Improving the state of central and eastern Europe’s debt capital markets is one of the biggest challenges facing Europe’s development banks. Both the EBRD and the EIB, the EU’s financing arm, have been active across the region issuing bonds in a range of local currencies, hoping to encourage other borrowers to follow their lead.
In recent years the two have issued debt in Polish Zloty, Hungarian forint, Czech koruna, Slovakian koruna, Estonian kroon, Slovenian tolar, Bulgarian Lev and Turkish lira.
But it’s the EBRD’s rouble bonds that have attracted special interest. For the second time in the past year, the bank tapped the fledgling rouble market, this time issuing a R5 billion (E47 million), five-year bond at the end of April. A third rouble deal is on the cards, possibly as early as September.
Isabelle Laurent, the EBRD’s deputy treasurer and head of funding in London, says the issue was launched to meet the increasingly strong demand in Russia for the bank’s local currency loans. Since it launched its first rouble-denominated bond in May 2005, also a R5 billion, five year, the EBRD’s loan book in Russia has grown from R3 billion to around R20 billion. EBRD was the first international financial institution to issue in the Russian domestic bond market and the first to issue a floating rate note linked to MosPrime.
new deal
The new deal was priced at par with a quarterly floating rate coupon flat to the three-month MosPrime Offer Rate. The EBRD will apply for the bonds to be listed on the Moscow Interbank Currency Exchange (Miced) and for the Bank of Russia to include them in its Lombard list. This would make the bond available for repo transactions with the central bank.
Both size and maturity of the deal are the same as last year. The main difference is that the new deal features an open subscription, rather than a closed one. The other innovation was to sell the bond on the exchange with a syndicated group of banks committed to bid for the bond for up to 100% of the deal. In contrast, last year’s deal followed the international process of having a syndicate and selling the paper to them.
The issue was sold to banks as the rouble market tends to be largely bank-based. There are few sizeable institutional investors. The state pension fund is one of the only few significant institutional investors, and one of the only local investors able to buy government bonds, although this may change in the coming months.
Lead managers were the Russian subsidiaries of Citibank and Raiffeisenbank Austria, with JP Morgan, ABN Amro, ING and WestLB as senior co-leads, Commerzbank and Gazprombank as co-leads and Vneshtorgbank as a co-manager. ING acted as calculation agent.
Further afield
Looking further afield, Laurent is confident there’s a market for local currency deals set to take off. “The Romanian Leu is really taking off,” she points out. “We’re now exploring other markets, particularly moving towards the south and east, especially where there are no swaps markets and it is difficult to raise money to on lend.”
Among the markets EBRD is actively pursuing are the Balkans and Ukraine, as well as “early transition” countries in the CIS. “We’re lending to corporations and projects that can’t access long-dated financing on their own,” she says.
Laurent says that issues involved in establishing local bond markets across the region are largely similar. “Negative real yields, no established money markets or indices, no international bank trading and underdeveloped legal frameworks” are among her concerns.
But on the positive side, she says: “Our investors tend to be local investors, and they tend to be less concerned about such issues and generally view our products as great opportunities.”
Many of the region’s markets need to make further improvements on the legal and regulatory side. Settlement and pricing can be problem areas. If these markets are to become consistent sources of capital for local and international borrowers, these are some of the issues that need to be resolved. The development of a large, liquid swap market is another consideration for many individual regulators.