Scroll down a list of borrowers from central and eastern Europe this year and one group dominates – banks from Russia and the CIS. By mid-May, well over 10 commercial banks in Russia, Kazakhstan and the Ukraine had tapped the Eurobond market, raising in excess of $2.5 billion.
Some of these issuers, such as Kazkommerstbank, are familiar names to investors. Others, such as Nurbank, were taking their first steps in the international markets. All received a strong reception as investors gravitated towards relatively high yielding assets.
Two issues are driving this issuance boom: the need for capital, and the need to resolve maturity mismatches on banks' balance sheets. "In the CIS, the short-term nature of most funding has been a key problem, constraining the development of bank lending and resulting in maturity mismatches on banks' balance sheets," says James Watson, director, European banking group at Fitch Ratings in Moscow.
"Improved access to capital markets and other longer-term sources of financing has partially resolved this issue, although, in particular in Russia and the Ukraine, the funding profiles of many medium-sized banks remain predominantly short term," he adds.
Even while the capital markets were off-limits to most other emerging markets borrowers in early spring, some banks in Russia and the CIS were able to sell their bonds. In early April, for example, Kazakhstan's ATF Bank issued a $200 million, seven-year bond in a week when there was no other international placement by an emerging markets borrower.
The bond, which was the bank's first 144A deal, produced strong demand across the globe. In total 67 names participated, with Asian investors accounting for 48%, European funds 32% and US names 20%.
ATF is one of a number of Kazakh banks that have raised funds this year. In February, three banks – Bank TuranAlem, Kazkommertsbank and Bank CenterCredit – sold deals totalling $700 million. Bank TuranAlem kicked things off with a $350 million, 10-year offer that was lead-managed by JP Morgan and ING.
Kazkommertsbank then followed, with a $150 million tap of its $350 million 2009 bond. "Despite investors' worries about supply from Kazakhstan, we managed to build a $650 million order book in record time, which allowed us to price only a few hours after the announcement," says Dennis Holtzapffel, head of emerging markets syndicate at UBS. The Swiss bank was sole lead manager of the issue.
Bank CenterCredit issued a $200 million, three-year deal – its debut bond. The transaction provided diversification to investors away from Bank TuranAlem and Kazkommertsbank, which are relatively frequent borrowers. Bank CenterCredit is Kazakhstan's fourth biggest bank. Its deal generated plenty of interest from Asian accounts, which bought 45% of the bonds.
The Kazakh bank bond spree also included Nurbank, Kazakhstan's seventh biggest bank by assets. In April, the bank made its Eurobond debut with a $125 million, three-year transaction. The order book was 1.6 times oversubscribed even though the emerging markets were plagued by volatility at the time. The key to the deal was its maturity. The short tenor fitted the market's mood.
Russian and Ukrainian banks have also been active. In Russia, two-state owned banks, Vneshtorgbank (VTB) and Sberbank, issued the country's first-ever international subordinated bond deals. Sberbank raised $1 billion. Its bond was launched just before Standard & Poor's upgraded Russia to investment-grade in February. VTB settled for $750 million after building a book of $1.2 billion. Both banks raised lower tier two capital.
In the Ukraine, Ukreximbank became the first borrower to issue debt in the international capital markets since last year's presidential election, when it tapped its outstanding 2009 dollar bond for $100 million in February. The export-import bank followed that transaction up in March with a $40 million, five-year subordinated bond – the first subordinated Eurobond from Ukraine.
The bank is now considering developing a 144A-compliant EMTN programme that will establish it as a regular borrower in the international capital markets. The bank is not guaranteed by the government, but is fully owned by it.
Outside of the banking sector, other borrowers in Russia and the CIS have taken advantage of growing investor appetite for relatively high-yielding assets. Mobile phone operators such as MTS, Vimpelcom and Kyivstar have placed successful offers.
Looking ahead, the deal pipeline out of the region looks strong. Banks will continue to forge ahead with issuance; financial institutions such as Bank of Moscow, Halyk Bank, Trust & Investment Bank and Ukrsibbank are all touted as potential borrowers in the months ahead.
Oil and energy companies will also be busy. The market is expecting deals from Gazprom, Energo, Lukoil, Petrokazakhstan and Tatneft sometime this year. Other possibilities include the steel companies Zaporozhstal and Azovstal, and Russian Railways and Ukrainian chemicals firm Stirol.
On the euro trail
With EU accession now accomplished, central Europe's sovereign borrowers have another target in mind – joining the euro.
For some, such as Estonia, Lithuania and Slovenia, that might be in only a few years' time. These three countries have already entered the Exchange Rate Mechanism II, membership of which for two years is a prerequisite for signing up to the euro.
Other countries, such as Poland, might have to wait a little longer. Even so the strategy is clear and adoption of the euro as the national currency is a matter of when, not if.
Not surprisingly, therefore, this has influenced these sovereigns' funding strategies. All of these borrowers have focused on big, liquid benchmark transactions. At the same time, they have diversified their investor bases as they move out of the emerging markets universe and compete instead with their west European counterparts such as Greece and Italy.
In February, for example, Hungary placed a E1 billion, 15-year bond in the market. The strategy was to extend the sovereign's curve by six years and diversify its investor base. Hungary's longest-dated euro issue was twice oversubscribed and produced interest from investors across Europe, in particular from Benelux and Scandinavia – two regions that hadn't bought many Hungarian bonds before.
In April, Poland trumped Hungary's deal in the 15-year sector with a blow-out E3 billion transaction. It was Poland's first 15-year bond. Demand was strong as the order book reached E5.6 billion. Distribution was broad, with funds across Europe participating. One of the most pleasing aspects was that a number of accounts new to Poland bought the bonds, especially EU sovereign buyers.
In between the Hungarian and Polish euro-denominated deals was a 15-year bond from the Czech Republic. This also raised E1 billion. Although demand for 15-year bonds was not as strong as in the weeks before the transaction's launch, the order book still reached more than E3 billion.
The euro accession countries have also focused on diversifying the currencies in which they borrow. Hungary, for example, returned for the first time in five years to the US fixed rate market in January with a $1.5 billion, 10-year bond. Poland has also been busy and has issued two bonds in the Swiss franc market – its ever first venture in that currency.