Vneshtorgbank’s (VTB) $8 billion public offering in May 2007 stands out not just for the astute mechanics of the deal. The landmark listing blazed a trail for eastern European equity overseas, while jumpstarting Russia’s local capital markets and opening doors for other emerging market banks to launch into developed markets.
This was Russia’s most successful ever retail offering, which saw many people camp out overnight to buy shares: the bank has captured the confidence of retail investors in modern-day Russia, which is bouncing back after the bank collapses and botched privatizations of the 1990s.
The deal was oversubscribed eight times, making it the largest IPO so far in 2007 and Russia’s second biggest ever. Citigroup, Deutsche Bank and Goldman Sachs acted as joint global coordinators, together with Renaissance Capital acting as a joint bookrunner for the Russia listings.
Crispin Osborne, managing director of CEEMA equity capital markets at Citigroup, argues VTB offers good exposure to the positive macroeconomic story in Russia, hence the strong investor demand. The bank’s assets have more than quadrupled since January 2004 to over $52 billion at the end of last year, representing growth of 67% per annum, faster than the overall Russian banking sector and top Russian banks.
“This is a scarce opportunity to play the Russian financial services sector with a bank that has strong governance, management and a credible stock market platform,” says Osborne.
VTB and the arranger banks managed to wrap up a successful deal despite a dicey backdrop: the RTS index was down 2.7% between the start of the roadshow and the initial pricing of the deal, and recorded further losses of 2.5% after the first day of trading. Furthermore, while arch-rival Sberbank traded up 1.0% over the marketing period, it was down 4.0% on VTB’s first trading day, which in turn traded up 7.5% in London.
It was structured as an offering of ordinary shares on the RTS and MICEX exchanges in Russia and global depository receipts (GDRs) listed on the London Stock Exchange. Its GDRs, each representing 2000 shares, were sold for $10.56, at the tight end of the price range $8.77-10.79. A total of 1.5 trillion shares were issued, giving VTB a whopping market capitalization of $35.5 billion, 22.5% of the bank’s capital.
The transaction was conducted outside the US in accordance with Reg S in order to access qualified institutional buyers under rule 144A. Certificates were offered outside Russia that allowed investors a short-term exposure to VTB’s underlying ordinary shares without the hassle of complying with the Central Bank of Russia’s complex paperwork for buyers of primary shares.
Unprecedented
But what is so distinctive about this deal is its unprecedented equity distribution compared to similar transactions in Russia. Rosneft’s headline $10.4 billion IPO in July 2006 was swallowed up by entities close to the Kremlin, with only $3 billion in fact offered to international institutional investors. Sberbank’s $9 billion rights issue in February, saw $3 billion bought by the Russian government, $3 billion by existing shareholders, leaving only $3 billion to new investors.
What’s more, it witnessed blistering retail demand with 131,000 orders, buying a total of $1.6 billion of the stock. Osborne explains how this landmark deal has helped educate individual investors about the opportunities offered by local capital markets. “This deal underscored that there was legitimate retail demand in Russia and stimulated local market interest. This is very helpful in the development of domestic capital markets in the country since successful privatizations beget a stronger retail market,” he says.
Nevertheless, the positive story was marred in July when VTB shares traded below their issue price in London for the first time since its flotation, amid fears that the bank would be hit by the higher costs of refinancing its debt due to the global credit crunch.
But bankers involved in the deal argue VTB’s transition from a Soviet-era bank to a global market player will not be derailed. “VTB’s more recent performance is not out of line with the Russian financial services sector and is to do with broader, global market conditions,” says Osborne.
Getting real
In fact, Reinout Koopmans, managing director of CEEMEA equity capital markets at Deutsche Bank, believes the current global liquidity strain will help consolidate Russia’s banking system, boosting VTB’s long-term growth potential. “We are already seeing domestic institutions that rely on wholesale funding, reduce their lending. As a result, valuations are becoming more realistic, which is helping to consolidate the banking system. In this context, VTB’s retail ambitions will become more achievable,” he says.
In truth, VTB’s stock performance has more to do with global market turbulence, than with concerns over the bank’s prospects. Nevertheless, it has provided international investors with a vehicle to capitalize on the country’s growth potential, so VTB is now a means to gauge how insulated oil-rich Russia is from market unrest triggered by events in the West.
Koopmans is bullish: “The fundamental dynamics of the bank have not changed. As soon as people realize that recent events are an international issue and concentrate on Russia’s macro-story, VTB shares will normalize.” Only time will tell: the impact of VTB’s volatile trading performance on the sentiment of Russia’s newfound retail capitalists has yet to be seen.