It has been a big year for TNK. Its $3 billion merger with BP was the biggest deal of the year for the region, and the biggest ever one-off equity investment in Russia.
That deal was in part possible thanks to the reputation for transparency and sound management that the Russian oil company has built up in the debt market in recent years, and the professionalism it has shown in its debt dealings in the past 12 months.
TNK has stood out as the most sophisticated borrower in the loan market this year, which has been dominated in central and eastern Europe by big structured loans for oil companies. Usually, such loans are backed by oil exports with a fixed off-taker: an oil company is obliged to sell its oil to a certain buyer for the length of the loan. Obviously, this puts the buyer in a strong negotiating position on price. TNK, however, has now built up sufficient trust among its lenders to develop a structure without a fixed off-taker.
TNK CFO Joseph Bakaleinik says: “Banks are becoming confident enough in us to understand that we don’t need a major oil company to handle our trading.” Alan Bigman, director of corporate financing, adds: “The deal structure has certainly become more flexible. Our new facilities now always have open off-taker structures. We pioneered that.” Not having a fixed off-taker has strengthened TNK’s position in oil trading. Bigman says: “It has certainly significantly improved the price of our oil.”
To develop this flexible structure, TNK has issued several medium-size loans, with a handful of banks in syndication. As Bakaleinik says: “Smaller deals work better for us. The more participants there are, the more difficult it is to push for innovative structures. But when it’s a club deal with a smaller list of participants, it’s possible to talk to all the banks and get them comfortable with the structure.” One of its banks, CSFB, took the structure further by securitizing its loans and selling it to retail clients – one of very few securitization transactions from the region this year.
Another benefit of doing smaller deals is that it allows the company to borrow opportunistically, and to give all its key relationship banks a chance to lead manage a deal.
The company has also had significant success in loan maturity and pricing. Georg Feldscher, head of syndication at RZB, says: “It’s been able to stretch its loan maturity continuously.” Bakaleinik says: “Our average loan tenure is around three years now. In 2001 it was less than two. I think that’s remarkable.”
And its pricing levels have gone down too. TNK’s average cost of borrowing in 2001 was 11.5%. It’s now around 8.8%. That has been a result of an improvement in market sentiment towards Russia. In addition, the Russian loan market has become cheaper thanks to strong competition from the domestic bond and Eurobond market, and TNK has capitalized on this competition, issuing a $400 million Eurobond in November, lead managed by Citigroup and CSFB. The issue had to be delayed after it was discovered that the company’s auditors had made a mistake in its accounts. But, thanks to the finance team’s openness and professionalism, the markets did not take fright and the deal was completed, with a coupon of 11%. The company tapped the issue for a further $300 million in February 2003, with tighter pricing. The bond issue has won a lot of praise from investors and bankers, and it was a close second to Gazprom for best corporate bond borrower for the region.
The success of the bond deals in turn helped TNK to get cheaper financing in the loan market. As Feldscher of RZB says: “They played the game well, bringing the bond and the loan markets into competition with each other.”
Finally, the company’s activity in the debt market helped it prepare for its big splash in the equity market in February 2003. Bigman says: “A lot of the expertise we’ve built up with banks was of immense significance for the BP deal. All this debt activity was a dress rehearsal for the equity deal. In fact, the lawyer for the Eurobond, Linklaters, was also the lawyer for the BP deal.” Bakaleinik agrees that the debt activity – particularly the bond issue – was an important precursor to the equity deal. He says: “Before BP made a bid for us, we were planning an IPO, and bond issues were the only way to get public attention.”
Restructuring exercise The company’s finance team is now faced with the task of restructuring its $10 billion in debt, to capitalize on an expected improvement in its rating after the BP merger is completed late this year. The restructuring will be easier thanks to the goodwill the company has built up with its key banks. Bigman says: “We consider our relationship with our lender banks to be very important, so we will try to do new loans with them to replace the old loans.” Bakaleinik says the company is also considering another Eurobond issue in autumn 2003, possibly for as much as $1 billion.
The restructuring will be Bakaleinik’s last major challenge at TNK – he tells Euromoney he won’t be staying on at the new merged company. He says: “There are a couple of options on the table as to where I go next. I won’t necessarily stay in the oil sector, but I will stay in the Russian corporate sector.”
It shouldn’t be too hard to land another high-profile CFO position – he has built up a lot of credibility in the six years he has been at the company. As Kaha Kiknavbelidze, oil and gas analyst at Troika Dialog, says: “He has a very good reputation in terms of financial management, and is viewed as one of the top financial professionals in Russia.”
