The European Bank for Reconstruction and Development reopened Russia’s domestic bond market for international issuers with a R5 billion ($184 million) five-year floating rate note in May 2005.
EBRD is the first international financial institution to issue rouble denominated debt since Russia defaulted in 1998. This is also Russia’s first floating rate note. It will, it is hoped, bring greater transparency to the country’s growing debt market.
Russia is the largest recipient of EBRD funding. Since 1991 it has committed k5.87 billion to the country in 212 projects.
The joint lead managers were Citigroup and Raiffeisenbank Austria. “Our objectives were two-fold,” says Isabelle Laurent, the EBRD’s deputy treasurer and head of funding. “First, the development of domestic capital markets and second, needing to raise roubles to on-lend. Both were achieved.” The issue was so popular that another one of the same size and tenor was made this month, with plans for yet another in September.
Because of the lack of derivatives and hedging instruments in Russia’s capital markets, the EBRD had to create a floating rate bond directly, instead of borrowing in fixed rate and swapping out to floating rate.
The first transaction was priced at par on May 18, with the first three-month coupon set at 4.04% – flat to the new Moscow Prime Offered Rate (MosPrime Rate) introduced in late April.
Establishing a credible interest rate using MosPrime Rate was another benefit of the issue. Spreads on Mosibor, using quotes from local banks, varied by as much as 3%. MosPrime, however, with quotes from ABN Amro, Citibank, Gazprombank, International Moscow Bank, Raiffeisenbank, Sberbank, Vneshtorgbank and WestLB, quotes prices daily in a 50 basis point range.
With no provision in the legal infrastructure for international borrowers to issue in Russia, the EBRD worked with the regulatory authorities before a new securities law was passed in December 2003, which for the first time recognized international issuers.
There was no legal provision for a foreign institution to borrow on the Russian market. “We had to change securities market law... or we would have had to do what was required of a Russian entity. Sub regulations for issuance were changed as well as further sub regulations for listing,” says Laurent.
For the future, Laurent would like to see floating rate bonds take off and a derivatives market develop. “Then we will see more types of products in debt markets.” To develop Russia’s capital markets further, foreigners need more access, especially foreign corporates doing business in the country,” she says.
Issuer: EBRD
Date of launch: 18 May 2005
Amount: R5 billion
Maturity: 5 years
Coupon: 4.04%
Credit rating: AAA
Lead managers: Citigroup and Raiffeisenbank