Debt capital markets: Taper or no, Federation shows Russia demand

By:
Dominic O’Neill
Published on:

Issuer ‘comes of age’; creates first euro benchmark.

The Russian sovereign proved doomsayers in emerging markets bonds wrong last month, grabbing its 2013 international funding requirement in one swoop in the biggest EEMEA bond deal so far this year.

Coming a week before the September US Federal Open Market Committee sparked a strong rally in emerging markets after September 18, the sovereign raised almost $7 billion in four tranches: issuing five-, 10- and 30-year dollar notes and its first euro notes, in a seven-year tranche.

"There was some scepticism that Eurobond investors were going to buy Russian names; that they were fed up with all the money raised at the beginning of the year," says Andrey Solovyev, global head of debt capital markets at VTB Capital, one of the bookrunners. "This deal clearly showed the market was open for Russia, even before the Federal Reserve announcement a week later."

Coupons on the dollar tranches were higher than the sovereign’s Eurobond last year, at 3.66% on the five-year notes, 5.11% on the 10-year notes and 6.08% on the 30-year notes. But, says Solovyev, spreads over US treasury bills were the same on the five-year notes, and lower on the 10- and 30-year notes.

Moreover, spreads tightened in the secondary market, and South Africa – which has the same rating and priced a $2 billion note on the same day – paid a higher new-issue premium.

Denis Shulakov, senior vice-president at Gazprombank
Denis Shulakov, senior vice-president at Gazprombank
The main factor in attracting the great demand for Russia, says Denis Shulakov, senior vice-president at Gazprombank, is the government’s relatively low level of leverage. Oil prices, pushed higher by tensions in the Middle East, might have helped.

It was the first time the sovereign managed to execute a deal within a day of opening the book. Bankers say a roadshow was unnecessary as investors understand the credit better because the state has issued annual Eurobonds since 2010 (it issued for the first time after a 12-year absence in 2010).

"Investors only needed to look at the pricing this time," says Solovyev. "The deal really proved Russia has grown up as a Eurobond issuer."

The issuer mooted seven-year and 12-year tranches in euros. Although demand was skewed to dollars, and the 12-year tranche was pulled, bankers say the seven-year tranche nevertheless eases pressure on the dollar curve and helps Russian corporations – many have exports denominated in euros – to issue in euros.

In retrospect, the deal might have come a week too soon, before the Federal Reserve decision. But Solovyev says Russia was "not in a position to bet" on the direction of US monetary policy; a reduction in quantitative easing was widely expected.

As such, say bookrunners, the sovereign was right to take advantage of a window of opportunity for emerging market issues after US non-farm payroll numbers on September 6 tempered investors’ fears of an imminent reduction of quantitative easing.

"At the first sign that the pendulum had moved, the [Russian] Federation was the first to issue," says Shulakov. Indeed, Russia’s September 9 deal was followed later in the week by other international emerging market bonds and sukuk, including sovereign deals from Indonesia and Romania.

Solovyev says that the order book of $16.5 billion, from more than 500 investors, shows there was much unsatisfied demand. And the Fed’s delay to its mooted tapering of quantitative easing has since fuelled further optimism among Russia-focused debt bankers.

By late September, Russia Eurobonds to follow the sovereign included a seven-year sterling deal from state-owned energy firm Gazprom and a Basle III-compliant subordinated bond from Gazprombank. Bankers say Gazprombank’s deal will be followed by similar deals from other Russian banks this autumn.

Bookrunners for the sovereign were Barclays, Deutsche Bank, RBS, Renaissance Capital, VTB Capital and, for the first time on a federal sovereign Eurobond, Gazprombank, whose rise in international debt markets mirrors local state-owned lenders VTB and Sberbank (the latter was absent from this deal).

Shulakov, a former investment banker at Barclays who moved to Gazprombank just over a year ago, says Gazprombank is leveraging its relationship with Russian corporates. He expects around $200 billion in local and international bonds from Russian issuers between now and the end of 2015.

As corporate lending in Russia stagnates, the bond market might continue to grow relatively rapidly. Shulakov expects outstanding Russia bonds to swell to around $670 billion by the end of 2015, compared with $470 billion today.