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| VTB | |
| Size | $1 billion perpetual tier 1 bond issue |
| Bookrunners | Citi, UBS, VTB Capital |
| return to the Emerging Europe Deals of the Year index | |
The overriding theme in central and eastern Europe in 2012, as with other emerging regions, was the dominance of the debt capital markets. As ever-decreasing yields in the developed world prompted a wave of liquidity into emerging market bond funds, borrowers across CEE were duly lifted by the flood.
This rising-tide effect, however, made the task of picking the year’s most notable transactions more challenging. With even weaker credits attracting record levels of demand from cash-rich bond buyers, neither bumper books nor wafer-thin spreads were enough in themselves to earn any deal an accolade – this year’s winners had to show something extra in innovation, timing or execution.
In the first of these categories, no deal scored higher than VTB Bank’s capital-raising exercise in July. The first ever tier 1 and the first perpetual deal out of Russia, it was also only the second subordinated debt issue from any emerging markets borrower to include features designed to maintain its capital-compliant status when the country makes the move to a Basle III regulatory regime.
Unlike Banco do Brasil, however, which sold a similar structure in January, VTB did not have the luxury of being able to tap into a well-established market for hybrid instruments from the region. “As this was the first transaction of its type the investor base was inevitably narrower than for deals from markets such as Latin America, so it was a very brave move by VTB,” says Barry Donlon, head of corporate and capital syndicate at UBS, which led the deal along with Citi and VTB Capital.
Execution was also made more challenging by VTB’s desire to get in ahead of the summer slowdown, to avoid potential market volatility in the autumn and ensure that registration of the capital – a lengthy process in Russia – could be completed before the year-end. As a result, not only did the deal have to contend with a relatively weak broader market environment – by the admittedly high standards of 2012 – but the development process was compressed into an unprecedentedly tight timeframe.
“VTB developed a complex structure very quickly and managed to get the regulator, the bank itself and the investment community comfortable with it in a very short period of time, whereas in other jurisdictions it has taken years to establish structures for new-style instruments,” says Donlon.
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| Herbert Moos, deputy president and chairman, chief financial officer at VTB |
The fact that the deal nevertheless managed to attract healthy levels of demand and price at a very respectable 9.5% yield was primarily attributable to two factors: VTB’s own long-standing relationship with the global private bank community – especially in Asia, where the bank has a history of innovation with deals in renminbi and Singapore dollars – and the inclusion of several unique features designed to increase investor receptiveness to the structure. Chief of these was a two-step process, with substantial built-in capital buffers, for implementing and triggering the loss-absorption mechanism required under Basle III. “We were able to build a certain amount of flexibility into the structure while also putting in some sensible protections for investors so that they were comfortable with the instrument and how it would work,” says Simon McGeary, head of new products at Citi.
VTB’s management also assisted the process by restricting the transaction size to $1 billion and returning for a further $1.25 billion only in November, when both broader markets and the issue itself had stabilized. “We deliberately limited the size at the initial placement because the instrument was not familiar to many investors, and tapped it very successfully in a few months’ time with a better yield after investors became more familiar and comfortable with the structure,” says Herbert Moos, deputy president and chairman, chief financial officer at VTB.
Subordinated debt issuance went on to become one of the key themes of the autumn in Russian markets, with Sberbank, Gazprombank and VTB itself – as well as a clutch of smaller lenders – attracting hefty levels of oversubscription from yield-hungry buyers for transactions in more investor-friendly tier 2 formats.
