Emerging Europe Best sovereign borrower
Poland
The past 12 months were, on the whole, hospitable to sovereign issues from eastern Europe, though the story turned nastier in late April since short selling from hedge funds hit much emerging-market debt.
Among accession countries, the buzzword was liquidity, with many issuers aiming to take advantage of the New EuroMTS platform for central and eastern European sovereign issues. Lithuania, for example, did a successful tap issue of an existing bond in February to take it up to the e1 billion minimum requirement to be included on the MTS platform.
Among non-accession countries, one of the biggest success stories was Turkey, which experienced a rapid return to investor favour thanks to successful negotiations with the IMF, financial support from the US in the run-up to the Iraq war, and a perceived improvement in the country’s chances of EU accession.
As a result, the country’s old 2030 bonds tightened by around 350 basis points from May 2003 to April 2004. Its international new issues, which have totalled about e6 billion since May 2003, were progressively better received, culminating in the very successful $1.5 billion 30-year issue in January 2004, lead managed by UBS and Citigroup. This was priced at an interest rate of 8.23%, and was probably the single most successful deal from the region in the past 12 months.
Violent correction
However, Turkey’s debt has been hit harder than most in the violent emerging-market debt correction of the past few weeks, as analysts and investors decided the country’s chances of EU accession might have been overstated.
As one dealer puts it: ?The failure of the Cyprus reunification referendum, and negative comments from some leading European politicians on Turkey’s chances of EU accession, have not helped in the past few weeks.? Turkey’s 2030 debt has now widened from about 350bp over treasuries to about 475bp.
But one of the most notable features of the correction has been how little it has affected accession sovereign issues. Slovakia, for example, managed to issue a e1 billion bond on May 7, the day after the JPMorgan Emerging Market Bond Index had dropped six points, at spreads of 33bp over Bunds, which was the tightest pricing for any CEE bond ever. The issue underlined the extent to which accession country debt has now decoupled from the emerging-market asset class.
But our award goes to Poland, for the second year running, in recognition of the sovereign’s ability to meet large borrowing requirements with innovative and liquid financing.
In some ways, Poland’s external debt team, which was headed by Edward Basinski until December 2003, and is now headed by Andrzej Ciopinski, is faced with a challenging task. As one banker puts it: ?They need big chunks of money ? around e4 billion a year ? and Polish politics isn’t always the most stable.?
This year it has been far from stable ? with former prime minister Leszek Miller being forced into resigning, and the Polish senate refusing, in May, to approve the new prime minister and cabinet.
Nonetheless, the country has maintained a remarkably consistent presence on the international capital markets, continuing with its strategy of building up liquidity in its dollar and euro issuance while tapping new investor bases in local markets.
Indeed, the country increasingly has the characteristics of a frequent issuer such as France or KfW, with a very loyal and informed investor base, and very strict demands made on its bookrunners.
Poland is in the market sufficiently frequently to mean that it can more or less demand a level of pricing from bookrunners. Peter Malik, head of CEEMEA syndicate at CSFB, says: ?It’s not quite the same process as with the G10 frequent borrowers, where issuers basically say ?buy the deal and sell it over the next few days’, but you still have to give Poland a large amount of binding comfort. That means underwriters are taking on more of the risk.?
Establishing a market presence
Ciopinski says: ?We have to achieve at least two goals with our financing ? first, to meet our borrowing requirements, which mainly means refinancing maturing debt. For example, e2.5 billion of the total e4 billion issued last year was to refinance matured debt, while another e1.5 billion was to prepay debt (mostly Brady bonds). Secondly, we want to establish Poland even better on the international markets, by broadening our investor base and providing better liquidity. Thus, in the past 12 months, we tapped two new investor bases ? Swiss franc investors and samurai investors.?
The country issued a SFr400 million ($310 million) five-year issue in March 2004. Ciopinski says: ?The Swiss franc market is very interesting. The investor base is completely different to the Eurobond market. We were able to achieve pricing that was even slightly tighter to our Eurobond market.? The deal, which was lead managed by UBS, priced at 27bp over Euribor, while Poland’s euro-denominated five-year traded at that time at 32bp over.
