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Bonds galore and easy loans: corporates in clover

Russia’s corporates have borrowed more money from bond investors this year than ever before. And with the newfound confidence that a diversified funding strategy brings, Russian companies are putting new pressures on the loan market, writes Michael Turner.

Life has rarely been better for Russian corporates in the international debt capital markets. With bond issuance in 2013 already smashing full year bond volume records, investors and corporate issuers have had to adapt quickly to keep up.

This year has already seen around $21bn of Russian corporate bonds priced, compared to a full year 2012 issuance of about $15bn, according to analysts at Citi. In April this year alone, $11bn of corporate deals were priced — the highest for any single month in Russia’s history.

The bond market is buzzing for two reasons. The first is that investors are looking more to emerging markets generally as they hunt for yield — or at least they were until the US Federal Reserve spooked markets on May 22. The second factor is the Russian government’s transition to international financial reporting standards in 2012. Now, the country’s biggest corporates are now putting out quarterly financial reports, rather than half yearly and annually as they have traditionally. 

“That is why we have seen much more issuance,” says Blazej Dankowski, director, CEEMEA DCM at Citi. “Reporting on a quarterly basis allows corporates to come to the market in the first quarter. If you’re doing semi-annual reporting then you don’t have this window to issue.”  

Deals done in January and February 2013 were based on Q3, 2012 quarterly reports while deals from March through to May were based on the full year results. 

And Russia’s corporates have been taking advantage of their newfound opportunity to print. They raised $3.5bn in January, $3.8bn in February and $3bn in March. This is up from just $1.8bn signed across the entire first quarter of last year, with no deals in the first two months of 2012 at all, according to Dealogic. 

Debut issuers in particular found a warm market reception. Petrochemicals firm Sibur printed its debut $1bn five year Reg S/144A bond in January. The company was swiftly followed by fertiliser producer Phosagro with a $500m five year debut in February. In April, port operator Fesco Transportation Group sold $800m of debut bonds and potash firm Uralkali printed a debut $650m Eurobond from a $2.3bn order book.

“We want to raise funds to try to keep our debt portfolio at an appropriate level of 30% of debt in our capital structure. Right now, this represents about $4bn,” says Victor Belyakov, chief financial officer at Uralkali. “This helps make the cost of capital cheaper.”

The issuer will now do regular roadshows in the debt capital markets, matching its efforts in keeping equity investors informed, Belyakov adds.

And companies are also being attracted to the bond market by tightening yields, according to Andrey Solovyev, head of DCM at VTB Capital. 

“Issuers understand that the rates on offer for borrowing in bonds at the moment are very good so they’re keen to get the money in,” he says. “Some are already looking at pre-funding for next year.”

But the bond story has not been entirely smooth for Russian issuers, particularly down the credit curve. In February, oil and gas firm Ruspetro postponed a senior unsecured five year bond for around $350m after releasing price guidance of low to mid-11%. And oil producer Exillon Energy pulled a debut Reg S/144A bond of around $300m after releasing price guidance in April. Both firms are rated B-. 

Investors were not prepared for the high volumes and found it difficult to cope with all the extra roadshows and credit work they had to do, particularly with new issuers which require more due diligence, says Dankowski at Citi, speaking generally and not about the Exillon or Ruspetro deals.

 “This year is phenomenal in terms of the volumes,” he adds. “To some extent, this has created some fatigue among investors.”

Indeed, the deals that did get away soon after the first quarter showed signs of investor strain. At the end of April, Russian metals producer Norilsk Nickel priced a $750m five year bond in line with guidance at 4.375% from a modest book of $1.5bn. 

 “The market was overcrowded when we issued our Eurobond,” says Artem Pozdnyakov, head of corporate finance at Norilsk. “After us, some refused to place their bonds. But the demand is certainly there, especially for good names, and I do not expect that it will change in the near future.”

Hoping for M&A

The roaring bond market has come at the expense — and perhaps because — of the quiet syndicated loans market. While bond volumes have soared, loans have dragged along at much lower levels this year. 

