Until recently the trend of international bond issuance from Russia has largely fallen into two camps: banks and resource companies from the oil/gas and metals sectors. And most transactions have been plain vanilla. So when Gallery Media, Russias second-largest outdoor advertising firm, came to market in June 2006 with a $175 million, 10.125% seven-year high-yield offering via Citigroup it broke the mould in more ways than one. First and foremost, the company effectively amounts to an option on the consumer boom in Russia, which has resulted in the country becoming one of the worlds most vibrant and profitable retailing markets. As a result there is fierce competition for the hearts and minds and wallets of Russian shoppers, with the fight to secure market share and establish brand loyalty in a thriving environment resulting in a boom in outdoor advertising, to Gallerys obvious benefit.
Second, by taking that high-yield route, Gallery established a trend that bankers hope will be emulated by mid-market corporates across all industry sectors in the course of the next couple of years.
According to Albert May, head of corporate finance for central and eastern Europe, the Middle East and Africa at Citigroup in London, high-yield bond issuance will open up the international debt markets to a new pool of Russian issuers.
May says that smaller Russian companies have effectively been excluded from the Eurobond markets because of a combination of complicated credit stories, short financial track records, a lack of international-standard accounts and weak credit ratings. As a result they have hitherto usually raised international debt through credit-linked notes.
Although CLNs offer the advantages of a short deal-execution timetable and limited financial disclosure requirements, they are essentially a small-scale, short-term financial fix the maximum issue size is $100 million and average tenor is one to three years. This makes them unsuitable for corporates looking to finance large merger and acquisition projects or long-term capital expenditure programmes.
Additionally, the narrow universe of CLN investors international hedge funds and domestic banks means that on a cost-duration basis CLNs are an expensive form of funding.
By contrast, says May, high-yield bonds offer Russian issuers longer-term funding typically seven to 10 years through an instrument with less restrictive covenants than bank debt and wider appeal to investors high-yield specialists, generalist emerging market buyers and hedge funds thus making them more cost-effective.
Bankers caution, though, that although there will undoubtedly be an increase in high-yield issuance from Russia, it will occur in tandem with a rise in volumes of credit-linked, asset-backed as well as traditional Eurobond offerings.