Western Europe | Asia | Latin America | North America
Best M&A deal
BP’s merger with TNK
Deal size: $9 billion
Date: February 2003
Arrangers: Merrill Lynch, Morgan Stanley, UFG, Alfa Bank, Goldman SachsRussia could not have asked for a better start to 2003 than the announcement of BP’s $9 billion merger with TNK in February. The eyes of the business world turned to Russia, which only five years earlier had defaulted on its debt. The deal seemed to symbolize the return of the federation’s economy to normality.
Two months later, at the Russian Economic Forum in London, the buzz was still palpable. The conference was packed with foreign investors, politicians and journalists, all eager to find out more about Putin’s Russia and what the next deal would be. As Ben Morgan, managing director of UFG, remembers: “Suddenly there was a real degree of urgency in people’s analysis of Russia.”
That dissipated somewhat with the arrest of Mikhail Khordorkovsky, majority shareholder of Yukos, in late 2003, and with concerns about Putin’s authoritarian leaning. But 2003 was still a great year for Russia’s capital markets, in terms of bond issuance, ratings upgrades and market perception, and the BP-TNK deal was an important component of that.
It could have been very different. On the advice of Morgan Stanley, BP initially considered a merger with Yukos, which seemed to have better corporate governance than TNK-Sidanco. If that deal had gone through, one wonders if Khordorkovsky would have been arrested. If so, it might have been the BP-Yukos merger that collapsed, rather than the Yukos-Sibneft merger. That would have been a catastrophe for foreign direct investment in Russia.
However, in the words of a banker who worked on the transaction, BP decided “better the devil you know than the devil you don’t”. Despite having had disagreements with TNK owner Mikhail Fridman in the late 1990s over Sidanco, BP decided that TNK-Sidanco would make a responsible investment partner. As one banker who worked on the deal explained to the UK oil company: “Oligarchs have gone through the phase of smash and grab. It’s now becoming increasingly important to legitimize what you’ve got.” BP also thought TNK-Sidanco, in which BP bought a 50% stake, would be more likely than Yukos to sell the remaining 50% later.
On BP’s side, Merrill Lynch and Russian broker United Financial Group (UFG) were the main advisers, and Alfa Bank and Goldman Sachs advised Fridman’s Alfa Renova group. Merrill’s team, which included Chris Baxter, Andrew Shrager and Andrew Chulack, was supported by UFG’s domestic knowledge, provided by UFG CEO Charlie Ryan, who is a friend of Fridman’s, and UFG chairman Boris Fedorov, who as former Russian finance minister maintains good contacts with the Kremlin. Ben Morgan, head of corporate finance at the broker, also provided knowledge of the Russian oil market. Alfa Bank, which is also owned by Fridman, was represented by Alex Knaster, who acted as much as a principal as an arranger.
Since the deal closed, the Russian market has had to absorb the Kremlin’s attack on Yukos. Robert Dudley, the chief executive of BP-TNK, told a conference in the US in November that he was not concerned by the affair. He said: “The president says it is an isolated case and not an attack on property rights in a general way. It won’t change our direction in any way. We are continuing to make plans for heavy investments.”
The other oil super-majors are hanging back. Exxon, Chevron and Conoco were all rumoured to be close to big deals at the end of last year but now say that the government’s monopoly on oil exports, through Transneft, is a problem. Rex Tillerson, senior vice-president of Exxon, says: “It will be necessary to ask questions of transportation ownership – that’s the question the Russian government has to grapple with. Russia desperately needs improvements to crude exportation infrastructure. Will they do it through the present monopoly system or through injections of private capital?”
These issues don’t seem to have caused BP too much concern. Merrill’s Chulack believes “that’s because BP was the best informed about how Russia actually works, so was able to feel more comfortable”.
The merger is said to be experiencing some teething problems from the clash of cultures. Dudley says: “It’s a fascinating cultural process. Entrepreneurial founders are merging with a public shareholding company. Even within TNK-Sidanco, the two entities had remarkably different cultures.” Dudley adds: “I’ve worked through three other mergers at BP, and none of them has been easy.”
The banks and bankers involved have certainly fared well since the deal closed. Chris Baxter, one of Merrill’s energy team, moved to Renaissance Capital, reportedly for a “three for three” deal – $3 million for three years. UFG put its name on the map as a corporate finance player. UFG’s Morgan admits: “The deal took up a hell of a lot of time. We literally weren’t able to do other things. But it’s been very valuable to us. It gave us credibility.”
Julian Evans
Best loan deal
LUKoil
Deal size: $765 million
Date: October 2003
Arrangers: ABN Amro, Citigroup It has been a dynamic year in the central and eastern European loan market. In EU accession countries, spreads have been brought in from 100 basis points to a mere 40bp. In eastern Europe, Bulgaria and Romania have seen loan pricing halve and maturities extend from three to five years. Project financing has had some big energy deals, such as the financing for both Sakhalin and the BTC pipeline. The $1 billion deal for the latter, arranged by SG, ABN Amro, Citigroup and Mizuho, will be closed by the time of publication.
