Rosneft’s tantrum will not endear it to the market
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Emerging Markets

Rosneft’s tantrum will not endear it to the market

Rosneft refused to issue its $2bn-$3bn bond last week because it could not price flat to Gazprom. This arrogant and unrealistic approach to the market smacks of hubris, say reporters at our sister publication Euroweek.

Time was when a bond issuer — especially an emerging market borrower — came to the market hoping for a smoothly executed deal, attracting good demand at a price that gave it efficient funding.

Rosneft clearly hasn’t read that script.

The Russian state oil company hired eight bookrunners to lead its $2bn-$3bn five and 10 year Reg S/144A bond. ABN Amro, Barclays Capital, Citigroup and Morgan Stanley were the ‘active’ players.

But last Monday, after a successful roadshow that garnered a warm response from investors amid choppy markets, Rosneft decided against printing the bond.

Rosneft wanted to raise the funds, said Peter O’Brien, its vice-president and head of finance and investments, “but not at any cost”.

What he should have said was what emerging market bond bankers knew all along: Rosneft was fixated with pricing flat to or through Gazprom and would not budge from this aim. So, despite a deal being on the table, Rosneft stormed off in a fit of pique.

It’s a story that, while frustrating, is becoming familiar to bankers and investors in Russia, where some borrowers are earning a reputation for inflexibility, arrogance, and an almost irrational drive towards ever-tighter pricing, regardless of market conditions.

In February, hubris made Transneft, the oil pipeline company, insist on pricing its debut bond flat to Russian sovereign credit default swaps. Priced at 55bp over mid-swaps by Credit Suisse and Goldman Sachs, the $1.3bn seven year bond widened to as much as 80bp over and has never traded back to reoffer.

When Transneft returned in June it was with a Eu700m and $500m five year issue. Citigroup, Goldman and UBS priced it at a more generous but realistic 60bp over mid-swaps, or 20bp over sovereign CDS.

In their defence, borrowers such as Rosneft and Transneft have a point. Debt-free and 100% state-owned, Transneft undoubtedly has double-A rated credit metrics, but is rated A2/BBB+.

And Baa2/BB+/BBB- rated Rosneft believed its scarcity value and 75% ownership by the government justified pricing flat to or through the higher rated Gazprom (A3/BBB/BBB-). Gazprom’s five year CDS were trading at around 67bp.

But bankers working on the deal admitted that 10bp-15bp wide of Gazprom was the level needed to get the deal done.

And there lies the rub: a deal was there, had Rosneft decided to pay for it.

Bankers were scathing of the decision to abandon the deal over a few basis points. Rosneft has board approval to issue $5bn of bonds as part of the refinancing of the $24.5bn loan it took out to finance the acquisition of Yukos.

Was it really worth the potential damage to Rosneft’s reputation as a borrower, the frustration for investors, and the uncertainty that comes from pulling the deal?

Gazprom is now preparing another issue that will, most agree, drive its curve out even further, while emerging market bond bankers are preparing for the most congested September in memory.

And at the moment, the market is moving against issuers. The iTraxx Crossover index has widened from 290bp to 373bp since Rosneft pulled its deal. Gazprom’s five year CDS are out from 64bp/66bp to 78bp/80bp, while the sovereign has widened by 8bp.

Rosneft may find that last week was as good as it’s going to get for some time to come.

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For more analysis of deals in emerging markets, see Euroweek.com, the weekly newspaper of the global capital markets.

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