The CIS is enjoying a sweet spot when it comes to borrowing money from the international banks. Emboldened by surging energy and commodity prices, Russia, Kazakhstan and Ukraine now have the ball in their court – and they are playing an aggressive game.
Last year, lending to Russia’s leading banks and companies exploded, after years of rising steadily. The number of deals is on the increase, with up to 70 syndication agreements between international banks and Russian clients inked over the first four months of this year, compared to the 50 signed over the same period in 2005 and 30 deals in 2004.
The volumes at play have surged this year, with international banks lending a whopping $17.5 billion to Russian banks and companies between January and the end of April, compared to the $4.5 billion they lent over the same period in 2005 and $3.8 billion in 2004.
“Russia’s economy and financial position are now superstrong on the back of high oil prices, high reserves and high commodity prices,” says Edward Parker, head of emerging Europe at the Fitch Ratings agency. “But there is an element of froth in the financial sector.”
A few mega-deals account for a large chunk of the up-tick in volumes. State-owned oil company Rosneft, gas monopoly Gazprom and the state owned banks Vneshtorgbank, Vnesheconombank and Gazprombank between them accounted for $5 billion of this spring’s syndications.
Russian banks have also been steadily increasing their international borrowing, accounting for 29 of the 70 deals signed over the first four months of this year, and raising $4.3 billion, double the $2 billion they raised over the same period a year earlier.
But the real driver of the syndication borrowing business is the arrival of Russia’s dynamic second-tier companies. Of this spring’s deals, second-tier corporates accounted for $8.2 billion of the $17.5 billion total.
“There is a lot of interest in the second -tier banks, where the spreads are much higher – around 200-250bp – and more attractive for investors,” says Robert Scott, head of syndications at Standard Bank in London. “Their strength is that this class of companies is either producing things that are feeding the oil and gas industry or they have strong export receivables.”
TURNing THE SCREW
Russia is currently en vogue, riding on the wave of historically high commodity prices. But with serious money available on the domestic market and rising competition at home pushing down margins, companies and banks are aggressively pursuing better deals from international lenders.
Russian banks borrowing on the international market have seen spreads fall considerably from the 150bp over Libor. Leading Russian banks like UralSib Bank and MDM Bank were paying 150bp over Libor for loans in deals signed in February and March, but spreads were down to around 80bp that Alfa Bank was getting in a syndication signed at the start of May.
Moreover, Russia’s biggest companies have become increasingly aggressive in using their market power. State-owned oil major Rosneft forced a syndication of banks that lent it $2 billion last year to more than halve its interest rates in April. Rosbank told the five banks that
organized the loan – ABN Amro, Barclays Capital, Dresdner Kleinwort Wasserstein, JP Morgan and Deutsche Bank – that it wanted to cut interest rates from 180bp over Libor to 65bp or it would go elsewhere.
“It was an arrogant move,” says one banker close to the deal, “but we are seeing resistance forming to deals at this level. However, some of [international] banks are being pushed into taking larger pieces of the syndications than they would normally do.”
The carrot in this case is the promise of a slice of Rosneft’s potentially lucrative $10 billion-plus initial public offering (IPO) slated for later this year. But not everyone is happy with these pushy tactics, and many banks have begun to walk away from the table.
The syndication-based lending to top Russian companies and banks has dramatically narrowed in the last year, falling from the typical 40-plus banks. It is now concentrated among seven to 10 key players as returns fall but the amounts required double or treble.
For example, 42 banks participated in Gazprom’s $650 million, three-year loan in April 2005 with a spread of 150bp over Libor. Almost exactly a year later Gazprom was back, cap in hand. It organized Russia’s cheapest ever credit: a $1.5 billion, four-year syndication loan with a spread of only 60bp over Libor. This time only 23 banks wanted a piece of the action.
“At these spreads the risk return equation is less appealing,” says Scott. “The big banks stay at the table because they are hoping to get other business, but those people who are there just for the yields are leaving.”
The narrowing of interest in less regal Russian companies is even more dramatic. Tyumen Oil raised $1 billion, earlier this year at 65bp over Libor in a syndication between 10 banks. Rosneft did another syndication this February in which only seven banks participated, an unusually low number.
KAZAKHSTAN
Like Russia, Kazakhstan is also awash in liquidity. It showed economic growth of 7.6% in the first quarter of this year and is expected to pick up the pace to 8.8% a year, making it the fastest growing country in the CIS, according to Alfa Bank.
Despite the fact that the country’s economy is based on the simple raw materials extraction (until last year it earned more from metal exports than from oil), Kazakhstan boasts the best banking system in the CIS, thanks to the vision of a string of competent central bankers. The result is that half a dozen banks – the smaller of which are putting in triple digit growth – dominate the loan business.
There have been a total of 15 syndication deals between January and April of this year worth $600 million, up from the 12 deals worth $410 million over the same period in 2005. But Kazakh banks seem to do most of their borrowing in the second half of the year, as they raised a total of $5.6 billion in 53 deals over all of 2005. The spreads that Kazakh banks command are about 10-20bp higher than those that Russia’s blue chips pay.
ukraine
Ukraine is the latest eastern European country into the game, which is reflected in the 400bp-plus that borrowers have to pay for syndications. While the romance of regime change initially set the stock market on fire after last winter’s “Orange Revolution”, it has yet to filter through into the syndications market.
“Ukraine’s top banks did more deals in the first months of 2005 than this year, but people are waiting to see what the outcome of the parliamentary elections will be,” says Scott. “After that we expect to see things pick up.”