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Russia's bond champion

01 Mar 2006

2005 was a vintage year for Gazprom in the debt capital markets. Russia's state owned gas monopoly towered above its peers to raise a record volume of money in the syndicated loan market, and more than punched its weight in bonds.
Gazprom crowned its status as one of the euro denominated market's new premier issuers with a Eu1bn 10 year bond, led by ABN Amro and Credit Suisse First Boston in May.
As Duncan Kerr reports, the deal took the market by surprise with a change of format.

International bond investors have had little chance to buy Russian sovereign debt in recent years, so they have turned to Gazprom as an alternative.

Underscoring its title as Russia's leading corporate Eurobond issuer, Gazprom issued larger and arguably more sophisticated deals in 2005 than any other borrower in the Commonwealth of Independent States (CIS).

Most of the CIS issuance in 2005 was from banks — including Gazprombank. Besides Gazprom, corporate bond issuance was slight.

So far this year, that pattern is continuing, but an upturn in mergers and acquisitions could prod corporate Russia into action. At the head of any charge, however, will be Gazprom.

The company's capital markets team in Moscow has kept its funding programme for 2006 close to its chest, but it is understood to mirror 2005's fine balance between international loan and bond issuance, combined with one or two perfunctory rouble bonds to keep domestic buyers happy.

Last February and again in August, Gazprom attracted impressive demand when it sold Rb5bn of five and four year bonds with coupons of 8.22% and 7.07% respectively. Renaissance Capital and Rosbank jointly led both deals.

It was between those months, and rather later than usual, that Gazprom decided in May to open its Eurobond account for the year, with the deal that won best corporate bond, EEMEA in EuroWeek's Emerging Markets Poll.

ABN Amro and Credit Suisse First Boston set off at first on what turned out to be a wrong tack, as on Thursday May 19 they started marketing a Eu1bn equivalent bond split into dollar and euro tranches.

The two-pronged strategy underlined Gazprom's clout as a leading borrower in both currencies. Many buyers in both markets were keen to buy into a company that has become emblematic of the modern Russian credit story, and which offers some of the country's most secure, liquid new issues.

Gazprom was the biggest Russian borrower in euros last year, reflecting the fact that roughly 40% of its revenues are gleaned from its European customers.

Abrupt change of plan

Just one day after the leads had begun marketing the two tranche deal — a maximum $500m 10 year and a minimum Eu500m 10 year at price talk in the 7% and 6% areas — the dollar piece was dumped. Gazprom went forward on Friday May 20 to launch a single Eu1bn tranche of Reg S and Rule 144A 10 year benchmark bonds.

The single euro tranche was said to have better fitted Gazprom's revenue profile, but euros were also offering a lower absolute yield. Perhaps decisively, the euro book was filling more quickly with fewer speculative investors, a factor that was deemed important since Gazprom wanted to attract long term money.

Price talk was refined on the Friday to 5.75%-6% as the secondary market rallied, and the new bonds traded up 20bp-50bp in the grey market before launch.

Later that day the deal was priced at par with a 5.875% coupon — one of Gazprom's lowest — right on the revised price talk of 255bp over Bunds.

At that level the book contained orders from 277 investors, mostly European asset managers.

"There has always been demand for Russian credits in the European markets, but it is a tougher market than US dollars if you are not a prime borrower like Gazprom," says Chris Tuffey, head of emerging market syndicate at Credit Suisse in London. "Gazprom's last, and debut, euro deal was two years ago at that point, and as a result one-third of the book was entirely new to the Gazprom credit, while 75% was new to it in euros."

The aftermarket performance was spectacular. The bonds traded up on the break to 100.20-100.30; about a week later they were quoted at 107.88 — a spread of just 142bp over Bunds. In mid-February this year it was trading at 107.63 mid.

That trading performance was enough to seal the deal's success and win plaudits for the leads' change of direction.

"The reception for the new euro tranche was outstanding, especially when considered against the backdrop of a volatile market in the wake of the negative news from GM and Ford," says George Niedringhaus, global head of emerging market debt syndicate at ABN Amro in London. "The euro order book built to a final size of Eu4.28bn and was boosted by heavy crossing over of US interest once the issuer decided to focus exclusively on a euro deal."

One senior emerging market portfolio manager in London summarised the deal's appeal to EuroWeek's voters: "Gazprom may have surprised the market with such a late change in plan," he said. "But it succeeded, and I think the fact that it did shows that the company is one of the most flexible benchmark issuers around. Could any other non-sovereign issuer from Russia and the CIS have successfully pulled off such a strategy? Probably not." 

01 Mar 2006