Russia coverage bankers are keeping their anxieties well hidden. While many will be worried about the Russian government's handling of oil company Yukos and its subsidiaries or the anger being stirred by state pension reform, those anxieties are not being reflected in the syndicated loan market.
While established names like Gazprombank and Vneshtorgbank look for better pricing, bankers are persuading new borrowers to access the market, despite some familiar concerns.
Yukos, for example, had a $1bn syndicated loan placed in default last year, and the sale of its main production unit Yuganskneftegaz — which ultimately ended up in the hands of rival Rosneft — remains mired in claims and counter-claims regarding its legality.
And the government's proposed welfare reforms prompted thousands of pensioners to take to the streets across Russia in protest in January.
"People are of course aware that the Yukos situation has still not been resolved, so everybody is watching to see how it develops, but in the meantime they are doing business as normal," says Elena Ivanova, a managing director of central and eastern European, Russian and CIS loan syndications at ING in London.
Russian loan market volumes reached $15.3bn last year, an increase of 84% on the $8.3bn of debt raised in 2003.
Borrowers accessing the market continue to look for a combination of bigger deal sizes, finer margins and longer tenors.
The $300m three year loan for Gazprombank in the market at the end of March through ABN Amro, Citigroup, Deutsche Bank and JP Morgan, for example, pays a margin of 150bp over Libor.
Last April the borrower paid 180bp over Libor on a $275m 364 day facility arranged by ABN and Deutsche.
But this time Gazprombank set out to match the terms of the landmark deal that Vneshtorgbank (VTB) signed in November last year, when VTB paid 160bp for $300m of unsecured three year debt — the longest loan tenor secured by a Russian bank since the economic crisis of 1998.
VTB has subsequently obtained a 40bp drop in its own pricing, paying 120bp over Libor for its latest $300m three year loan, in syndication in early April.
Standard & Poor's (S&P) decision on January 31 this year to assign Russia an investment grade rating of BBB- has helped borrowers in their efforts to secure better terms on their loans, with the agency citing improvements in government debt levels and external liquidity as crucial to its decision.
The upgrade, which gives Russia a full house of investment grade ratings, has opened up the country to new investors. Bankers say that VTB's deal had originally been planned with a higher margin but that the bank's bond spreads began to tighten on the back of the sovereign's upgrade, prompting a revision of VTB's loan pricing.
The progress of the loan is indicative of the market's confident outlook — last year's facility was put through a two step syndication, but the new deal has so far raised over $400m during a one step general syndication.
"There is huge demand and liquidity at the moment, and that will remain as long as the market doesn't jump the psychological hurdle of 1% margins for the top three or five bank borrowers," says Thomas Hädicke, a senior manager of syndications and asset sales at RZB in Vienna.
"The top four or five banks could even get longer money at more competitive rates, and the other banks will get more competitive margins on one year tenors," he adds.
In July last year some lenders began to get nervous when a short term confidence crisis in Russia's banking sector saw Guta Bank turn away depositors because it feared a run on deposits and Alfa Bank issue a warning about the level of its retail deposits. But the repercussions for the loans market were short lived — in October Ural-Siberian Bank closed an $80m 364 day loan that was increased from $40m after an oversubscription.
The success of that deal coaxed Rosbank back into the market with a $50m facility through Commerzbank, HSBC and Standard Bank, just a few months after a planned $70m loan led by the same arrangers was pulled from the market.
With lenders' confidence by and large restored, Russia's financial institutions have wasted little time approaching the syndications market this year.
Industry & Construction Bank of St Petersburg, or Promstroybank, has already signed a $90m 364 day loan, Transcreditbank has raised $50m on the same tenor, and MDM Bank on March 24 signed a $78.5m one year deal.
Bank of Moscow, Bank Petrocommerce, Bank Zenit, BCEN-Eurobank, Evrofinance Mosnarbank, debutant Russian Development Bank and Ural-Siberian Bank all have deals that are either in the market or soon will be.
But some bankers remain cautious, pointing out that there are lenders which still concentrate solely on state owned banks, or those like Raiffeisen Bank Moscow or International Moscow Bank that have international capital.
Others are concerned that little has changed since Russia's banking sector ran into difficulties last summer.