And in Russia, loan market pricing came down from around 400bp to the mid-200s for many credits, after TNK was able to achieve pricing of just over 200bp following its merger with BP. The year produced a number of firsts: the first unsecured loan since 1998, a $215 million loan for Gazprom arranged by WestLB; the biggest Russian loan since 1998, a $1.3 billion transaction arranged by seven lead arranger banks for Yukos; and the first Russian loan since 1998 to achieve seven-year financing, for LUKoil.
LUKoil has been a much less frequent visitor to the loan market than other Russian oil companies, such as Rosneft or Sibneft, which meant its return in October generated a lot of investor enthusiasm. It mandated ABN Amro and Citigroup for the deal. Mike Emery, director of syndicated debt at ABN Amro, says: “LUKoil is really the biggest and the best oil company in Russia, and it has a scarcity value in the loan market.”
The banks structured an export-secured deal for it in two tranches, at five years and seven years. The five-year tranche was eventually priced at 200bp, which when set was the lowest pricing ever achieved by a Russian oil company in the five-year range.
There was some concern that the banks would struggle to syndicate the seven-year tranche. But that too sold well, pricing at 250bp, and both tranches ended up being oversubscribed, with the deal being increased from $500 million to $765 million. The senior syndication included 11 banks, and the general syndication another 15. The syndicate included some names, such as Barclays Capital, that haven’t been seen in the Russian loan market much since 1998.
Russian borrowers have also tended to find it hard to manage their interest rate risk, as the Russian regulatory system still views derivatives as gambling. But the arrangers managed to work around that, by structuring in an offshore swap option, giving LUKoil the freedom to switch from floating to fixed rate if it wants.
JE
Best securitizations
Akbank, Halyk Bank
Arranger: WestLB
Eastern Europe produces very few securitization deals. This is partly because the most obvious market – Russia – has yet to work out regulatory issues. However, some Russian borrowers, among them Rosbank and MDM, have said they will try to bring deals this year. Central European banks, other obvious candidates, tend to be foreign-owned, so can easily access cheap financing. And the mortgage market is still not very developed, though Hungary in particular shows signs of growing an MBS market.
Nonetheless, in 2003 the CEE securitization market showed tentative signs of life. There was the first deal out of the Czech Republic, a consumer finance deal for Home Credit Finance; the first out of the CIS, for Halyk Bank; and the largest deal yet of the future flow securitization deals from Turkey, for Akbank.
The Halyk and Akbank deals were both arranged by WestLB. Halyk’s was a $100 million securitization of Swift MT100 remittance payments, with a 3.5-year-maturity, launched in October. The deal securitizes remittances and other cashflows from foreign correspondent banks. Julian Turner, director in WestLB’s securitization team, says: “Kazkommertsbank and Bank Turan Alem have both done Eurobonds, but these have tended to be sold back to Kazakh investors. Halyk wanted to differentiate itself from competitors, and the deal also helped it achieve a higher rating than the sovereign ceiling.” The deal was rated Baa2 by Moody’s, one notch higher than Kazakhstan’s Baa3 rating. Pricing has not been revealed.
In the same week, Akbank launched the sixth and final $325 million deal from its $1.175 billion cashflow securitization programme. This was set up in 1999 as one of several future flow deals set up in Turkey, imitating Latin American future flow deals.
Many of these deals have been marketed to US investors. However, Akbank and WestLB have developed an investor base for their programme that includes more European and Middle Eastern investors. The securitized pool includes remittance payments from the community of 3 million Turkish workers in Germany, as well as trade finance cashflows. Last year saw several such future flow transactions from Turkey, including deals by Garanti, but Akbank’s was the biggest-ever of this type from Turkey.
JE
Best sovereign deals
Turkey, Poland
Lead managers: Morgan Stanley, Merrill Lynch (Turkey), Mizuho, Daiwa SMBC (Poland)
Last year’s perfect conditions for emerging-market bond issuance resulted in a large number of sovereign deals coming to the market and many deals performed very well. Hungary, for example, found extremely tight pricing, at just 27 basis points over mid swaps, with its e1 billion sovereign deal in January 2003, lead managed by Citigroup and Dresdner Kleinwort Wasserstein.
Ukraine also enjoyed a successful return to the bond markets, with an $800 million deal and a $200 million tap, lead managed by DrKW, JPMorgan and UBS. But the award goes to two deals from frequent issuers that managed to reach out beyond domestic investors or the typical German convergence funds and find alternative investor pools – Turkey’s $1.25 billion blow-out and Poland’s ¥25 billion samurai issue.
Turkey’s 10-year issue in September, lead managed by Morgan Stanley and Merrill Lynch, was the high point of a great year for the sovereign, whose outstanding 10-year price rose from 81 in March to 135 by the end of the year.