Poland also issued a ¥25 billion ($220.6 million) samurai in June 2003, lead managed by Daiwa and Mizuho, where the issuer found demand in the relatively undersupplied seven-year market. Ciopinski says another ¥50 billion samurai is being prepared.
The country also issued its debut floating-rate note in September, a e500 million three-year deal, which opened it up to a new pool of investors. And it built up impressive liquidity in its 2013 euro-denominated issue, which it tapped in June 2003 and again in March 2004, bringing the issue size to e3 billion.
Ciopinski says: ?These were important deals, because they brought substantial liquidity to the issue. It’s much more liquid than any other CEE bond.? Thanks to the liquidity of the issue, the deal trades at around the same level as the country’s 2010 issue, despite the longer maturity.
Some bankers have even begun fantasizing about increasing the issue to e5 billion, to make it eligible for EuroMTS’s jumbo platform, but Ciopinski thinks the ministry won’t make the issue any bigger. Indeed, he says the borrower has more or less completed its financing requirements for this year, which, considering the volatility in emerging market debt now, is another indicator of a savvy borrower.
Best sub-sovereign borrower
HBOR
HBOR, the Croatian Bank for Reconstruction and Development, was founded in 1992, shortly after Croatia declared independence, with the aim of funding reconstruction of the war-torn country, particularly in the regions, and facilitating trade finance.
The pace of the bank’s activities has picked up as economic growth has quickened in Croatia in the run-up to EU accession. Indeed, Vedrana Carevic, executive director in the export division at the bank, says it has extended more loans in the first four months of 2004 than in the whole of 2003.
It has also been increasingly involved with major long-term infrastructure projects, such as the e112 million renovation of the Zagreb tram system, and a e150 million municipal environment infrastructure project, which is a combined effort between HBOR, the European Investment Bank and the European Bank for Reconstruction and Development. These longer-term infrastructure projects have prompted the bank to look beyond its usual method of financing, syndicated lending, to tap the Eurobond market for longer maturities.
The bank issued a Eurobond in February 2004, its second international issue following its debut in 2002. The new issue was a e300 million seven-year bond, lead managed by Deutsche Bank and UBS.
The senior management went on a five-day roadshow, to Vienna, Athens, Frankfurt, Munich, Zurich and London. Carevic says: ?The key selling point was definitely that we are a sub-sovereign, and are a 100% state-owned entity with a full government guarantee. This, together with HBOR’s strong financials, allowed us to appeal to many investors.?
The presence of assistant minister of finance Hvroje Radovanic on the roadshow helped to underline the close support the bank enjoyed from the sovereign. Investors also liked Croatia’s position as a strong EU accession candidate.
Carevic says: ?We also timed the deal so as not to coincide with the sovereign, which we knew was planning to issue later in the year.?
The deal was priced at 100 basis points over mid-swaps. About 20% of the deal was sold to Austrian investors. Twenty per cent went to Switzerland, 14% to Greece, 13% to Germany, 13% to the UK and 8% to domestic investors.
The bank has also successfully sourced syndicated loan financing. On October 2003, it priced a $200 million syndicated loan, up from $150 million thanks to oversubscription, involving Bank Austria, Tokyo-Mitsubishi Bank, DZ Bank, and San Paolo Bank. Pricing was US dollar Libor plus 60 basis points. This was much better pricing than had been achieved in previous deals. For example, in June 2002, the bank paid Euribor plus 80bp, and in 2001 it paid Euribor plus 97.5bp.
In addition, the bank accesses capital from several multilaterals, particularly for infrastructure and SME projects.
Investors can expect HBOR to return to the Eurobond markets in the near future, perhaps in the fourth quarter this year. Spreads on the bank’s issues are likely to tighten in line with Croatia’s sovereign spreads if, as most analysts expect, the country is given a starting date for EU accession negotiations at the EU summit this summer.
