Russia debate: Crisis presents opportunity for Russia
Russia’s capital markets remain upbeat, despite negative forecasts from the IMF. Amid the eurozone crisis, market players see an opportunity for the country to prove itself as a developed and reliable financial centre. Bankers, investors and issuers discuss what needs to happen next.
• Russia is feeling the effects of the global financial crisis, but it is not as extreme as 2008 when the market effectively shut down completely
• Russian companies are improving corporate governance to make themselves more attractive to foreign investors
• They are spending time and effort making their international securities as attractive as possible to a wide array of international investors
• However, more needs to be done to develop the local capital markets and that will entice more international investors into the market
• Pension reform and changes to listing requirements would go a long way to achieving that goal
• The bond markets are relatively strong, with a good culture of debt repayment and a long pipeline of potential issuers
• Over the past year, ground-breaking new deals have emerged that have cemented some Russian names at the top table of issuance
• Privatization IPOs will come out in 2012 and 2013 and more Russian companies will tap into the international debt markets in coming years, but in a wider variety of currencies and structures
• Russia has a huge opportunity now to use the crisis to push through local changes and internationalize its capital markets. If it can show that its markets functioned through this crisis and that it has come out stronger, international investors will truly believe that the market has become an international one
Euromoney The IMF has cut its growth forecast for Russia and foreign capital has been leaving the country. But despite this, the mood is still upbeat in the Russian capital markets. Companies are still reporting strong numbers and everyone I speak to is very positive about the future. But even still in the short term there are clearly problems. Where are we with the markets?
Investors in the market are displaying a high level of selectivity and price sensitivity, especially now that the market is not stable on a global level. So not all the companies were well prepared to do deals.
Euromoney Igor, given that Alrosa is planning an IPO, from a CFO’s point of view how do you view your ability to access the capital markets?
Euromoney From an investor’s point of view what are the challenges facing the Russian IPO market? Are they to do with the internal culture of the market players or to do with vulnerabilities to the external crises happening in the world, or is it more to do with the structural issues facing the Russian domestic capital markets?
|“It is important that Russian companies are getting more experience. Even if the public market is closed we are seeing private transactions. We will see lots of interesting public deals when the markets come back”
Oleg Mukhamedshin, Rusal
Euromoney Jean-Pascal, Nomos recently successfully completed its IPO, and is now seen as one of the premier Russian bank stocks. What lessons did you take from the process and do you think maximizing proceeds is sensible?
Euromoney How can companies make their stocks as attractive as possible for foreign investors? Maxim, you recently undertook a conversion of preferred shares into common stock. What was the thinking behind that?
|“We are working with our consultants and auditors to improve the transparency of the company. We are also bringing the corporate governance standards of the company closer to the standards that investors are used to”
Igor Kulichik, Alrosa
IK, Alrosa We are at the beginning of the road [to our IPO]. We are talking to our major shareholders and discussing our IPO prospects. It is likely to take place at the end of 2012 or the beginning of 2013 and will likely be a mix of IPO and SPO. The Russian Federation will decide how much of the company will be privatized and depending on how much cash the company will need we will determine the amount of the deal. In the run-up to that we are doing as much as possible to maximize the value of the company. For instance, earlier this year we converted the company from a private company to a public one. Then we decided to split the stock. And then in parallel we are working with our consultants and auditors to improve the transparency of the company. We are also bringing the corporate governance standards of the company closer to the standards that investors are used to. We have already changed the composition of the board of directors. We are taking our time and trying not to repeat someone else’s mistakes. Euromoney Russian companies have a unique ability to list in many different venues around the world. Leading tech companies such as Yandex are listed on Nasdaq, many others are listed in London and now UC Rusal is listed in Hong Kong. Some are even listed in Russia! James, from your point of view how do the listing venues of Russian companies affect your investment advice?
