In 2007, Gazprom raised a heap of cash in international markets through a series of groundbreaking deals which paved the way for other benchmark issuers to tap new sources of financing. But more importantly, the Russian gas giant’s landmark deals over the past year have helped the firm cement its status not just as a leading emerging markets borrower but, more compellingly, as a preeminent high-grade credit.
Among its feats, Gazprom (A3/BBB/BBB-) last year showed its nerve by issuing a multiple currency benchmark bond amid rising market volatility, which saw double A rated Procter & Gamble scrap a euro-denominated issue.The firm last March raised $2 billion equivalent with a $1.3 billion 15-year bond combined with a E500 million 10-year tranche. The former was issued with a 6.51% coupon - 195bp over US Treasuries – and the latter offered a 5.44% coupon, —125bp over mid-swaps –via joint book-runners Credit Suisse and Morgan Stanley.
“This was about picking the right transaction, picking where the demand was and seeing where the market was headed,” says Nick Slee, emerging market debt syndicate banker at Credit Suisse. “The timing was primarily dictated by the fact Gazprom had specific funding plans in place for the year, but also the opportunity to access an attractive market window.”
The proceeds of the debt sale were used to shore up its financing base following its $7.45 billion purchase of a controlling stake in Sakhalin Energy from Shell, Mitsubishi and Mitsui earlier in the year.
But the real groundbreaking transaction came in May when the gas giant sailed into the sterling market with a debut £550 million issue and a E700 million offer. The dual 6-year sterling and 7-year euro tranche blowout drew in £1.75 billion in demand and E2 billion respectively. For the sterling issue, bookrunners ABN Amro and Morgan Stanley arranged a 6.58% coupon at par to yield 6.59%, equivalent to 115bp over Gilts.
Accessing the sterling market lent a boost to Gazprom’s status as a highly innovative issuer in the international markets and marked its “transition from an EM borrower into a high-grade one,” says Nick Darrant, head of CEEMEA debt syndicate at ABN Amro in London. “The beauty of the sterling market is the sophistication of its investors, providing a deep well of liquidity; other currencies simply don’t have the same identifiable buyer base.”
He explained that the order book represented that of a single A domestic corporate issuer, highlighting the demand for the Gazprom name and securing the Russian energy giant with a faithful investor base.
“Most issuers expect to pay a premium as investors are introduced to a new name but this was not incurred. The sterling transaction actually priced inside US dollar secondary levels,” he says. In fact, the notes tightened by 2bp-3bp in secondary markets.
Funds took 75% of the notes, banks 7%, insurance and pension funds 9% and others 9%, while UK names bought 75% of the deal.
The euro tranche via leads ABN Amro and Societe Generale had a 5.346% coupon, yielding 5.37%. The deal was priced at 79bp over mid-swaps, while Gazprom’s February 2014s were trading at 81bp over. This means the deal was priced within its existing euro curve by 2bp.
Investment grade investors also powered the transaction through. Germany and Austria took 33% of the notes, France and Italy 25%, UK names took 24% while Benelux countries grabbed 9%. By type, fund managers bought 61% of the deal, banks 29%, insurance and pension funds 9%.
Its next foray into international markets and its last dollar Eurobond of the year came in August as market volatility returned full force. Gazprom issued a $1.25 billion 30-year deal at 225bp over US Treasuries through bookrunners ABN Amro and Morgan Stanley. The deal attracted $3 billion worth of orders from mostly US names. The deal was priced around 37bp over Gazprom’s equivalent 10-year curve in line with benchmark peers Petrobras and Pemex.
Such borrowing costs are impressive, but more so given that the US leveraged loan market crisis revealed its full extent that month. “This was launched when no other issuers could come to the market bar sovereigns and US high grade,” explains Darrant, who was involved on the deal. Just a day after the transaction, BNP Paribas announced it was freezing redemptions from three of its funds on the backing of tightening liquidity.
In October, Gazprom went further by printing its largest euro-denominated bond, at E1.2 billion. The 10-year issue paid a 6.605%, 187bp-193bp above mid-swaps, drawing in over E8 billion.
Then in November, the energy giant secured yet another place in the debt capital market history books when it priced its debut yen offering – the first from an EMEA corporate issuer. A Y50 billion ($433.7 million equivalent) offering via bookrunners Citi and Mizuho and co-leads Societe Generale, comprised a Y20 billion 3-year tranche and Y30 billion three year portion. This first tranche carried a 2.263% coupon at 154bp over mid-swaps and the other paid a 2.89% coupon, equivalent to 160bp over mid-swaps.
Following its trailblazing sterling issue, the energy firm discovered a new investor base drawn to its name, with Japanese investors taking 60% of the bonds and yen buyers outside Japan in Asia taking 20%, the remainder going to European accounts.
No doubt Gazprom’s quasi-sovereign status boosts its name globally helping to attract a wide investor base, but market players explain its borrowing record and financial management should not be downplayed. ABN’s Darrant points out: “It has a clearly impressive management team highlighted by its high hit ratio with investors on road-shows. Gazprom is certainly a trailblazer.”
At the very least, its innovative borrowing strategy in 2007 took this reputation up a notch.