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Athough there is still confusion about which Russian entities will be allowed to make international offerings this year, some bankers have placed their bets on entities from Moscow. “It’s not a hard call,” says one. “All you have to do is spend time in Moscow and then go out to the regions. You will quickly understand the difference.” The Russian economy as a whole has failed to turn around and register growth but Moscow has been booming. The city accounts for 23% of the Rusian Federation’s income the resource-rich Tyumenskaya Oblast in western Siberia is a distant second with 4.6%. The sudden appearance in Moscow of statues of Peter the Great and rapidly constructed gold-domed cathedrals may raise concerns over where all the wealth is going, but the economic fundamentals look good. In February, rating agencies gave Moscow city a sovereign ceiling (Ba2 from Moody’s; BB minus from Standard and Poor’s) with suggestions Moscow would have come out even better were the rating agencies not by policy subject to sovereign ceilings. Bankers expect the city’s debut Eurobond offering to be led by Credit Suisse First Boston and Nomura in the market soon. Moscow city officials, the Russian media says, intend to raise $400 million but bankers suggest that a target of $200 million to $250 million may be more realistic. The deal is expected to have a three- to five-year maturity. Moscow’s position as Russia’s most economically dynamic city will also have a positive effect on companies whose business is focused on the Moscow region. Capital-raising and investment are being encouraged by the city authorities, and in particular the city’s mayor, who has some interesting visions for Moscow’s future. Indeed not only the first municipal bond, but also Russia’s first corporate Eurobonds are likely to be from Moscow-based entities. Mosenergo, the city’s electricity utility, is expected to receive a rating soon. Salomon Brothers has been awarded the mandate for the company’s planned $150 million Eurobond issue. The company is no stranger to the international capital markets. A huge portrait of Lenin on a wall at the company’s headquarters opposite the Kremlin may suggest nostalgia, but where financing is concerned Mosenergo has been looking ahead for some time. In 1995, it raised some $22.5 million through an ADR offering. Since then, analysts have been impressed by the openness of the company’s management and its sophistication in meeting the demands of foreign investors. As Moscow’s provider of heat and electricity a growing franchise Mosenergo has been a popular choice for investors interested in getting exposure to the Russian utilities sector. UES a holding company that has a 49% stake in Mosenergo and holdings in many of Russia’s other regional utility companies – may ultimately be a bigger player. When, though, it comes to what it owns and determining how valuable those assets are, UES is relatively hard to get to grips with. Mosenergo, by contrast, is what an analyst at Brunswick Brokerage refers to as the “plain vanilla Russian utility play”. It is, he says, “simple to understand”. But not everything there is to understand about Mosenergo is favourable. One major problem facing it as with many other Russian companies is non-payment by customers. In 1996, for example, says Brunswick, Mosenergo’s average debt collection rate was only 65%. Of this, only 50% was in cash. Still, Mosenergo’s close relationship with the Moscow city government has given it regulatory advantages. Regulators have, says one broker, even been somewhat “biased” in the extent to which they have allowed Mosenergo to pass on all its costs to end-users. The other company to look out for in the market is Moscow City Telephone Network (MGTS). The company confirmed in February that it would proceed with a Eurobond issue of between $75 million and $100 million, to be led by Credit Suisse First Boston and Salomon Brothers. MGTS is probably further behind than Mosenergo in preparing itself for foreign issuance since it has no ADR programme in place. Brokers were also somewhat dismayed last year when it dismissed Coopers & Lybrand as auditors, replacing it with a Russian firm. One broker suggests that the change was intended to save MGTS money but it was a hindrance to the preparation of IAS-audited accounts, a critical precondition for issuing in the international capital markets. MGTS’s investment story is nevertheless interesting. As the local telephone service provider for Moscow, it has a near monopoly on the capital’s local calls and the advantage of an extensive if somewhat outmoded network. With the largest city telephone system in the CIS, with 3.6 million access lines, MGTS’s penetration rate is 45 lines per hundred inhabitants, higher than those of Telecom Malaysia or the Czech Republic’s national carrier. The company has tried to build on this advantage through an ambitious modernization programme. This has been helped by a number of joint ventures with foreign partners, which have given the company the opportunity to take advantage of foreign technology and financing sources. Sophie Roëll |