Best corporate borrower
Sistema
The strongest issuance in the past year from eastern Europe has been from the Russian corporate sector. Russian companies have issued so many Eurobonds that JPMorgan even launched a special Russian corporate bond index to track them.
The ironic background to this mass Russian exodus to the international markets was that Yukos, the company that more than any other led the way in opening Russian business to international investors, was being attacked by the Kremlin. As a result, its own international borrowing strategy was being stymied. It had to pull a planned $1 billion Eurobond, and the $1 billion loan it raised instead is now looking close to default. The company was downgraded five notches by Standard & Poor’s in May.
It is too early to say what long-term effect this political attack on Yukos will have on Russian corporate strategy, but some have suggested that the attack could reverse the trend of Russian companies opening up to international investors. As one source at Yukos puts it: ?Khordorkovsky opened up to public scrutiny, admitted how much he was worth, and look what happened to him. The effect of this will be to drive Russian business back into the shadows.?
That would be a bad thing, both for Russian business, which would become less efficient and more expensive to finance, and for foreign investors, who would find fewer opportunities to capitalize on strong Russian growth. However, there are hopeful signs that a retreat from international markets will not occur. And one such sign is the success of Sistema’s international borrowing strategy.
Undeserved reputation
Sistema had an underserved reputation for being ?synonymous with opacity? in the words of one analyst, during the 1990s. In fact, it made some groundbreaking steps for Russian corporates in opening up to the international markets. For example, its mobile subsidiary, Vimpelcom, was the first Russian corporate to list on the New York Stock Exchange, back in 1996. Its fixed-line phone company, MTS, followed suit in 2000.
In 1998, it appointed Deloitte & Touche to be its auditor, becoming one of the first Russian companies to follow international accounting standards. In 2002, the company issued its first rouble-denominated bond, and was the second major Russian company, after Yukos, to reveal its shareholders.
Last year, the company took further key steps in its international strategy. Early in 2003, it issued a $100 million credit-linked note. Then, in April 2003, it issued a $350 million five-year bond, lead managed by Deutsche Bank and ING. The bond was to finance the acquisition of 10% of MTS, which had recently become available.
The bond was the first ever international issue by a Russian holding company. Partly to sweeten that, Sistema secured the bond on 10% of MTS shares. However, the deal, which was intended to be a 144a issue, ran into regulatory complications, and ended up being only Reg S. It still found decent pricing, at a yield of 10.375%.
Following the issue, the company made its first ever public presentation of its annual US GAAP figures, in July 2003. It also appointed a special investor relations team, led by Andre Bliznuk, formerly of Wimm-Bill-Dann. Bliznuk says: ?The increase in our investor relations effort meant a change in mentality, a switch from a private to a public company. We’ve become a lot more active in terms of financial reporting, publishing our figures on a semi-annual basis. We’ve done more roadshows, more conference calls, attended more broker conferences, and we recently hired a corporate secretary specifically to overlook corporate governance issues.?
Also during July, the company started preparing its second Eurobond offering, with CSFB lead managing. Sofia Smirnova, director in CSFB’s emerging Europe debt capital markets team, says: ?In July, the market was very volatile because of the Yukos story. By October, the liquidity of the Russian market had deteriorated significantly. Therefore the company did a non-deal roadshow, in the US, Europe and Asia. The feedback was very positive.?
Bliznuk says: ?By that time, we were much better understood by the markets, thanks to our investor relations effort. Investors liked the fact that we are the only major Russian company not active in oil and gas, and that we’re a retail-orientated company, at a time when Russia is starting to switch to retail and consumer-driven growth.?
The company could have issued in November, but held off until January when the market traditionally tends to be more eager for new deals. Smirnova says: ?This allowed for significant improvement in pricing. The order book for an announced issue of $250 million exceeded $1 billion.? The borrower increased the deal to $350 million to capitalize on the strong demand.
