

"Most of this the spread over Russia is driven by our expansion in the last five years, when the group’s balance sheet grew over 30 times to reach $120bn," said Moos. "Most of this growth was funded via capital markets, putting significant pressure on our credit spreads."

But VTB’s new business specifies consolidation rather than growth and as such VTB will issue less in the capital markets than it has done in the past, which Moos hopes will put downward pressure on VTB spreads.

VTB is 85.5% owned by the Russian state, but some emerging market analysts fear an implicit guarantee may be meaningless in hard times. However, the Russian government showed throughout the crisis that its support of VTB, and several other state owned entities, is strong, with the government using VTB as one of the entities through which it channeled state funds to other institutions.

Analysts recognise that this continuous support from the government has put VTB in a strong position.

"Bearing in mind what’s happened over the last three years, investors are wary in terms of placing too much emphasis on implicit government guarantees, but Russia has shown throughout the crisis that its support of VTB is strong," says Okan Akin, an emerging markets credit analyst at Royal Bank of Scotland.

Making S$ sing

But VTB relies not just on government support — VTB’s tapping of the Singapore dollar market was applauded by syndicate officials and analysts as a good way of diversifying its funding base. In July, VTB raised S$400m ($299m), which at the time was the largest Singapore dollar deal of the year from any issuer, having also issued a $1.25bn five year note and a Sfr400m ($398m) three year deal in 2010.

"VTB is expanding their operations globally and had built good relations with the investors in Asia so the Singapore dollar bond was a natural extension of that — they’re clearly keen to diversify their funding base, which is a positive for the bank," says Akin.

The VTB offering generated strong investor demand from Singapore, Hong Kong and other Asia Pacific countries, as well as Europe.

"We consider the Asian market among the most promising for VTB Group," says Moos.

The deal has also paved the way for other Russian borrowers in the Singapore dollar market — Moos says that VTB Capital has built a pipeline of Russian blue chip names keen to issue in Singapore dollars.

VTB has also issued private placements this year, which is unusual for a Russian bank, as many of these investors have shunned this kind of borrower over the last few years because of the lack of the liquidity that their deals offer. But the attractiveness of VTB as a quasi-sovereign issuer that pays a generous spread over the Russian curve has managed to tempt some investors out of their shells this year.

"One of the fundamental principles of our strategy is diversifying our debt issuance across instruments, therefore private placements are an important tool in this dimension," says Moos. "We are looking at a number of deals, including some reverse inquiries from investors who are looking at tailored exposure to VTB."

Big call over non-call

Even a risky move in August failed to derail the positive sentiment towards VTB. Against market expectation, subsidiary VTB North-West decided not to call its lower tier two bonds — the bank claimed it was financially beneficial not to do so. The price of bonds immediately dropped four points, with the move enraging syndicate officials, who said that the reputation of VTB would be damaged and that the bank had betrayed a trust between it and its investors. But a fortnight on from that decision, most observers accept that the move has only changed investors’ perception of emerging market callable bonds, rather than VTB.

"There has been some negative impact of VTB North-West calling its bonds, but the impact has been on other Russian banks rather than on VTB risk itself," says Akin. "When VTB didn’t call its bonds earlier in the year, no one expected that and it had set a precedent, but now that has changed."

19 Sep 2010