Sealing its reputation as possibly the most proficient corporate borrower in central and eastern Europe, Gazprom executed a successful and sophisticated funding strategy last year.
Russia’s state-owned gas monolith, the largest corporate in the country, raised money via a combination of bond issues and syndicated loans. Total bond issuance reached around $4 billion, and a $13 billion deal in October surpassed all previous emerging market syndicated loan transactions.
“As a borrower, Gazprom had a spectacular year in 2005. The company’s standing in the international financial community was demonstrated by a number of highly successful transactions, including both of the two largest bond issues from Russia, as well as the largest syndicated loan in emerging markets history,” says Mike Elliff, head of debt capital markets CEEMEA at ABN Amro in London.
It is a difficult company to ignore. In May this year its market value exceeded $300 billion on the Moscow bourse, making it the world’s third-largest company after US ExxonMobil and General Electric. The size and success of Gazprom means that it acts as a useful proxy to the sovereign, and it is instrumental in driving developments in the use of capital market instruments in the region.
Sofia Sool, head of Russian debt capital markets at Credit Suisse in London, says: “Gazprom is a large company with diverse funding requirements and a very professional team. They have been aggressive in exploring new products in order to find the optimal ways to finance their needs.”
The year’s funding started with a E1 billion, 10-year deal in May last year, arranged by ABN Amro and Credit Suisse. Initially this deal was marketed as a E1 billion equivalent bond split into dollar and euro tranches. Ultimately the dollar tranche was abandoned and Gazprom went on to launch a single E1 billion tranche of 10-year benchmark bonds.
“The deal was in the market during an exceptionally volatile period, and Gazprom decided on a conservative strategy with two tranches. Once price guidance was established, it was clear that a huge number of investors were prepared to brave the market volatility for a Gazprom deal,” explains ABN Amro’s Elliff. He says that they established a large over-subscription for both the US dollar and euro tranches, but decided to take all their needs in euros.“Following pricing, the euro transaction traded at a lower yield and spread to swaps than the existing dollar curve, further vindicating the strategy,” says London-based Chris Tuffey, head of debt syndicate in Europe at Credit Suisse.
The final order book reached in excess of $4 billion, with over 225 international investors participating. “Virtually all of the investors were long-term holders of the Gazprom credit, some existing investors but also many that were new to the name. An in-depth allocation process ensured that Gazprom knew who would be holding its paper,” explains Tuffey.
Given the deal’s success, the structure was used again in a seven-year E1 billion deal in December last year, again arranged by ABN Amro and Credit Suisse.
Despite difficult market conditions and a number of Russian corporate issues failing to get out of the starter blocks, this deal was again enthusiastically bought up by investors.
Tuffey says that even given the broader volatile market conditions, the order book was almost exclusively long-term, high-
quality investors. He says that total orders reached over E1 billion, split among 129 investors.
Gazprom’s acquisition strategy also directly impacted its funding strategy. In a ground-breaking deal that distinguishes itself as one of the most important M&A deals ever in emerging markets, in September 2005 Gazprom bought 72.633% of the oil company Sibneft for $13.01 billion [See Best Deals].
This was assisted by a $13.01 billion loan from a number of key banks, including Gazprom Finance, Dresdner Kleinwort Wasserstein, ABN AMRO, Citigroup, Credit Suisse First Boston, Goldman Sachs and Morgan Stanley.
The size of the deal tells us a lot about the reputation of the credit. “This was a breathtaking transaction, which demonstrated the unparalleled support Gazprom enjoys in the bank market,” says ABN Amro’s Elliff.
Incredibly, Gazprom representatives have said that, by June this year, virtually all of the short-term debt that it took to buy oil company Sibneft will be repaid. In December 2005, Gazprom repaid $8 billion, including $2 billion from its equity capital and $5 billion from the capital it received following the sale of a 10.6% of its shares to the state. As of the end of June this year, a further $1.5 billion of short-term debt will be repaid, leaving only some $2.5 billion of longer-term debt remaining.
In July last year Gazprom launched a novel $1.87 billion double tranche loan participation note (LPN) to refinance two existing secured loans for the Blue Stream Pipeline Project. With Deutsche Bank and MCC Capitalia acting as lead managers, and Depfa and Dexia as co-leads, a $1.222 billion tranche, maturing in July 2013, is supported by a financial guarantee from Italian export credit agency Servizi Assicurativi del Commercio Estero. This makes it the first Russian deal to be structured with a foreign wrap.
The second tranche, an amortizing eight-year LPN with an average life of 3.8 years, totalled $646 million. Demand for this segment, which Deutsche led on its own, was enormous, reaching around E4 billion.
Credit Suisse’s Sool says: “It further demonstrates the sophistication of the issuer.”
Aside from international issuance, the company continues to use the domestic market to issue debt, although more as a benchmarking exercise than a financing requirement.
In February and August last year, Gazprom issued R5 billion of five- and four-year bonds with coupons of 8.22% and 7.07% respectively. Both deals had Renaissance Capital and Rosbank acting as joint leads.
Gazprom looks likely to remain one of the most influential and frequent borrowers in the central and eastern European region.