"There are still around 1,300 banks, which makes supervision difficult," says one banker responsible for loans to Russia's financial institutions. "We're seeing more and more accounts supervision by international auditors, but finding out shareholder structures can be hard."
Asking the right questions
An ever increasing number of lenders are willing to take up the challenge, however, as they try to invest capital in new areas and diversify away from oil, gas or bank debt.
That cannot be achieved by taking larger tickets on deals for state owned companies like Gazprom or well known commodities companies like TNK-BP, and bankers say that margins and upfront fees seldom make large commitments worthwhile in terms of economies of scale.
One alternative is for banks to bring new borrowers to the market. "This year I think we will see more lenders, so as well as the blue chips and large industrials we will see more mid-caps — companies with a turnover of between $500m and $750m a year," says Eric Zimny, head of syndicated loan originations for the CIS at Commerzbank in Frankfurt.
Lenders are familiar with names like Gazprom, Mobile TeleSystems (MTS) and VTB, but the analysis of balance sheets and organisational structures will have to start at a lower level if loans for new names are to be approved by credit committees.
Zimny adds: "These might be companies that are not in the loop yet and have little or no capital markets experience and no public rating, but are keen to benefit from favourable market conditions. With no proven credit history and no comparables, banks will find peer group analysis more difficult, so companies have to understand the importance of disclosure."
Yet new borrowers are not necessarily at a disadvantage. Institutions are keen to lend money to a Russian market that offers healthy returns, and some well established borrowers have problems of their own when it comes to transparency.
"As banks start to look at smaller names there is a lot of information that needs to be gathered, and some companies are probably still taken aback by it," says David Taylor, head of corporate banking at Moscow Narodny Bank in London. "These aren't household names, but bankers will put the work in to get the yield."
Bankers also say that because the Russian market is now investment grade, there are more comparables against which borrowers can be measured.
And then there is the idea of what one Russia loan banker calls the "blank slate": "Take the Mobile TeleSystems loan from last year. It was their first unsecured deal, so in that sense it was not constrained by the terms of previous facilities. Bankers didn't have to go back in front of their committees and justify yet another cut in pricing, which gave them a bit more freedom."
But a widening borrower base cannot simply be put down to banks' willingness to lend, or the willingness of companies to borrow — just as important has been the development of unsecured lending, as opposed to pre-export financings or trade related deals.
Oil and gas companies like Sibneft, for example, which is in the market with a $200m three year secured deal arranged by RZB and HSH Nordbank, have export receivables on which to secure a loan, but unsecured lending allows companies with predominantly domestic sales to tap the syndications market too.
With non-exporters now in a better position to approach lenders for financing, bankers predict more deals for energy, transport and logistics, as well as telecommunications companies. That is provided they have the requisite number of yearly accounts — audited in accordance with international standards — to satisfy banks' internal criteria.
Gazprom opened the market for unsecured debt last year with two $200m three year deals through ABN Amro — one signed in April and the other in June.
MTS also approached the market with a $500m three year deal that was increased to $600m following an oversubscription. Bookrunners ABN Amro, HSBC and ING arranged the loan, which was signed in September and pays 250bp over Libor.
That was also the margin that VimpelCom paid on its three year unsecured deal launched in 2004 at $200m and signed at the end of February this year for $425m.
Citigroup and Standard Bank were bookrunners on the deal, which was oversubscribed despite some concerns late last year over unexpectedly large tax demands.
The Russian tax inspectorate claimed in December that the company owed about $157m in back taxes, fines and penalties relating to its 2001 accounts, but later reduced the bill to just $17.6m after intervention by Norway's trade minister late last year. Norwegian telecoms company Telenor owns 29% of Vimpelcom.
And oil pipeline operator Transneft has kept up the flow of unsecured debt by mandating Barclays to arrange a $200m three year deal paying just 115bp over Libor.
Other bankers were surprised by the margin, saying that most other bids were in the 140bp-150bp range, but the deal was well supported by senior banks and was proceeding well in general syndication by the end of March.
"The greater breadth of Russia's loans market is a function of economic maturity," says ING's Ivanova. "More companies now feel able to approach the capital markets, so a system of fragmented secured lending is changing into a more mature corporate lending environment."