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09 February 2012 15:06

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Russia returns to loans as macro environment takes positive turn

Anonymous. Euroweek (Aug 6, 2010).

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Note: After a new year false dawn, Russia's loan market is picking up momentum again despite structure, funding and credit challenges. Several sectors have produced a flurry of RFPs lately, while positive responses to the biggest new deals including TNK-BP and Lukoil underscore lenders' strong appetite. But will the excesses of the pre-crisis era be avoided this time round, as bankers claim? Paul Wallace reports. The syndicated loan market was an inevitable victim as Russia's economy suffered throughout 2009. Volumes crashed to just $8.6bn, according to Dealogic. This was a fraction of the $61bn of supply in 2007 and $49bn in 2008. Several of Russia's biggest companies, which became highly leveraged during their acquisition binges in the run-up to the financial crisis, were forced to restructure their debt. The metals and mining sector , which, along with oil and gas, provides the bulk of loan supply from Russia , was hit particularly hard. Rusal, the aluminium group controlled by Oleg Deripaska, cast the biggest shadow over Russia's capital markets when it defaulted on $17bn of bank debt and began long and arduous restructuring talks with around 70 lenders. As a result, the market shut to all but the highest quality credits, such as Gazprom-Neft, Lukoil and TNK-BP. Each of these ranks among the five biggest oil producers in the country. Even for these giants raising money was not easy. Despite being a subsidiary of state owned Gazprom and paying a hefty margin of 500bp, Gazprom-Neft found liquidity tight as it tried to issue a three year unsecured deal. It eventually signed a $500m facility with a club of five banks. "Russia's loan market never fully closed in 2009," says Charles Griffiths, head of European origination at Bank of Tokyo-Mitsubishi UFJ in London. "But it came pretty close to it. Gazprom-Neft's deal typified that. It was a struggle." By the end of 2009, however, lenders' sentiment towards Russia had improved thanks to signs of a global economic recovery and rising commodity prices. This was reflected in the strong uptake for deals from Bank of Moscow, state development bank Vnesheconombank and Tatneft. The latter, Russia's sixth biggest oil group, was even able to raise $364m of five year debt as part of a $1.5bn pre-exporting financing (PXF) loan signed in November. Only a few months before, many loans bankers were dismissing the idea of such a long tenor for a Russian borrower.

Capex cut Despite the renewed optimism , helped by Rusal completing its restructuring in December ,the first half of 2010 saw no immediate recovery. A new $2bn Tatneft PXF was the only corporate deal, while Promsvyazbank (PSB) was the only financial institution to raise money. International banks were keen to lend. They faced a lack of supply from other emerging markets across eastern Europe, the Middle East and Africa. But much of the activity that drives borrowing, such as M&A and capital expenditure, was cut back as Russian companies looked to deleverage and repair their balance sheets. "Financing follows corporate activity, not the other way round," said Roland Boehm, global head of DCM loans at Commerzbank in Frankfurt. "Banks haven't avoided Russia as such. Rather, clients have been consolidating their positions and building up their cash reserves. This is part of a broader trend we have seen in Western Europe as well as in Russia. We've seen far fewer requests for working capital and, obviously, M&A funding." The lack of investment by Russian borrowers since 2008 has been particularly apparent in the commodities sector. "It's quite notable that Tatneft has been just about the only oil and gas company in the past two years increasing its capex," said Graham Lofts, head of international loan origination at Commerzbank. "Others have been paying back loans." Moreover, Russian borrowers were able to turn to their local banks when funding was needed. In 2009 the Russian government boosted the big state owned institutions' liquidity, urging them to continue lending to support the flagging economy. "International banks largely withdrew from the Russian loan market in 2009," said Griffiths. "However, the Russian government and state owned banks provided the local market with ample liquidity. Rouble and dollar funding was there, albeit at a price. A lot of borrowers thus didn't feel the need to go outside the country to raise debt." Back to life In the last month, however, Russia has made a clear comeback. Loans activity has dwarfed that in all other EMEA emerging markets. Banks have received a deluge of requests for proposals from would be borrowers. The turnaround has not been confined to commodities groups either. Financial institutions and retailers are also seeking new borrowing. "Russia's really come alive in the last few weeks," said David Pepper, managing director of CEEMEA syndicate at WestLB, in London. "There have been plenty of RFPs and while most transactions are in their early stages these deals will happen." The market seems unlikely to slow before the end of the year, bankers judge. "The second half of 2010 will be much busier than the first," said Griffiths. "At the moment, loan volumes in Russia may be growing faster than elsewhere in Europe. There's been starvation for over a year. But it's catching up now." Much of the renewed activity is a result of Russia's economy stabilising thanks to oil prices recovering and capital outflows slowing. Last year GDP fell 7.9%. But the International Monetary Fund expects growth of 4.3% in 2010, it said on Monday. Russian borrowers are again willing to increase capex now that last year's deleveraging has strengthened their balance sheets. "There's a lot of investment that needs to be done," said