The deal was unsecured, with a maturity of seven years plus a three-year put option. It was priced at 8.875%, significantly tighter than the first, secured, deal. It found good demand among US, European and Asian investors, with about 21% of the deal being sold in Asia, thanks to a roadshow there.
The rating of the deal, B3 by Moody’s and B by Standard & Poor’s, in part reflect the interdependence of the company’s fortunes with those of MTS, in which the company owns a 50.4% stake. MTS itself has shown a strong borrowing policy in the past 12 months, bringing three bond issues in 2003, and with arrangers CSFB presently waiting for a decrease in market volatility to launch another.
The success of both Sistema and MTS on the international capital markets in the past 12 months shows that Russian companies don’t have to fear a Yukos-style collapse if they open themselves up to scrutiny, at least as long as they stay out of politics.
Best financial borrower
Russian Standard Bank
Russian Standard Bank (RSB) is one of the great success stories of Russian business in the past three years. It is an unlikely one ? it was set up by Roustam Tariko, a Russian entrepreneur who made his fortune importing luxury alcoholic drinks brands into Russia and establishing his own vodka brand, Russian Standard. But despite the initial market scepticism about a vodka manufacturer setting up a bank, RSB has asserted a surprising and impressive grip on the consumer finance market, controlling 51% of the consumer loan market and 77% of the credit card market in Russia.
Consumer finance is a good market to dominate in Russia. The average monthly wage has risen from $60 in January 2000 to $180 in January 2004. Household consumption has grown by over 5% quarter on quarter for the past four years. However, consumer finance is still relatively undeveloped, with consumer loans accounting for just 2.2% of GDP in Russia, compared with 20% in eastern Europe and 74% in the US. Thus RSB thinks the loan market could grow by 50% annually over the next five years.
RSB has been capitalizing and driving the growth of the consumer finance market since it was founded in 2000. Its consumer loan portfolio has grown from $45 million in 2001 to $349 million in 2003, while its credit card portfolio has grown from $3 million in 2001 to $127 million in 2003. The bank’s CEO, Dmitri Levin, says: ?We’re issuing 10,000 consumer credits and 2,000 credit cards a day.? Its total assets grew from $193 million in 2002 to $518 million in 2003, and the company had a return on equity of 70% last year.
The challenge for the company has been to find ways to finance this rapid expansion. Levin says: ?The business is growing fast, at around 200% annually, and we need more financing.?
The company has risen to that challenge with one of the more innovative financing strategies of any eastern European financial institution. It has tapped all the obvious sources of funding ? the domestic and international bond and loan markets, as well as finding capital from the European Bank for Reconstruction and Development and the International Finance Corporation, and even breaking ground with securitizations.
The company raises 70% of its debt on the domestic market. A lot of this is through a promissory note programme that the bank set up three years ago. Several of the more innovative financial borrowers in Russia, such as last year’s winner in this category, MDM Financial, also use promissory note programmes for short-term borrowing.
RSB also does an annual rouble bond issue, and has so far issued about $100 million in rouble debt. This includes an innovative asset-backed-type issue it launched in July 2002, of a rouble bond backed by the bank’s consumer loan portfolio, which was arranged by Renaissance Capital. The company is preparing a R1 billion ($34 million) bond, lead managed by Citigroup, for launch later this year.
However, the rouble bond market is limited in terms of the maturity and amount of debt that can be raised, and interest rates are often in the 20% range.
To find cheaper and longer-term financing, the bank visited the Eurobond market in April, when it launched a $150 million three-year bond at an impressive coupon of 8.75%, which compared favourably with similarly sized Russian financial institutions. The deal was lead managed by Barclays Capital and Citigroup.
Levin says: ?The key point of our presentation to investors on the roadshow was that we’re not a classic Russian bank. We specialize in consumer finance and credit cards, so in some ways we’re more like a corporate.? He adds that investors liked the bank’s international-standard management and accounting.
