MDM Financial, one of the most interesting banks in the crowded Russian banking sector, has prepared itself for activity in the equity markets later this year with several international debt transactions.
MDM has always been ahead of the Russian banking pack in its debt transactions. It was one of the few Russian banks to meet all its debt obligations after 1998. In 2001, it raised the first uncollateralized loan for a Russian bank since the 1998 crisis. But even by its own high standards, the past 12 months have been busy.
The bank has launched three loans and extended another loan facility; issued a $125 million Eurobond, and tapped it for a further $75 million; and set up a $300 million commercial paper facility. It also obtained a ratings upgrade in October 2002 from Standard & Poor’s, from triple C + to B-, making it the highest-rated private bank in Russia. No other financial institution in the region has been nearly as active in the international debt markets.
A lot of this is thanks to the energy of Alexandre Kotcherguine, head of international business development at MDM Financial. Kotcherguine has rapidly expanded MDM Financial’s foreign debt activity since he joined the bank two years ago from Renaissance Capital.
He began by expanding the cross-border trade-finance business. “We’ve built this business quite aggressively,” he says. “It has grown ten-fold in 18 months.” In forfaiting, MDM was the first bank to place trade-related promissory notes. It has financed trade in products ranging from precious metals to soya beans. In June 2002, for example, it extended a $13 million pre-export finance facility for JSC Kuznetskiye Ferrosplavy to finance the export of ferrosilicon to Asia, with the financing being syndicated to seven western banks. It has also been successful in obtaining guarantees from Exim banks – for example, it recently financed the import of soya beans into Russia with a guarantee from the US Department of Agriculture.
As Kotcherguine says, the trade finance business “helped us segue into debt transactions. A number of banks bought our debt because they were familiar with us through forfaiting.”
With the help of lead manager CSFB, MDM Financial issued a $125 million Eurobond in December 2002. The deal had a coupon of 10.75%, and had wide geographic distribution, including 32% placed in Russia, 12% in Benelux, 25% in Germany and Austria, and 8% in the UK. Kotcherguine says the transaction was helped by having strong domestic demand. He says: “We made a lot of effort to make a very strong Russian book. It meant we went on our European roadshow knowing we had a good backstop of domestic demand.”
The bank tapped the deal in May 2003, for $75 million. The new issue was priced at 104.50, was 60% oversubscribed and sold in four hours. Both deals were important for MDM in securing longer-term financing (though still only two years), which is increasingly urgent for many Russian banks, as the duration of assets is lengthening, while the duration of funding they can secure isn’t that long. This is making it difficult for banks to expand into markets such as mortgages as quickly as they would like. Funding from the international markets is the obvious way to obtain this long-term financing.
The bank has also been innovative in its short-term financing, setting up a $300 million commercial paper facility in April 2003 with Standard Bank acting as arranger. Kotcherguine says: “The beauty of the instrument is that it’s extremely flexible. It allows you to match financing to assets.” Kieran Donnelly, head of primary markets at Standard Bank, says the programme is “the first of its kind for the Russian market”.
Pioneering securitization The bank is contemplating another first for Russia in the form of future flow securitizations. There has only been one securitization deal done by a borrower so far in Russia – Bank Russky Standart’s July 2002 securitization of its consumer loan portfolio. Future flow transactions have been a success in Turkey, but nothing equivalent has happened yet in Russia. But Kotcherguine believes “there is definite potential for securitization. The market for future flow deals is about to open.”
In the past 12 months, thanks to these debt deals, MDM Financial has had the capital to expand more rapidly than some of its peers in the domestic banking sector. In two years, it has bought nine banks. The next step of the plan is to sell around 10% of the company to a foreign strategic investor later this year. The bank has appointed Daiwa SMBC to build an internal valuation model, and is looking to begin talks with potential investors – possibly private equity funds – this month. It wants to use a strategic investor to improve its corporate governance internally and its international standing externally before floating the company in perhaps two years.
