Buy now while stocks last! That seemed to be the sales pitch in a $3 billion debut Eurobond from Russian state-owned oil firm Rosneft late last year.
Many expected a much bigger issue, especially after the order book reached $25 billion. At the front of everyones mind was an agreement, announced in October, to pay UK oil company BP $17.1 billion in cash for a 50% stake in BPs Russian venture, TNK BP.
Rosneft registered a $10 billion Eurobond programme in November. But the message in the bond roadshow was that it would not necessarily return to the bond market in 2013. "Rosneft did a great job of reassuring investors it had diverse sources of funding, and that it didnt immediately need the money," says one of the bookrunners.
Partly through curtailed supply, Rosneft priced to yield 3.15% for five-year notes and 4.2% for 10-year. This achieved an apparent aim of pricing lower than similar maturities at Gazprom. The state-owned gas firm has a lower debt-to-earnings ratio than Rosneft, and up to now has been a cornerstone issuer for regional DCM bankers.
Bankers in Russia say there would have been little point pre-raising a much bigger amount, and then sitting on the cash. After all, before Rosnefts bond, various steps still remained before the TNK BP acquisition would be completed.
But Rosneft is perhaps hoping it has merely whetted bond investors appetites. After the bond issue, in mid-December, Rosneft announced an agreement to pay BPs billionaire local partners $28 billion in cash for the other half of TNK BP. The government has publicly approved the acquisition.
Many of the 15 international banks that committed themselves to a $32.5 billion syndicated loan for Rosneft in the autumn will now be hoping the company returns the favour with new bond mandates. Barclays, Citi, JPMorgan and local firm VTB Capital coordinated the debut, alongside joint bookrunners Deutsche Bank, Bank of America Merrill Lynch, Morgan Stanley and Gazprombank.
Only $7.5 billion of the syndicated facility is a term loan. The remaining $25 billion is a bridge with staggered maturity and containing the possibility of an extension, although Euromoney understands conditions for this might not have been finalized by mid-December.
The extent to which the bridge loan must be refinanced in the Eurobond market could be mitigated by a multi-billion-dollar pre-export facility. Various reports emerged in recent weeks quoting industry insiders as saying that Rosneft is trying to agree loans backed by oil with various western commodities traders and oil firms with oil-trading units.
Rosneft has the equivalent of another $2.3 billion remaining in a domestic bond programme, although that market had been closed during the latter part of last year because of increasingly tight domestic bank liquidity.
In addition, Rosneft has consulted with Sberbank on a bilateral loan. Russias other big state banks, VTB and Gazprombank, have been cited as other potential bilateral financiers of the acquisition.
By early December, however, negotiations with Sberbank were still at an early stage. Sberbanks corporate-loan-growth expectations for 2013 of about 11% exclude any financing for the TNK BP acquisition, says Anton Karamzin, Sberbanks deputy chairman.
|Rosnefts Igor Sechin sees considerable synergy between Rosneft and TNK BP|
Rosneft has said it could raise more cash from non-core asset sales such as a minority stake in a pipeline between Kazakhstan and the Black Sea, according to Reuters. The firm has further indicated existing cash resources on Rosneft and TNK BPs balance sheets of around $15 billion.
With production of an estimated 4 million barrels a day after the merger, Rosnefts cash generation should be formidable. It will become the worlds biggest publicly traded oil firm by production, and TNK BP is renowned for its operational efficiency.
Yet Rosneft has expensive refinery upgrades to complete. Igor Sechin, Rosnefts chairman and one of Russias most powerful political figures has bold plans to develop complex oil fields in the Arctic and elsewhere. Overall, Sberbank Investment Research says Sechins strategy is "too ambitious".
In a statement in mid-December, Sechin highlighted "considerable synergy" between Rosneft and TNK BPs operations, which could save capital expenditure. But estimates for synergies are often overestimated in M&A deals.
One danger, says Julia Pribytkova, an analyst at Moodys, would be if oil prices were to fall dramatically before the bridge loan was replaced with term debt. If that happens, says Pribytkova, Rosneft will be much more vulnerable to refinancing risks, and its leverage will increase considerably.