In the first quarter, $17bn of loans were signed by Russian corporates, according to Dealogic. However, $14.2bn of this was the second tranche of Rosneft’s $31bn loan for its TNK-BP acquisition and due to its size is considered a one-off, or even anomaly by loans bankers.  

Only one loan was signed for a Russian corporate in April and May — a $1bn term and revolving loan facility for Gazprom Neft from nine banks. 

“The loan market won’t pick up fully until companies begin to grow inorganically again through M&A,” says Ashu Khullar, managing director, co-head, EMEA loan structuring and syndications at Citi in London. “It’s difficult to imagine that there’s going to be [a boom in M&A] in the near future. Everyone’s hoping but I can’t see where it would be.”

The metals and mining industry looks particularly unlikely to offer M&A activity anytime soon because of volatility in commodity prices, Khullar adds. Nickel is down by around 12.7% over the last 12 months, while iron ore is down around 7% and aluminium 9% over the same period. 

 
 

Uralkali shows that PXFs can
still shine despite falling risks

 
  Though the pre-export finance structure is becoming less popular among Russia’s largest corporates, the secured route can still produce strong results in the loan market. At the beginning of June, Russian potash firm Uralkali signed its five year PXF at $1bn, after commitments saw the deal oversubscribed by 100%.

Uralkali began speaking with lenders at the end of 2012 and launched the self-arranged club deal at $700m after hiring Bank of America Merrill Lynch as co-ordinator in January. 

Demand from the bank group pushed commitments to $1.4bn. 

BNP Paribas, Natixis, Société Générale, Sumitomo Mitsui Banking Corporation and UniCredit joined Bank of America as bookrunners and initial mandated lead arrangers.

Deutsche Bank, ICBC, ING, Intesa Sanpaolo, Nordea, Mizuho Corporate Bank, Raiffeisen Bank and RBS also joined the deal.

Uralkali initially indicated that it would only marginally increase the size of the loan, said bankers in May. 

The borrower is paying a 215bp margin for the loan. This is 35bp cheaper than the 250bp margin that Uralkali paid for its $205m five year PXF from August 2012. However, it is 35bp more than the 180bp margin the firm paid on its last $1bn plus deal — a $1.02bn five year PXF signed in September 2011. 

The loan will be used to refinance existing debt and for general corporate purposes.    

 
     

And it’s not just a lack of M&A that is suppressing loan volumes. “Corporates are not going for the big capital expenditure programmes that they used to do, either,” says Yuri Korsun, head of the structured finance department at Sberbank CIB. “There are sporadic project finance proposals, but they require more work and will hardly be ready for the market in the near future.”

But those that have ventured into the loan market have found lenders willing to improve terms on previous deals. Norilsk Nickel sent out a request for proposals in May for a $2bn five year facility. The deal is unsecured, an improvement in terms on the pre-export finance (PXF) structure that Norilsk used in its last loan — a $1.5bn deal signed in January 2012. 

“Since the banks are ready to accept unsecured risk on us it is better for the company to borrow on an unsecured basis,” says Pozdnyakov at Norilsk. “There were not so many transactions in the first quarter in the syndicated loan market and now the banks are keen to do business.” 

Norilsk is not the only firm moving to unsecured loans. Uralkali is also planning to increase the proportion of unsecured debt in its portfolio. 

“We do not have a target amount, but we have already discussed opportunities to raise loans from Russian and foreign banks and we see that they are quite eager to provide us with such facilities,” says Belyakov at Uralkali. “Now we have options to raise money through debt capital markets and loans, our bargaining power with banks is much higher.” 

Pre-export finance facilities have been popular among Russia’s export focused borrowers since the sovereign defaulted on its domestic debt in 1998. The technique was a way of increasing a loan’s credit rating for lenders’ credit committees and it also matched the dollar-denominated export businesses of the borrowers. 

Indeed, half of the $20.6bn of Russian corporate loans signed in 2009 were pre-export finance facilities. This ratio dropped to around 30% in the following two years, according to Dealogic. 

But now the structure is becoming less relevant, as Russian country risk has fallen sharply since the state defaulted on its debts, says bankers. The country’s CDS levels were around 150bp at the end of May, down from a five year high of 1,246bp seen in October 2008, according to Markit. 