The start of the year was worrying for holders of Turkish bonds, partly because of tensions over Iraq and Turkey’s disputes with the US. However, the rapid conclusion of the war in Iraq helped the issuer, and investors were heartened by positive economic data. Patrick Mullins, head of emerging market origination at Morgan Stanley, says: “Turkey also did a comprehensive non-deal roadshow in the US in August, and that really raised the profile of the issuer.”
When the deal was launched in September, it diversified away from domestic investors, selling 36% to US investors and 36% to Europe. The book was also oversubscribed, allowing Turkey to increase the size from its usual $500 million to $750 million range.
The deal was priced at a yield of 9.65%, just wide of the outstanding 2013s, which was notably tight, considering the deal was Turkey’s first to include a collective action clause.
The rally in Turkish debt has continued into 2004, with the sovereign issuing another 30-year bond, its first since 2000. The lead managers, UBS and Citigroup, managed to build an $8 billion book, out of which it launched a $1.5 billion bond.
Poland also deserves praise for its debut samurai, which came to the market in June at levels flat to the sovereign’s euro curve. The ¥25 billion deal, lead managed by Mizuho Securities and Daiwa SMBC, achieved the best pricing ever for a debut samurai, at 40bp over yen Libor. Vince Purton, managing director of debt origination at Daiwa SMBC, says: “The deal was very easy to sell. There’s a demand for investment-grade credits with good pick-up in the samurai market at the moment, and central Europe is seen as an area of great political stability and growth.”
Poland follows the example of Croatia and Hungary, both of which have been frequent borrowers in the samurai market.
JE
Best corporate bond deal
Gazprom
Deal size: $1.75 billion
Date: February 2003
Lead managers: Morgan Stanley, DrKW
Gazprom’s $1.75 billion 10-year issue was the runaway success in emerging-market debt in 2003, and remains the largest emerging market corporate bond ever. And yet, says Patrick Mullins, head of debt origination in Morgan Stanley: “The truth is, we tried to do the deal six months previously and had to delay it. We couldn’t get the accounts together.”
Juts six months after this disappointment, in February 2003, the lead managers struck one of those market windows that come along once every five years. The gas company was originally aiming for a $500 million deal, but it soon became clear that the wind was in its sails, and a book of around $7 billion ended up being built. The deal was priced at the tight end of the 9.625% to 9.75% price guidance range. “It was the first emerging-market super-deal”, says Mullins. “We were lucky. No-one in their wildest dreams thought the deal would be that big or that successful.”
The deal was helped by several factors. First, it was a wonderful year for emerging-market debt, thanks to the interest rate environment in Europe and the US. Second, Russia stayed out of the primary market in 2003, so many investors turned to Gazprom as a sovereign substitute. The presence of officials from the Russian finance ministry helped them to see the company as government-supported.
Finally, Gazprom, together with accountant PricewaterhouseCoopers and law firm Cleary, Gottlieb, Steen & Hamilton, made an enormous amount of effort with its due diligence. “We treated investors as if we were marketing equity,” says Mullins.
The book ended up being like a “who’s who of emerging-market and cross-over investors”, says one investor. About 50% of the deal was placed in the US, mainly among asset managers, leveraged accounts and corporate accounts. Another 40% was placed in Europe, and 14% in Russia.
Doing the due diligence necessary for a 144A deal was a big step, but with that Gazprom was able to achieve its aim of reducing the level of its short-term debt and replacing it with longer-term liabilities. It continued to meet that aim later in the year with a e1 billion seven-year issue, lead managed by Deutsche Bank and UBS. That deal was the first from its new EMTN programme, and was the largest euro-denominated corporate bond from eastern Europe.
JE
Best equity deal
Norilsk Nickel
Type of deal: combined convertible and ADR
Deal size: $625 million
Date: December 2003
Lead manager: Brunswick UBS
In December 2003, the dormant Russian equity capital market finally came back to life, with a $625 million combined convertible and ADR issue for 5% of Norilsk Nickel, arranged by Brunswick UBS. The broker will not reveal the owner of the shares, but it is widely thought to be Vladimir Lisin, chairman of the board of directors of Novolipetsk metal works (NLMK).
The sale, the biggest convertible issue this year and the third biggest ever, was deemed to be a success for Lisin. One analyst estimates that he bought his stake in Norilsk when the shares were at $20. The ADRs were sold at $53.50. The deal was structured as a $300 million ADR and a convertible issue of $325 million, with a three-year maturity, and a 15% premium.
This year, Brunswick Asset Management is predicting around $30 billion in IPOs on the RTS by 2006, which compares with hardly any new issues in 2003, or indeed the year before. The growth of the pension fund market, and the desire for mid-size companies to raise new funds domestically, are both strong incentives for new issues. This spate of IPOs will help the Russian economy diversify away from oil – Brunswick estimates that around $25 billion of the new issues will come from the metals sector, and $5 billion from the retail and consumer sector.
JE
>