The timing of the bond was prescient ? lead managers launched it just weeks before the Russian corporate bond market took a 100-basis point dive on fears of steep Federal Reserve rate increases. Several new issues, scheduled to be launched just after RSB’s bond, have now been put on hold. Levin says: ?I wouldn’t issue right now.?
The bank has also sought financing from the syndicated loan and credit-linked note markets. It is preparing a $50 million one-year floating-rate loan, lead arranged by Citigroup, which should close by the end of June. It also issued a $30 million credit-linked note, lead managed by Dresdner Kleinwort Wasserstein, in November 2003. Levin says: ?We did the CLN because it was cheap and very easy from a documentation point of view.?
And the bank has managed to secure a good relationship with both the IFC and the EBRD, which appreciate its good corporate governance and its role in encouraging the consumer boom in Russia and thus diversification of the Russian economy away from the energy sector. Their support has not only provided the bank with cheap financing but also the approval of foreign investors.
Levin says: ?We’ve had a relationship with the IFC and EBRD for more than three years. Their financial expertise and participation has been very positive for us, and for our debt issues.?
For example, in December 2003, the IFC issued its first ever rouble-denominated transaction, a $40 million rouble-linked revolving loan. That was the IFC’s fourth loan to the bank, in addition to its $10 million equity investment into RSB. The EBRD, meanwhile, issued its latest RSB loan, for $20 million, in September. RSB’s total debt from the two banks is about $100 million.
Its competitors, such as Rosbank-owned OVK or Home Credit, must be wondering what RSB did to deserve such lavish attention from the multilaterals. It’s simple ? the bank has shown an aptitude for understanding how foreign bankers think, what they like to see, how they communicate. It has shown an ability to leverage financing from abroad using these skills, to then make money through its knowledge of another group, Russian consumers.
Levin says the bank plans more visits to the international capital markets soon, probably in the third quarter. He says the bank is considering issuing a securitization of offshore credit card receivables, in a deal worth perhaps $100 million, though the bank might opt for a straight Eurobond.
Best high-yield borrower
TVN
When broadcasting company SBS said in mid-2003 that it wanted to sell its 33% minority stake in Polish TV company TVN, TVN’s parent company, ITI, knew it wanted to buy the stake. TVN’s own management also wanted to buy TVN-24, a 24-hour news channel that had been developed outside of TVN because SBS didn’t want to invest in it. With SBS out of the way, TVN wanted to bring the successful news channel back under the TVN umbrella.
TVN considered different ways of financing these two acquisitions, such as issuing equity or going to the loan market. However. Karen Burgess, its CFO, says: ?It would have been difficult to raise the necessary amount of money on the Polish loan market. As a media company, we don’t have a huge amount of assets, so we couldn’t offer much collateral against a bank loan.?
An equity issue didn’t seem right either because, Burgess says: ?If you’re in a hurry because you’d like to close a particular transaction, it’s better to take on debt, which you can pay back, rather than issue shares, at potentially unfavourable prices in an unfavourable market.?
The company was talking about financing options to a number of banks, including JPMorgan, Bear Stearns, Jefferies & Co and a boutique called Griffin Emerging Markets. Griffin was the first to suggest a high-yield bond.
A high-yield issue made sense from a number of angles. Poland was nearing EU accession, so TVN could capitalize on positive investor sentiment towards accession debt. It could definitely raise more on the high-yield market. And it could avoid the many covenants. Plus, as Robin Forrest, head of JP Morgan’s European high-yield team, says: ?The high-yield market was continually improving throughout the year.?
The bank waited until the end of the year to issue the bond, which made sense considering the improving market conditions. The $235 million 10-year bond was priced at a coupon of 9.5%, and rated B3 by Moody’s and B? by Standard & Poor’s. Forrest says: ?It would have been in double digits if we had issued earlier in the summer.?
He adds: ?We got good take-up from the high-yield community rather than from emerging-market investors. A lot of them were media-savvy, and liked the Polish market compared with the French or the German market.? Poland, despite its large population and rising GDP, has one of the lowest advertising cost per rating point levels of any country in Europe. This, says Burgess, is the result of a price war in 2001. That means there’s a lot of room for growth in advertising revenues.
