Russia and the CIS may have provided the loans market with their fair share of dramas over the past 12 months, but borrowers are still able to attract longer, larger and more tightly priced syndicated loans, bankers say.
Yukos-related volatility rocked the Russian market at various intervals throughout 2004. Other companies such as Vimpelcom and TNK-BP have also had their own tax worries to contend with. At the same time, Ukraine's disputed presidential elections at the end of 2004 caused palpitations for anxious loan syndicators.
Yet Russian loan market volumes reached $15.3 billion in 2004, an increase of 84% on the $8.3 billion of debt raised in 2003, in a growth spurt symptomatic of the wider CIS market. And borrowers have not yet reached the peak in their borrowing potential. "We expect the market to continue to explore both pricing and tenor benchmarks," says Roland Boehm, managing director of global loan product at Dresdner Kleinwort Wasserstein. "The market will continue to remain sensitive to credit events in the region."
In Ukraine both Aval Bank and Ukrsibbank suffered from bankers' jumpiness, when their facilities were delayed last November after the election wrangles. Both deals resurfaced this year, with Aval raising $47 million during syndication through mandated lead arranger Standard Bank. Ukrsibbank raised $37 million through RZB and Standard Bank. Both deals were oversubscribed and were signed in March.
The unsecured route
One way in which companies are improving their pricing is through unsecured transactions, bankers say. "Unsecured borrowing from Russian corporates will increase as borrowers take advantage of liquidity and reduce secured debt to improve rating profiles," says Hasan Mustafa, head of CEEMEA loans syndicate at ABN Amro in London. "Tenors will increase as some significant project financings emerge, pulling the rest of the market along with them."
International banks are becoming increasingly competitive for emerging market mandates, where fee levels remain relatively high, which is also having the effect of driving down pricing. Gazprombank signed a three-year facility, arranged by ABN Amro, Citigroup, Deutsche Bank and JP Morgan, in mid-April for $650 million.
The deal pays a margin of 150bp over Libor and was increased from $300 million following an over-subscription. Bank commitments still had to be scaled back. This compares with a $275 million loan arranged by ABN Amro and Deutsche in April 2004, when it paid 180bp over Libor for a 364-day facility. It broke the record for the largest-ever syndicated deal for
a Russian financial institution, in turn breaking the record set only one week
earlier by Vneshtorgbank with its $450 million three-year loan.
US interest rates are expected to rise steadily this year, creating bond market volatility and making Eurobond funding levels more expensive, and loan market volumes may benefit. "Recent bond market volatility has clearly made the loan
market more attractive to borrowers,"
says Mustafa.
"Given the increased size and tenors now available in the loan market, we are likely to see borrowers alternate between the loan and bond markets in an effort to minimize borrowing costs and diversify funding."
But the loan market can only absorb a finite volume of debt from the region. "In the CIS region, bond and loan markets are complementary to each other," says Boehm. "The volume and number of issues for syndicated loans will continue to grow, especially in Russia, but banks will continue to have country ceilings and limits on individual borrower groups.
"Prime borrowers will look to the capital markets for a steadily increasing share of their funding requirements."
Corporate comeback?
Kazakhstan is the only big country in the CIS not to have experienced episodes of political risk in
the past 12 months. That has helped ensure a
busy time for Kazakh borrowers, especially in the loans market.
Alliance Bank and Kazkommertsbank added to the surge of Kazakh loan deals in March when they began talking to lenders about $50 million and $100 million facilities respectively. Bank TuranAlem surprised some bankers by asking for a three-year deal in February, keeping them on their toes.
Bank Caspian, Bank CenterCredit and Halyk Savings Bank all signed deals in February that were oversubscribed by at least 40% during syndication. All banks took an increase before the loans were signed.
But Kazakhstan has been notably short of decent corporate flow for either syndicated loans or Eurobonds, something that bankers hope will change later this year.
"We do expect to see more corporate supply from countries such as Ukraine and Kazakhstan, whereby markets will focus on countries in the region that are judged to be stable and on corporates with a convincing credit story," says Roland Boehm, managing director of global loan product at Dresdner Kleinwort Wasserstein.
"Within the CIS, we expect markets to focus on Russia, Ukraine and Kazakhstan. Russia's investment grade status and the competitive environment between leading banks for mandates for prime borrowers
has pushed down returns in Russia, so that the markets are prepared to look at sound alternatives."
Corporates have traditionally provided a healthy supply of loans business in Russia, unlike in their CIS neighbours, although this too is changing.
"The balance between corporates and bank and/or financial institution funding shifted in Russia in early 2005, with the bulk of new money being raised by banks," says Hasan Mustafa, head of CEEMEA loans syndicate at ABN Amro in London.
"Kazakhstan already witnessed a fourth-quarter 2004 surge in borrowings, mainly from banks. There is a general expectation that the market will see more corporate
deals from Kazakhstan and Ukraine in 2005.
The remainder of the year should see a good mix of new and repeat borrowers, bankers say. "As banks continue to grow more comfortable in lending in the region, we expect to see new names accessing the market," says Boehm.
"Again, a convincing credit story will be the key to success. In the short term, existing borrowers will dominate, seeking to exploit competitive market conditions."
A continued search for yield will drive appetite for new names. "Lenders looking for yield will go down the credit curve, and we certainly expect new corporate names to debut this year, although the bulk of the market liquidity will continue to be reserved for the blue chip names," says Mustafa.