Emerging Europe – Russia: Unsecured, untied and not a bond in sight

Sean Keating
Published on:

International banks recently put up an unsecured loan for a Russian borrower with a parent on the US sanctions list. Has the loan market for unsanctioned investment-grade Russian borrowers just got broader, deeper and potentially cheaper?

Vladimir Putin binoculars-R-600
Vladimir Putin looks to the US for mutual backslapping in the global media

A $500 million five-year unsecured loan to a Russian borrower with a parent on the US goods, services and technology sanctions list would have been laughed out of European bank credit committees six months ago. The deal closed in November.

Lead arranged by Intesa Sanpaolo, Natixis, Mizuho, UniCredit, VTB Bank, ING, Raiffeisenbank of Russia and Raiffeisen International for Soyuzneftegaz Vostok, an indirect but wholly owned subsidiary of US sanctioned Lukoil, the unsecured loan is the strongest signal to date that western bank appetite for Russian borrowers, particularly those with commodity-linked cash flows, is back.

The loan is not the first unsecured facility from international banks to a Russian commodities-linked borrower in 2016 – that accolade went to Norilsk Nickel on September 30 when it also raised a $500 million five-year unsecured loan from Commerzbank, HSBC, Mizuho, SMBC and UniCredit. But the Lukoil deal does come with the most risk of potential future sanctions fallout for lenders.

Although Lukoil is not the specific subject of EU sanctions and only the focus of US goods, services and technology sanctions rather than financial, since 2014, many international lenders, particularly those with a large asset base in the US, have steered clear of all Russian borrowers – sanctioned or unsanctioned – for fear of retroactive US legislation.

That fear is receding, particularly among EU lenders where sanctions legislation is not retroactive. Banks are not going to find themselves with a loan portfolio that is suddenly subject to massive penalties.

In addition, the political impetus behind sanctions is changing. Trump and Putin’s mutual backslapping in the global media has increased expectations of a thaw in US-Russian relations. And some EU states are wavering in their support for sanctions, given they are not having the desired political effect in Moscow.

Softening attitudes

Even without an improvement in US-Russian relations, international bank attitudes to some Russian lenders have been softening since as early April 2015, when Uralkali signed a $530 million four-year pre-export facility and paid considerably less than the predicted doubling of its pre-sanctions margin.

With that softening, which in part reflects banks searching for higher spread assets as well as a more benign global commodities market, there are now signs of a tightening in Russian loan margins as more lenders begin to return to the market.

In the pre-export loan market – the staple of Russian borrowers since 2014 – margins dropped by at least 30 basis points over the last year, although all-ins are still high at 300bp-plus. Even the pricing on the Norilsk and Lukoil five-year unsecured borrowings was surprisingly tight; Norilsk is rumoured to have priced at just under 300bp over Libor and Lukoil at 300bp over Libor.

Part of the reason for the growing appetite for Russian debt, particularly commodities-linked debt, is, ironically, the result of sanctions. According to data from Trafigura Eurasia, the Russian oil sector alone is undervalued by $1 trillion, the value of Russian oil companies dropping more steeply than that of their foreign counterparts during the oil price slump because of sanctions. The pricing of Russian loans reflects that undervaluation, with debt priced on perceived credit strength rather than the reality. 

We intend to use ECA financing on a more regular basis. It is a good opportunity to raise cheap and longer-dated financing, as well as to diversify funding sources 
 - Sergey Malyshev, Norilsk

There has always been a core of international, mostly European, lenders for Russian borrowers. But that funding pool is growing again. This year Chinese banks have entered the market for the first time, while Japanese and some US banks are also showing more willingness to lend.

Gazprom M&T’s $400 million 12-month revolver, signed in August, demonstrates the breadth of lenders with a taste for Russia – although the borrower is an indirect London-based subsidiary of Gazprom. Provided by ABN Amro, ING Bank, UniCredit, Raiffeisen Bank, Citi, DBS, DZ Bank, Lloyds, Natixis, Rabobank, Société Générale, OCBC, Crédit Agricole, Deutsche Bank, SMBC, Commerzbank, Mizuho and Maybank – the deal was 100% oversubscribed and pulled in two new lenders.

As Mark Rowland, who has since left Gazprom M&T but at the time of the deal was director of global treasury and corporate finance, says: "Sanctions led to banks considering their appetite for Russian risk. Some banks retracted from some Russian deals, or pulled back all Russian business. But some have been very stable and others have seen it as an opportunity to expand Russian business."

Less prevalent

As more lenders get back into the Russian loans business and the range of lending products expands, the pre-export loan structure that has dominated the market since 2014 is likely to become less prevalent and take a margin cut. Pricing on pre-export financing doubled after sanctions, although part of that reflected volatility in the commodity markets.

Pre-export loans have not always been the structure of choice, just the only international dollar loan offering available to Russian borrowers. Western export credit agency-backed project loan volume plummeted after 2014 and the nascent unsecured loan market for unsanctioned Russian corporates disappeared completely.

Before sanctions, pre-export volume out of Russia was falling, primarily because the product has serious limitations. Like any form of secured lending, borrowers are limited in loan size to the amounts their collateral or asset base can support. 

Conversely, the unsecured lending market has considerably deeper pockets and offers greater flexibility. Pre-sanctions, many Russian borrowers, particularly those looking to fund expansion plans, were beginning to migrate to the more flexible, if slightly pricier, unsecured market.

TNK-BP (subsequently acquired by Rosneft, which is now sanctioned), Eurochem, Uralkali, Norilsk Nickel, MMK, Gazprom Neft, Uralchem and Novatek all signed unsecured deals in 2013/14. Suek was trying to move away from the pre-export structure when sanctions hit. The $1 billion (plus $300 million accordion option) pre-export deal signed by Suek in February 2016 – which comprised five- and seven-year tranches lead arranged by ING, UniCredit, Alfa-Bank, Commerzbank, Intesa Sanpaolo, Nordea, Rabobank, Sberbank and Société Générale (via SGBT Asset Based Funding and Rosbank) – was originally planned to be an unsecured borrowing, according to a syndicated loans banker in London.

Sergey Malyshev-160x186
Sergey Malyshev,

If the recent Norilsk and Lukoil deals prove catalysts to the rebirth of that unsecured market, the list of potential borrowers will include some strong credits. Starved of product choice for two years, Russian borrower appetite for funding diversification is high. As Sergey Malyshev, CFO at Norilsk, says of a small €37 million but very rare Euler Hermes covered deal Norilsk closed with Commerzbank recently: "We intend to use ECA financing on a more regular basis. It is a good opportunity to raise cheap and longer-dated financing, as well as to diversify funding sources."

New funding channels

This is all good news for unsanctioned Russian borrowers. But even those directly affected by sanctions are opening new funding channels – largely provided by Chinese lenders.

Norilsk’s $500 million international unsecured loan in November was not its only such facility of the year. Last January, the borrower closed its first unsecured financing since the first quarter of 2014 – a Rmb4.8 billion ($730 million) five-year loan provided by Industrial and Commercial Bank of China (ICBC), Bank of China and China Construction Bank. The loan was also Norilsk’s first yuan-denominated facility and a potentially important diversification of its funding base.

Similarly, in the ECA-backed market, the sponsors of the $26.9 billion Yamal LNG project – Novatek (50.1%), China National Petroleum Corporation (CNPC) (20%), Total (20%) and Silk Road Fund (9.9%) – raised $11.1 billion of dollar equivalent 15-year project debt in April from China Export-Import Bank (Chexim) and China Development Bank (CDB).