In a few years the Hong Kong market will be the main way for domestic Chinese money to invest in foreign-listed companies. That is why it is important to list in Hong Kong. But you need to be in the market for longer before Chinese investors start buying your stock. It was a strategic decision, not a short-term one. For international institutional investors, it does not really matter if you are listed in London, New York or Hong Kong. They can buy your stock in any of those markets. We also listed in Russia in the first-ever Russian depositary receipts deal.
Euromoney Elena, how do you approach the issue of listing venue when it comes to prospective deal sizes, company sector and deal type? Do you recommend different venues for different types of deals or companies?
London is still the most popular listing location because it is the easiest and most straightforward route to get an international listing. The investors are well educated, and there are already many companies from Russia listed there. Hong Kong is strategically an important market. When you go to Hong Kong you keep all your existing investors plus you get access to the most promising Asian investor base. The results will probably be seen from a long-term perspective. Overall, listing choice should be assessed on a case-by-case basis.
Euromoney One of the ironies at the heart of this debate about internationalizing Russia’s capital markets is that before international investors embrace a new market, they want to see that its local market functions effectively and in particular that local investors are active. How important is it that the local capital markets in Russia are developed before international investors come in and invest in Russian companies?
|“Russia should be a natural place for Russian companies to list. But there are technical problems at the moment that are an obstacle. If you are a large Russian company, most probably you would like to list in both London and Moscow, or Hong Kong and Moscow”
Jacob Grapengieser, East Capital Asset Management
Euromoney Do you the think the RDR [Russian depositary receipt] structure will bring some of those foreign incorporated but Russian companies back to Russia and would you invest in those RDRs?
Euromoney This brings us to the privatization process. Much has been made of the government’s list of major companies that it is looking to sell over the next two to three years. Moving away from the actual companies involved, do you think the process of privatization can be used to further the development of the Russian capital markets or do you think companies should just focus on maximizing proceeds? Igor, as a representative of a privatizing company, what is your perspective?
When we at Alrosa started our IPO process we spoke with Micex and VTB and a number of other banks about changing this situation and we understand that this is something that companies with a big government stake can do. They are a big bulldozer that can push through these changes. They can work with the government on this. If our IPO and SPO are to take place in 2012 or 2013, we want it to take place on Micex in Moscow. If this works for us, we want to act as a locomotive that can push through this barrier that stands in the way for big and small companies looking to list in Moscow. The choice of venue is very important for us.
As for privatization, as a government-owned company we know about the debates that are going on in the government. This is quite a complicated debate: who will be on the list, how will privatization be carried out, how the government should exit the companies and whether the government should keep a block of stocks. It is not decided yet and there are many different opinions. Some want the full privatization of big companies such as Alrosa, others believe a partial privatization should be done so the government would have blocking rights. I think the decision will be made in the next weeks and months on the list of the companies to be privatized in 2012 and 2013.
If we are to follow this strategy we should not act in a hurry but should first do all the preparation work and then select the best windows to go public. The goal of privatization is not just to turn companies into public companies but also to get the best price that can contribute to the budget of the Russian Federation.
Euromoney It is clearly a very difficult time in the markets right now, but Andrey, although the debt markets might be closed at the moment, in general how are Russian companies accessing the international debt markets?
|“The market is growing for Russian companies accessing the international debt markets. Another important trend is that companies have been looking at issuing in alternative currencies, trying to diversify their investor bases and finding some arbitrage opportunities”
Andrey Solovyev, VTB Capital
AS, VTB Capital I definitely think the market is growing for Russian companies accessing the international debt markets. Before 2008 we saw quite a few second-tier financial institutions come to the market. But after 2008 we have seen more highly rated companies coming to the market. Another important trend is that companies have been looking at issuing in alternative currencies, trying to diversify their investor bases and finding some arbitrage opportunities. Russian companies have come into the Swiss market and the Asian markets: VTB has issued in Singapore dollars and in renminbis and this opened the market for other Russian companies. They were public deals fully bookbuilt. For VTB it helped that our name was well known and Asian investors had purchased our bonds in US dollars. There has also been more active participation of Russian investors in international deals. It is not rare now to see 20% or 25% of the orders in the book coming from Russian investors. It helps Russian companies get better terms, as Russian investors know the names and credits much better than foreign investors. Foreign investors are more comfortable if they can see Russian investors putting in the orders.