 As of the end of May this year, no pre-export finance facilities had been signed by Russian corporates from $29bn of loans in 2013, according to Dealogic.  

 “It’s a surprise that it’s taken so long for Russian firms to move to unsecured loans,” says Khullar at Citi. “ PXFs came about to mitigate cross-border or country risk, and while that is useful when the country is not very mature — like in some African countries where it’s important to have these structures — in Russia this has ceased to be an issue for quite a long time now.”

Domestic banks priced out

The lack of supply from Russia’s top tier name has led to stiff competition among international lenders. This has pushed domestic lenders out of some deals. “Most of these transactions are not achievable for Russian banks in terms of price. The pricing levels are below cost of funding for Russian banks,” said Korsun at Sberbank.

However, Russian banks are in many cases the only source of bank debt for corporates outside the top tier names because international lenders are only interested in the biggest borrowers. And companies outside the top tier generally prefer rouble loans as they have little dollar revenue if they do not have large export businesses, assuming they export at all. 

“Retailers and telecoms are good examples of this,” said Korsun. “They would have to swap dollars into roubles should they decide to go to the international market.”

Equity outlet

Away from bonds and loans, the equity capital markets have given Russian firms a chance to raise modest funds. One company to successfully tap the equity markets this year was Russia’s largest property developer PIK Group. It completed a $275m capital raise at the end of May from an all domestic syndicate. 

The deal was covered up to $270m the day before completion, and the final amount raised was well over the $150m target that PIK released as guidance. 

But ECM has traditionally not been a big source of capital for Russian corporates when compared to the loan and bond markets. Only $1.6bn had been raised by Russian corporates this year through the equity market by June, up from $533m by the same time in 2012, according to Dealogic.

However, this market looks set to grow as Russian state owned corporates have begun finalising timelines for privatisation. Diamond company Alrosa and Russia’s largest state-owned shipping company Sovcomflot are likely to be privatised this year. Alrosa’s IPO is expected to hit the Moscow bourse in September with analysts valuing the business at up to $15bn, while Sovcomflot’s privatisation has been pencilled in for the autumn.

     
 

Brunswick Rail could ‘move beyond covenants’, says CFO

 
  With the exception of Rosneft’s $55bn purchase of TNK-BP in March, M&A bankers have had little to do in Russia this year. 

Companies are still shying away from M&A growth as they continue to be buffeted by macroeconomic problems in Europe, said bankers. 

But there are some firms on the hunt for M&A opportunities, even at the risk of breaking bond covenants. Russian rail freight lessor Brunswick Rail is this year considering “a few M&A deals,” says Nicolas Pascault, the company’s chief financial operator. “We’re looking to increase our fleet to 40,000 cars plus by 2016.”

However, this will not likely be financed through the loan market. “We would look to raise a bond,” says Pascault. “We want to raise as much as we can while abiding by the covenants of our existing bonds and keeping our rating in place. It’s not the plan, but if there is an M&A opportunity and there is no other way to close it, then we could temporarily move beyond the covenants of our bonds. But we are going to try not to.”

Brunswick’s covenants include keeping under four times debt to Ebitda. The ratio was at 3.5 times at the beginning of June. 

“What we can raise will depend upon how highly levered any target company is,” Pascault says. “We’d need to look at the full picture.”

Brunswick already has a combination of Russian and international banks lined up to provide a bridge loan.

Banks that have been involved in Brunswick’s bonds, loans and private placements have been contacted about the loan. Goldman Sachs, RBI, UBS and VTB were bookrunners on Brunswick’s $600m November 2017s, while the IFC, ING, RBI, Société Générale and UniCredit were lenders on the firm’s last loan of $180m that was signed in May 2012. 

“We’re hoping to have the same covenants for the bridge loan as the bond,” says Pascault. “And the bridge lender will be pari passu with the bond investors.” 

Pascault adds: “We’re actually a bit overbanked at the moment so we don’t want to do that transaction with too many banks as it becomes a bit too difficult to organise, so we’re going to be very selective.

“The most important factors in picking banks is pricing, relationship and the ability to close the deal quickly.”

 
     

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