Forrest adds: ?We got universally positive feedback from the roadshow. Investors liked the story, and liked the youthful, urban audience, which made the channel comparable to, say, Channel 4 in the UK.?
The bond had a call option allowing TVN to call 35% of the debt in the event of an IPO. That is looking likely this year, with CA-IB, JPMorgan and CDM Pekao mandated as advisers.
Following the bond issue, TVN successfully bought both the SBS stake and TVN-24. Ernst & Young advised on the acquisition of TVN-24, while JPMorgan advised ITI and Morgan Stanley advised SBS for the minority stake acquisition.
Best structured borrower
FHB
This could well be the best year yet for eastern European securitization. This is not saying much, because you can count the total number of international securitized deals from the region on two hands. However, the market is likely to pick up this year.
It was beginning to show life towards the end of last year, thanks to the first securitization from the CIS, a $100 million future flow securitization for Kazakhstan’s Halyk Bank; and the largest ever future flow securitization from Turkey, a $325 million deal from Akbank, the final tranche of a $1.175 billion programme.
This year, there are signs that Russian law will finally be changed, which will allow new issues from Russian Standard Bank, MDM Financial and Rosbank, all of which have made clear their desire to issue structured finance bonds when the right regulation is in place.
But the success story so far has been central European covered bond issuance. In the Czech Republic, national lottery operator Sazka issued the first ever Czech secured bond issue, and in Hungary, mortgage bank FHB launched an international mortgage-backed securities programme, which is likewise Hungary’s first ever international secured bond programme.
Sazka’s e175 million 10-year issue was launched at the beginning of May 2004, arranged by CSFB, and priced at a coupon of 7.375%. The bonds are secured on mortgages of Sazka’s real estate, including the Sazka arena in Prague where the 2004 ice hockey world championship was held.
FHB, meanwhile, has been working on setting up its MBS programme for around a year. The bank, which is the largest provider of mortgages in Hungary, already has a well-established domestic MBS programme, which has issued around e4 billion in debt so far.
However, as Sandor Pataki, head of capital markets at FHB, explains: ?The problem was that the domestic institutional market was not expanding dynamically, while the domestic mortgage market was.? If FHB was going to be able to finance that growing mortgage market, it needed to attract international debt investors.
The bank, together with adviser Dresdner Kleinwort Wasserstein, started looking at setting up an international MTN programme in early 2003. That involved talking to the ministry of finance, the central bank, and other regulatory bodies. ?It was a massive legal effort,? says Petri Kivinen, head of emerging market debt origination at DrKW. Allen & Overy were the lawyers for the programme.
In July 2003, FHB wanted to raise some money but the programme wasn’t quite ready, so DrKW repackaged some domestic MBS into a special purpose vehicle and launched a e75 million 10-year bond. Pataki admits it wasn’t exactly a jumbo issue but says: ?It was a brand new instrument, and you have to start somewhere.?
In late November, the bank began issuing from its programme. Its first issue was an e125 million 10-year deal, which was a private placement with German investors. Since then it has launched five other deals, the latest a 15-year transaction in March 2004, lead managed by Deutsche Bank. Pataki says: ?We’re starting to stretch out the maturity.?
All the deals so far have been forint-denominated, and then asset-swapped into euros for foreign investors. The bank would like to do a straight euro-denominated issue, for a minimum of e100 million, probably later this year.
Kivinen of DrKW says the programme ?has opened up an enormous funding vehicle for FHB?. The challenge now for the bank is to expand its investor base and move from private placement deals to more public offerings. Pataki says he would also like to see yields on the existing deals to be ?at least 50 basis points south? of where they are now.
The establishment of the international programme caps a very successful 12 months for FHB, which was taken public in November 2003, in the first privatization on the Budapest stock exchange since 1997. ?The issue price was Ft4,300 and the shares are now worth FT7,400,? says Pataki with pride.
