Transneft

  • 02 Mar 2007
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Rating: A2/BBB+
Amount: $1.3bn
Maturity: 5 March 2014
Issue/fixed re-offer price: 100.00
Coupon: 5.67%
Spread at re-offer: 98.8bp over the 4% 15 February 2014 US Treasury
Launched: Friday 23 February
Payment date: 5 March
Lead mgr: Credit Suisse, Goldman Sachs

Bookrunner's comment:

We went out with guidance in the 60bp over mid-swaps area and had built a $4bn book by Tuesday (February 20) afternoon. The market was clearly in rude health at that point. We stress tested people down at 57bp over mid-swaps but given the size of the order book and the fact the borrower was limited to printing a maximum of $1.3bn, they felt they could be hard on price.

We lost $1.3bn when we tightened to 55bp over and announced the $1.3bn deal size, but we expected that, and we were still twice oversubscribed at the final price.

This deal saw a number of investment grade accounts dipping their toes into the Russia pool for the first time. If you're going to play in Russian credit for the first time, you won't find a better credit than this.

It's 100% state owned, and extremely important to the Russian economy. It's a highly conservative asset to own. In addition to its investment grade rating, investors were comforted by a covenant allowing them to put the bonds at par if the government sells any of its 100% stake.

We were particularly pleased with the high proportion of real money accounts that came into this deal, especially from the US. US names took 46%, the UK 17%, Switzerland 7%, Scandinavia 6%, Germany 5%, southern Europe 5% and the Benelux 4%. Asset managers bought 46%, insurance 17%, banks 13% and retail intermediaries 6%.

There were two sets of comparables for this credit. Some accounts looked to European comparables such as National Grid and TransCanada which were trading at around 20bp over Libor.

Given Transneft's credit metrics, it is debt free, its metrics are those of a double-A rated company. The only reason Transneft is single-A rated is because of geography. This is a company with double-A rated metrics, but is rated single-A and came at 55bp over Libor.

The deal was clearly not angled towards traditional emerging market buyers — this is a high grade corporate that is cheap.

Emerging market accounts wanting Russian exposure will do so through Gazprom and get more yield. Gazprom was trading at around 85bp over mid-swaps when we priced this deal, so we printed 30bp through Gazprom and flat to the Russian CDS.

The deal was delayed when we had to wait for approval from the first deputy prime minister. By the time we printed on Friday, the markets started getting soggier and by late afternoon on Friday, Treasuries had rallied on the back of worries about the state of the US sub-prime mortgage lending market.

We priced this at par but the deal broke at 99.75 and with Treasuries rallying just after that, we finished 4bp-5bp wider on the day at around 59bp-60bp over mid-swaps.

This was not a dramatic underperformance relative to the rest of the emerging market space — Russia, Turkey and Ukraine were all wider on Friday.

This week we saw the markets in turmoil after equities tanked in China.

Transneft is happy it got the deal away last week although admittedly, investors were unlucky. That's not to do with the execution of this deal but with the markets.

Market appraisal:

"...this is pretty ugly. The US Treasury rally aside, this deal came off immediately and was trading at 99.75 at 4pm on Friday, London time.

By Wednesday it had widened to 80bp over swaps and the price has fallen by a point to 99. Maybe the Treasury rally didn't help. Maybe part of it is the market, but before the Treasury rally happened, this was already going weak at the knees.

At least half of the widening is due to execution — it was just too tight. Why was it so much tighter than Gazprom? At the end of the day, Transneft owns a bunch of pipes and people got carried away. I would have taken my hat off to them if this had stuck but it's been one of the worst trades we've seen this year in terms of secondary market performance.

Every now and then a puppy shows up, looks at you with sad eyes and you just have to take it home. Transneft was that dog for Credit Suisse and Goldman Sachs."

"...a really badly executed deal. It was priced too tight from the outset, even before guidance was revised. Sure, the markets didn't help but a whole bunch of the widening was pure credit spread.

They squeezed this way too tight and when the markets softened, they got slammed. It was just too ambitious and too aggressive. They should have done this deal a fortnight earlier and been more realistic with pricing, bringing it 5bp-7bp wider.

As it was, the deal got completely hosed and it's widened 10bp further than other Russian credits. This is what happens when you get an over-ambitious, over-exuberant borrower."

"...a disaster. It sounds like they had a good book at the wide end but they lost a lot of the quality when they tightened.

Even before the sell-off, this trade had widened by 10bp. Now it's 20bp off, so only the second 10bp can be said to relate to the market."

"...I don't understand who buys this stuff. There is absolutely no juice in this for anybody other than high grade crossover accounts.

But flat to Russia's 2030s? Even if the market hadn't tanked, there was just nothing in this. I know Russian issuers and I can see how this can happen.

The borrower was probably pushing the leads for these tight levels and it is the investors that have suffered.

Transneft wants to return to the markets this year — it will be interesting to see how they fare after this."

"...some of these borrowers seem obsessed with coming at absurdly tight levels."

"... where was Goldman when this deal was tanking in secondary?"

  • 02 Mar 2007

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