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Best Borrower Emerging Europe 2008

Vneshtorgbank (VTB)

Even as one of Russia’s state-owned banks, and the second biggest in the country by assets, Veneshtorgbank (VTB) has not escaped unscathed from the global financial crisis which continues to tighten its grip on eastern Europe. 

The bank has earned itself a pivotal role in the Russian government’s plans to stabilize the banking system and can count on almost unlimited access to short-term liquidity from the country’s central bank. But its vulnerability is also apparent: last week it revealed a record net loss of Rb25.9 billion ($800 million) for the first four months of the year. 

The bank blamed the devaluation of the rouble which impacted its foreign currency assets and a rise in loan impairments to 3.2% of its portfolio. But it stressed that its assets and deposits had increased by 3% and 20% respectively since the start of 2009. It also managed to pull off a profit of Rb1.99 billion ($60 million) from January to March this year, overshadowed by the blip in April. 

But recent developments stand in stark contrast to early 2008, when VTB posted a year-to-date profit of Rb6.6 billion ($210 million) at the end of April. It was from this position of strength that the bank blazed its way into the international bond markets in May and June 2008, sealing its reputation as one of Russia’s savviest borrowers. 

Even the recent impact of the turmoil on VTB’s results has failed to overshadow its standing as one of the top issuers in the country, after the bank displayed its masterful flair for timing. 

Flair for Timing

VTB’s strategy for its first bond of the year last May illustrated its ability to time a deal. The borrower waited six weeks after roadshowing a new issue to come to market, until its updated documentation was ready and market conditions showed signs of improvement. 

By the time it eventually priced its $2 billion, 10-year put five bond, paying a coupon of 6.875%, the deal’s bookrunners, Deutsche Bank and JPMorgan, estimated that the borrower had saved itself about 150bp over Libor for coming then instead of six weeks earlier. 

VTB not only score points on pricing. The borrower impressed by narrowly beating Russian Agricultural Bank to the mark with the Russian bank issue since October 2007. It is also to date the largest ever single tranche issue from a Russian bank, and the bond attracted $6.3 billion of orders from over 200 investors. 

VTB followed up quickly on its success with a return in June, but this time to the euro market. After a flood of dollar transactions from Russian banks came hot on the heels of VTB’s foray, the issuer seized the opportunity to outdo rivals once again by becoming the first to tap into euros that year. 

Its E1 billion, three-year bond, paying a coupon of 8.25%, drew demand from outside VTB’s existing dollar investor base, with 150 accounts from Germany and Austria to Asia, most of them new, placing orders. 

Following on from its dollar deal, VTB’s ability to raise an equivalent of $3.5 billion in such quick succession and with such ease had, by June, already earned it the crown of “borrower of the year” in the minds of many market observers, including one of the bankers close to bookrunners BNP Paribas and Deutsche Bank. 

VTB went on to clock up $5 billion of borrowing in the international markets in 2008, also venturing into the syndicated loan market for $1.4 billion in June. Priced at 60bp over Libor, the loan paid a premium compared to VTB’s previous ventures, but was still far below some of the levels secured around the time by some of its Russian rivals, including state-owned Sberbank.

The deal was even oversubscribed, and increased from the original amount of $1 billion, although some bankers close to the transaction dismissed it as nothing more than a relationship exercise, clubbed between 10 senior lenders. 

A Possible Return

But it is VTB’s clout and relationship pull among lenders and investors, as one of the Russian top banks, which is likely to stand it in good stead this year. 

Along with Sberbank and Gazprombank, it has become central to the Russian government’s plans to stabilize the country’s shaken banking system, and was one of the first beneficiaries of the $45 billion federal budget funds made available through deposits in Russia’s major banks in the wake of Lehman’s collapse last September. 

The recent knock to its results should not be a huge blow to VTB’s chances of accessing international funding if it chooses to go down that route – and the bank’s ability to tap the Russian central bank for funding should dispel any refinancing worries in relation to VTB’s $3.5 billion of debt maturing this year. 

There are even hopes that it may, despite the extent to which market conditions have deteriorated build on from its successes in 2008 and reopen the market for bank issuers. 

“I wouldn’t be surprised if they were to come to the market at some point this year, as the market sentiment has improved,” says Olga Fedotova, EMEA (Europe, the Middle East and Africa) credit research analyst at HSBC in London. “They have a need for long-term funding as their own loan book leans towards long-term lending.”

Others are more cautious, and warn that despite VTB’s envious position as a top Russian bank, aversion to financial institutions among investors and the high premiums necessary to access the market may hinder a quick return. 

“No one is even keen to do deals for western European banks, and there is something of BTA-itis in the emerging markets now,” says one capital markets banker in London, referring to the Kazakh bank’s default two weeks ago. “However, if Gazprom can do it, maybe VTB can too.” 

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