Gazprom’s entry to the international debt markets has been slow and at times laborious. This, after all, is a company that’s not famed for its openness. If you ring Gazprom’s main number and don’t speak Russian, the receptionists hang up on you. If you want to get some time with one of the senior managers in the treasury team, you have to fax a request several days in advance. It’s hard to know whom to contact there – the company’s been through three CFOs in 12 months. Even bankers who’ve worked with Gazprom for some time are unsure of the first name of the present CFO. “You just call him Mr Yurlov,” says one.
But gradually, over the past year, a spirit of perestroika has descended on Gazprom’s finance department. The present CFO, Boris Yurlov (for that is his name), seems to understand the need for dialogue with the markets, as does Peter Bakayev, who is responsible for debt funding at the company. As one banker says: “Bakayev is doing a great job at Gazprom. He’s on the phone constantly to investors.” And Gazprom has reaped the benefit of this new openness in the four bond deals it has done in the past 12 months, all of which have in their way been groundbreaking, as one would expect of a company bigger than most CEE countries.
Gazprom issued its debut Eurobond in April 2002 through CSFB and Citigroup. David Lasky, vice-president of emerging market debt at CSFB, says: “It took years and years of meetings and drafting sessions to help lay the groundwork for public disclosure.”
The roadshow was a new experience for the company. One banker close to the deal says: “They weren’t used to the process initially. They lacked the understanding of what to say. They didn’t know how to sell the company. They knew how to give facts but not how to put meat on to the facts.”
But the $500 million four-and-a-half year deal was still a success, and priced just 50 basis points higher than Russian sovereign bonds. In part this was because Russia was absent from the debt markets that year – investors, comfortable with the strong relationship between the government and the “ministry of gas”, as one banker calls Gazprom, saw the company as a sovereign proxy. This was helped by the presence of deputy finance minister Sergei Kolotukhin on the roadshow. The deal generated $2 billion in orders, from 180 accounts, including 30% from UK investors. It came in at a spread of 9.125%. As Gazprom CEO Alexei Miller said: “We had counted on a yield of 10.5% and received 9.125%. That says a lot.”
The next deal, another Reg S Eurobond lead managed by CSFB and Citigroup, priced in early October slightly wider at 10.5%. The price was wider, say lead managers, because of volatility in the bond market following the scandal at WorldCom and the prospect of a left-wing government in Brazil. But demand was still strong enough for the banks to increase the issue from $400 million to $500 million, and then tap the issue for a further $200 million later in the month. The structure of the deal – a seven-year bond with a three-year put option – helped the bond sell, say bankers, as it let the company tap into two distinct pools of investors.
Lasky at CSFB says these deals opened the market for other issues. “Before, there hadn’t been a real benchmark. This was the first true Russian benchmark in dollars. The market’s been on fire ever since.”
The company then sought to diversify into another area of funding, with another groundbreaker – the biggest domestic corporate bond so far in Russia. The R5 billion ($160 million) issue, launched in November 2002 and lead managed by Renaissance Capital, was the first rouble-denominated corporate bond to break through the 17% coupon level, pricing at 16.86%. CFO Boris Yurlov said: “The successful placement will serve as a benchmark for the development of the domestic bond market.”
And then came the big one – a $1.75 billion 10-year deal in February 2003, lead managed by Morgan Stanley and Dresdner Kleinwort Wasserstein. The deal, the biggest corporate bond in emerging-market history, capitalized on the huge demand for emerging-market paper that has arisen this year, as a low global interest rate environment sends investors chasing for yield. Indeed, for several investors, this was the first Russian deal they had bought. The order book reportedly reached $6.4 billion, with a total of 377 orders. It was the first 144A deal the company had done, which imposed further disciplines of openness on the management, and the banks succeeded in placing 50% of the order with US investors.
Why did Gazprom need this $3 billion in debt raised in the past year? The company has embarked on an ambitious restructuring of its $14 billion in debt, of which $7.9 billion was in short-term high-interest debt. Gazprom thinks it has saved around $81 million this year from refinancing this debt with lower-interest bonds. Some syndicate managers expect another big issue this year.
Although some investors are uncertain that Gazprom will use the money wisely, the banks are loving the deals. In an extremely tight fee environment, Gazprom still pays big, old-style fees of 1.25%, giving the lead managers on the last issue a healthy $10 million each.
