SBS-Agro: $250 million, three-year maturity
Alfa-Russia Finance: $175 million, three-year maturity
Unexim Finance: $200 million, three-year maturity
If you wanted exposure to Russian debt a year ago, there were only two options: government debt in roubles (GKOs), or dollar-denominated government paper, known as MinFin bonds. If you were bullish, they were an excellent bet: at the time of the presidential election in 1996 MinFins were trading at 1,000 basis points over US treasuries; a year on they’ve tightened to about 300bp over.
Back then, it looked as if these would remain the only options. The Russian government was still in debt negotiations with the London and Paris clubs; talks with western investment banks about issuing a Eurobond had dragged on for six months with little progress; and the IMF was continually cancelling credits.
Since then, however, Russia has been accepted as a lender in the debtors’ clubs, the government has issued three successful Eurobonds, and several other borrowers have tapped the international capital market. Whether investors still regard Russia as an emerging market is even up for debate. In their hunt for higher yields, many have moved on to Ukraine, Moldova and Bulgaria, and have placed Russia in their crossover portfolio. Coupons of 9%, as Russian government Eurobonds offered, are not enough to get investors excited any more.
In such an environment, top corporates and financial institutions are bound to find the issuing market attractive. Oil and gas company Gazprom is due to launch both a Eurobond and a convertible later this year, but it is the banks that have stolen the limelight. In the space of nine days in July, three Russian banks issued their debut public Eurobonds.
All three have been receiving technical support from the EBRD under its financial institutions development programme. The 31 banks on the programme were chosen because they were judged to be the most important or financially sound in the country.
Each bank issued bonds with a maturity of three years, partly (and certainly in the case of SBS-Agro) because a five- or 10-year maturity would not match their business needs. There is no medium- or long-term debt market in Russia and so the banks themselves rarely lend beyond six months to a year. But establishing a name in the public international debt markets beyond this is seen as a crucial step by all three banks.
As with other central and east European borrowers, the banks all issued through subsidiaries based in the Netherlands. This is because the Russian authorities have yet to allow non-government borrowers to benefit from the withholding tax exemption the ministry of finance introduced for its own Eurobonds. Any interest payments from a Eurobond issued inside Russia paid to investors outside the country would have 15% deducted at source.
But this is where similarity between the three banks ends. The first bank to come to market, SBS-Agro, is the result of a merger in January this year between Stolichny Bank of Savings and Agroprom Bank. It is the only one of the three that can properly be described as a bank: it takes deposits, lends to customers, and offers credit and debit card services. Alfa and Unexim are better described as the treasury arms of large financial-industrial conglomerates. As such, investors analyze them somewhat differently.
So do the rating agencies. Only SBS-Agro received ratings from all three big agencies, Moody’s, IBCA and Standard and Poor’s. The rating from S&P was just one notch below that of the Russian Federation. Although neither Unexim nor Alfa published S&P ratings, there were rumours this was because their ratings were lower than SBS-Agro’s.
But the difference in ratings should come as no surprise. As a bank, SBS-Agro is easier to analyze than a conglomerate. It is difficult to get a comprehensive set of accounts and a definite run-down of business interests from Russian companies. Add to this the difficulty of analyzing various, sometimes conflicting, divisions of a big conglomerate such as Unexim and the task becomes almost impossible. “A savings bank, on the other hand, is very easy to understand and get excited about,” says a banker involved in the deal.
That said, Unexim’s ratings from IBCA and Moody’s were higher than for the other two. Its cost of funds was accordingly lower: it launched with a coupon of 9.875% and a spread of 400bp over US treasuries. SBS-Agro and Alfa came at 10.25% and 10.35% respectively, both at a spread of 425bp over treasuries. Alfa achieved the same spread by launching at the level where SBS-Agro’s bond was trading one week after its launch.
Investor appetite for the first of the three issues, for SBS-Agro, was so overwhelming that the deal was reopened twice, each time by $50 million. “There was some concern about increasing the deal because everyone knew two other Russian financial institutions were issuing soon after,” says Eva Lindholm, vice-president, emerging markets capital markets at JP Morgan, the lead manager. “But as they weren’t commercial banks we decided there was little danger of overkill. The only other problem was that too many increases might make us and the issuer look greedy, so we made it known that the second increase was also the last.” Yet demand was still strong enough for the second increase to come at 5bp below the launch price. This did have some negative effects. The paper became volatile, trading between 385bp and 425bp over treasuries in the week after the launch.
As the first private-sector issuer, SBS-Agro blazed a trail for the others to follow. But investors have been exposed to the Russian credit story several times since last October: three times for federal government Eurobonds, and once each for the cities of Moscow and St Petersburg, and they now feel comfortable with Russian paper. What helped the SBS-Agro issue was the bank’s obviously strategic approach to the international markets. It started last year with loans and grants from the EBRD, and followed this year with a syndicated loan before the Eurobond. Plans to set up a Euro-commercial paper programme were mooted at the roadshow.
It was more of a surprise that Alfa was among the first issuers. “They’re by no means a big bank,” says one syndicate manager. “Nor is the Alfa conglomerate as well known as Unexim. But they are certainly a good quality institution.” Another question was raised by Alfa’s decision to set up a medium-term note programme and issue its debut Eurobond off it. And not just because the programme ceiling is $300 million, just $125 million more than the bond itself. “I can’t see the point of setting up an MTN programme,” says one banker. “They won’t be a frequent issuer, and don’t have a good enough credit rating to benefit from reverse enquiry. It makes it an expensive way to issue a Eurobond.”
Yet the paper was popular, and the size of the deal was increased during presentations from an initial $100 million. Unexim, too, increased its offer before launch, from a minimum $150 million to $200 million. Alone among the three, Unexim issued with a 144A option. As a result, 35% of the bonds were sold to US investors, 55% into Europe and the rest to Asia. Alfa’s went mainly to Europe, apart from 15% to Asia and a small amount to Latin America. SBS-Agro, despite not having a 144A for selling into the US, sold 25% of its paper to US investors with offshore accounts; the bulk, over 60%, went to Europe and the rest to Asia.
These three similar deals from very different financial institutions offered a welcome alternative to government paper. But only a few will be able to follow their lead. Fewer than 20 financial institutions publish accounts to international standards – buying a bond on the basis of Russian accounting would be too much of a blind punt for most investors – and only a handful of these are ready to issue internationally. But, given how fast things have changed in a year, anything is possible.