Best loan borrower
Aeroflot
Aeroflot, the Russian state-owned airline, has a declared aim of improving its image abroad and becoming a serious European carrier. That’s to come but, thanks to its smart financing in the past 12 months, it is already well on its way to establishing itself as a serious European borrower.
This year, the company bought eight new Airbuses, to modernize its European fleet from five-year-old Boeing 737s. To finance this, the company raised $285 million in loan financing, utilizing export credit guarantees from three different export credit agencies.
Because Airbus involves French, British and German companies, the deal was guaranteed by Coface, Hermes and the UK Export Credits Guarantee Department. This was the first Russian lease ever to be covered by European agency guarantee.
Three banks arranged the deal ? BNP Paribas, Citigroup and WestLB. It was structured in three separate tranches, with the French bank dealing with the Coface-guaranteed tranche, WestLB arranging the Hermes-guaranteed tranche, and Citigroup arranging the UK tranche.
Why not a British bank for the British tranche? Aeroflot’s treasury team, headed by Sergei Sukovatov, has a very close relationship with Citigroup, and indeed barely does a deal without Citi’s involvement. Sukavatov says: ?There are two major airline banks in the world, two that you can see at every conference ? Citigroup and JPMorgan. At the moment, we tend to work closely with Citigroup.?
Thanks to the credit agency guarantees, Aeroflot achieved a 12-year maturity, which must be one of the longest of any loan negotiated in emerging Europe. It also managed to price the deal at Libor plus 1%, which Sukovatov thinks is ?certainly the best pricing for Aeroflot, and possibly the best pricing for any Russian corporate this year?.
The deal was relatively complex, in that it involved so many counterparties ? the credit agencies, the banks, the manufacturers and Aeroflot itself. But it was made a lot easier because all the banks and agencies were represented by one lawyer ? Norton Rose ? with White & Case representing Aeroflot.
In addition to the purchases, Aeroflot is leasing a further 10 Airbuses from GE Capital. It is financing this through a $60 million one-year loan raised by Vneshtorgbank; that bank’s Austrian subsidiary; Danau Bank; and Citigroup. The loan is secured on International Air Transport Association clearing-house cashflow. IATA is the global clearing house for airline companies.
The deal was priced at Libor plus 3%. At the borrower’s request, the banks sold the deal on to another 10 banks. Sukovatov says: ?We wanted to increase the number of western European banks with exposure to and understanding of Aeroflot.?
The lease was initially financed through a rouble-denominated bond offering. However, the company matured the debt early, in September 2003, and raised a dollar-denominated loan instead when it saw the rouble appreciating against the dollar.
To finance the company’s working capital, Aeroflot also arranged a $42 million loan secured on international ticket receivables. The loan was raised from three banks ? Citigroup, RZB and Commerzbank ? in three tranches. Usually, in such ticket-receivables deals, one bank acts as arranger and agent for the cashflow from the receivables. However, because all Aeroflot’s international ticket sales were concentrated in one IATA account in London, Aeroflot was able to structure the deal so the cashflow would go directly to the three different banks. ?Aeroflot was the arranger,? says Sukovatov. As a result, the company saved about $200,000 in arranger fees.
The company also negotiated an innovative insurance premium loan, in September 2003. Usually, Aeroflot pays an insurance premium quarterly. However, it discussed with its insurer whether it could pay the annual price up-front, and secure a discount for doing so. The insurer said it could. Standard Bank London then said it could issue a loan to Aeroflot to pay this upfront cost. Sukovatov says: ?You couldn’t find another bank which could do this deal. We were surprised it was possible. The deal definitely made sense for Aeroflot and saved us some money.?
Sukovatov says that for the rest of the year the company wants to begin borrowing on an unsecured basis. It has done this before, but only bilaterally. He says: ?We think banks are getting a good enough idea of Aeroflot that soon we can transfer all our borrowing to an unsecured basis.? It’s already in negotiation with HSBC and WestLB to begin this process.