Otherwise Nomos has a diversified funding base and a calendar of repayment of our issues that is well distributed over time. Our strategy is never to be the prisoner of the capital markets. In good times they are there and in bad times they are shut down.
After that we began thinking about the next instrument that we would offer to investors. So we went to the sterling Eurobond market, which is unique in that you can issue up to 50 or 70 years. We saw it as an opportunity to prove to ourselves, to the regulators and to the ministries what we can do. The company proved that we are able to borrow from the debt markets on a very long-term basis. The first deal was done in March this year when the markets were in turmoil due to hostilities in Libya and the disaster in Japan. We managed to place £350 million [$542 million] at 20 years. We came back to market in June and nearly doubled the issuance to £650 million. It’s a unique transaction for Russian issuers, the Russian market and for Russian risk. In the future we plan to use the same practice to change our borrowing profile and diversify our sources of funding.
This year we raised about R30 billion in two tranches and immediately hedged it in the dollar swap market – our product, aluminium, is priced in US dollars. We got an attractive price for this four-year and five-year financing, about 5% in US dollars, which is less than it would have cost in the dollar Eurobond market.
I think it is also important to control your lender base because when you face any necessity to discuss and renegotiate the terms of your financing, you find the lender base is quite diversified and it is not easy to negotiate with. We completed our global debt refinancing and we decreased the number of our lenders from about 70 to 15 or 20. It is now much more comfortable to negotiate and discuss financing with the key relationship lenders rather than with a complicated market.
We never issued Eurobonds as we have targeted the lower-cost syndicated loan market. We recently raised $4.75 billion to refinance our debt. And the cost of our financing is about 4.5% at the moment, which is a relatively good benchmark for the Russian borrower.
Euromoney So is it still easier to go to the international syndicated loan market than the Eurobond market and is the access available for Russian companies in the loan market hindering the development of the international bond market?
|“There is a very wide dichotomy in the debt market compared with the equity market. Unfortunately Russia has a hard-earned poor reputation in the equity market but when you look at the bond market it is quite different”
James Beadle, Société Générale Private Bank
JB, Société Générale There is a very wide dichotomy in the debt market compared with the equity market. Unfortunately Russia has a hard-earned poor reputation in the equity market but when you look at the bond market it is quite different. Investors can see that in the Russian culture it is important to try to honour bonds as much as possible. Perhaps it has something to do with 1998. A lot of our global investors have a lot of interest in Russian bonds. From a diversification perspective it is very good to hear from these companies about their interest in issuing in foreign currencies. From a high-net-worth perspective, our clients also maintain a diversified exposure to currencies for their own asset allocation and so they will happily buy bonds in other currencies.
In the equity market you might see more regionalization of interest depending on which market you are listed on, but in the bond markets there is global interest to have exposure to a wide variety of currencies. It works for both the issuer and the investors.
Euromoney I know it is a very difficult time to be making any predictions, but what is your outlook for Russian activity in the international capital market over the next year?
|“The situation developing in the market actually offers good opportunities. While the international markets are closed we can use the time to develop the local markets so that when the situation improves globally Russian markets could become one of the priority markets”
Pavel Ilyachev, OJSC Russian Railways
The situation developing in the market actually offers good opportunities. While the international markets are closed we can use the time to develop the local markets so that when the situation improves globally Russian markets could become one of the priority markets for global investors. Fundamentally Russian companies look quite good. They are ready for hard periods in the economy so that when growth recovers we can be among the leaders and the first to go out and borrow from global investors.