Issuer: Gazprom
Amount: $2.5 billion eight-year syndicated loan
Launched: April 21
Lead manager: Dresdner Bank
Is Gazprom the most bankable company in the former Soviet Union?
So it would appear from the runaway success of the gas giant's inaugural international borrowing - a $2.5 billion syndicated loan arranged by Dresdner Bank. The debut financing has opened the international capital markets to Gazprom and redefined what Russia's best names can hope to achieve in the market. Given Gazprom's many big-ticket projects and large foreign currency earnings, bankers had long expected the company to make a move into the international loan markets for financing. But few, if any, had forecast the boldness with which it would launch its international borrowing programme.
The first many bankers knew of the financing was a phone call early in February from sole mandated arranger Dresdner Bank to set up a series of individual meetings with those banks that had been pre-selected to take part in the financing.
Before Gazprom came to the market, bank lenders had been used to making small $25 million to $50 million short-term loans to the country's top dozen or so banks. Maturities of six months were the norm, with a few of the more seasoned borrowers seeking tenors of one year. Imagine the surprise when bankers were informed that Gazprom was making its inaugural foray not for a few hundred million dollars but for $2.5 billion, and not for a few months but for eight years.
At that size, the facility was on a different scale to any previous Russian financing. Combined with the long maturity, the financing was quickly seen as among the most challenging ever sought by any borrower in the syndicated loan market.
The success of Gazprom's international share sale last year indicated the company's high standing with western investors. That deal positioned it as more than just a big gas producer. It established management credentials: it had successfully dealt with the problem of non-payment by large customers in the former Soviet republics, and had built downstream business as a gas distributor in western European markets. But seeking such big bank loan commitments was a new step. Dresdner and its client had been discussing the facility for nearly a year before they approached the market.
Given the bold nature of the financing, and the damage that failure would entail - for Gazprom's reputation and its prospects of coming back to the market - Dresdner's senior bankers realized that syndication would have to be very carefully managed at all stages. The financing is intended to be the first of a series of facilities from Gazprom to fund the $10 billion Yamal gas pipeline project - part of the company's $24 billion development of the Yamal gasfields in Siberia.
With no comparable benchmark, pricing and structure were crucial issues. Unlike previous medium-term financings for Russian borrowers, the Gazprom facility carried no western government or export credit agency support. The banks were being asked to take full Russian risk. To help mitigate this, Dresdner Bank cleverly added to the facility - which carries a letter of comfort from the Russian government - security in the form of throughput agreements for the pipeline's gas with two big western European gas buyers, Ruhrgas and Snam. Money from these buyers is to be channelled through Gazprom's account with Dresdner Bank Luxembourg. The borrower undertakes in the loan agreement not to change this arrangement. Pricing on the loan fully reflected the high regard international bankers have for Gazprom and the security of the throughput agreement. Instead of paying a margin over Libor of 4% or more, normal for the short-term stand-alone borrowings by Russia's leading banks, Gazprom set the margin at just 2% above Libor throughout the loan's life. Repayment begins after a grace period of three years.
Initially, Dresdner presented the jumbo facility to a carefully targeted group of 20 major banks in a series of one-on-one presentations. These banks were asked to support the financing with large underwritings of either $400 million or $200 million, for which underwriting fees of 60bp and 40bp respectively were on offer, with a front-end fee of 1% of final allocated commitments.
Given the size of the tickets and the facility's ground-breaking nature, banks asked to consider top-tier support for the facility, as either co-arrangers or senior lead managers, knew they would have to assume significant underwriting risk.
Many were initially extremely nervous of committing their institutions to the deal in such large amounts. As the presentations took place, the phone lines buzzed as bankers at many of the 20 banks tried to gauge the level of support the facility was winning at other firms. For most banks, the decision to support Gazprom was taken at board level. The importance of the facility to Gazprom offered banks a unique opportunity to forge a close relationship with the gas giant. Spurning Russia's most bankable company at the start of its borrowing programme was unlikely to be forgotten.
Few could have guessed at the success Gazprom was to achieve in the market. The initial impetus given to the deal by senior bankers rapidly built momentum with only two houses - rumoured to be Chase Manhattan and Union Bank of Switzerland - declining to give top-level support. With 18 of the 20 invited banks supporting the facility, suddenly Gazprom was awash with commitments totalling $7.5 billion provided by the elite of the loan market.
Few emerging market borrowers have received such a show of support from international banks. Even western Europe's top sovereign names struggle to raise as much money with such a low rate of turn-down from bank lenders.
With three times the funds chasing the $2.5 billion facility, and no hope of an increase, the deal was a guaranteed success even before the first invitation was sent out for the general syndication phase. Those banks that had committed $400 million as co-arranging underwriters were scaled back to $129 million each, with the exception of Dresdner which underwrote $178 million. The general syndication process also needed to be successful to demonstrate the depth of market support for Gazprom's name. A further 60 banks were asked to join the facility in the retail phase. In the end, a further $1 billion was raised from 38 banks.