Boehm. "The bank market will be a big part of that. And, once there's more clarity globally, Russian companies will look at M&A again." Another factor is upcoming maturities. "There's a significant refinancing pipeline in 20112012 and it is against this background that perhaps some borrowers are seeking first mover advantage and getting their refis done as early as possible," said Pepper. International lenders' hunger for Russian assets was clear from the few deals that emerged in the first seven months of 2010. Tatneft raised $3.1bn of commitments from 16 banks on its way to signing a $2bn three, five and seven year pre-export loan in June. "That was a far better result than most people expected," said a loans banker who focuses on eastern Europe. "In the first quarter, when the deal came to market, it was still not clear that they could borrow beyond three years in the syndicated loan market. But, in the end, 60% of Tatneft's loan was five or seven year money." Gazprom-Neft also found itself highly popular when it launched the senior phase of a $1bn five year PXF in June. The response enabled the borrower, rated Baa3/BBB- and considered one of Russia's strongest, to reverse flex the margin from 240bp to 210bp. And it still managed to increase the deal, which was launched in general syndication this week (see separate story), to $1.35bn. Retail and dairy too Other sectors have attracted healthy demand too. Shortly after Promsvyazbank issued its $150m one-year deal in June, mid-tier lender Trancapitalbank signed a $104m facility. One of the clearest signs of the market's recovery has been the return of unsecured facilities for commodities groups. TNK-BP, Russia's third biggest oil producer, recently sent out RFPs for a $750m three-year unsecured loan. Bankers expect Lukoil, the country's second-ranked producer, to sign a one-year facility of about $1.5bn next week to fund a $3.4bn buyback of its shares from ConcoPhillips (see separate story). Unsecured loans to Russian commodities credits have been very rare in the past 18 months. Lenders have preferred the protection of PXFs, which are secured against export contracts. But the response to the two new deals suggests unsecured lending is only going to increase in the coming months. Lukoil has managed to put its facility together in a matter of weeks , a rapid turnaround for an emerging market loan , and has only had to approach six banks. TNK-BP got such a strong initial response that it increased its request to $2bn this week and is still likely to obtain a margin under 200bp, well inside Gazprom-Neft's secured facility (see separate Lukoil story). Metals and mining companies are also making a comeback, having been absent since 2008. Steel and coal company Mechel made the first move, sending banks invitations in May for a $2.1bn three and five year secured deal, which will refinance existing debt. The loan is still some way off signing and has not received a particularly high uptake so far, according to banks. But the company's return less than a year after it was forced to restructure $2.6bn of bank debt testifies to how much sentiment towards Russia has improved, bankers say. Several private sector banks are seeking syndicated loans. These include MDM Bank, TransCreditBank, Nomos Bank, Credit Bank of Moscow and Locko Bank. Declining bad

loans across the Russian economy has improved the sector's outlook since January and makes lenders likely to welcome them. They do not expect state-owned banks to be very active over the rest of the year, however. Gazprombank is close to obtaining a three year loan of up to $500m. But most of the others will probably look to the Eurobond market, where they are in high demand. Only last week Sberbank issued a $500m five year tap, while Gazprombank issued a four year bond of the same size. "The big state owned banks are liquid," said BTMU's Griffiths. "The only thing they're interested in is investor diversification. They'll probably issue more bonds than loans as a result." Activity outside the commodities and FIG sectors has also increased. X5, the country's largest supermarket group, sent out a $700m three year RFP last month. 10 banks have already committed, according to sources. Dairy and fruit juices company Wimm-Bill-Dann is likely to send RFPs imminently for a refinancing deal that ING will co-ordinate. Treading carefully But the market still faces several obstacles to full recovery. The main one is that international banks are still treading carefully. Most prefer conservatively structured deals, such as PXFs ,especially for long term debt. The growth of unsecured supply cannot be taken for granted. "Banks aren't particularly receptive to lending beyond three years on an unsecured basis," said Commerzbank's Lofts. Some bankers view the use of PXF structures as one of the main reasons for the popularity of Russian commodities deals this year. "In western Europe, most five year lending is unsecured," said Boehm. "But it's largely undrawn debt. That Russian companies have been able to obtain so much drawn five year debt is a compliment to PXF structures." The retail bid for Russian assets is also untested so far this year. Most companies have put their deals together as tiered clubs with the larger loans houses. Gazprom-Neft is the first borrower to launch a big deal into general syndication. Bankers hope it will pick up many commitments. But most admit retail demand is volatile. This must change if smaller borrowers, who lack the blue chips' relationship clout, are to have access to the market. There are also concerns about banks' high costs of funding, particularly in dollars. Russian companies, especially the commodity exporters, are reluctant to borrow anything but the US currency, in which their revenues are denominated. But most of Russia's biggest loan houses are European players. Companies could start issuing dual tranche euro and dollar facilities if dollar funding remains costly, Boehm said. Moreover, retail investors especially may become warier of dollar commitments if Russian margins continue to tighten. Gazprom-Neft's 30bp reverse flex upset some bankers, who saw it as evidence of borrowers starting to become too aggressive. They expect pricing on deals such as TNK-BP and Lukoil to be even tighter. "Once Russian credits start paying margins under 200bp, the risk premium over western Europe isn't that great," said Griffiths. "Even in the pre credit crunch days there was a risk premium for Russia , it just wasn't as large as we saw in 2009, and is once again shrinking."

Some borrowers are still too weak to tap the market, despite Russia's robust economic recovery. The metals and mining sector, in particular, is in a precarious position after many of its companies had to restructure last year. "It's a bit early to say the market is fully open for metals and mining groups," said Griffiths. But good results for Mechel and coal miner Suek, which is putting together a $700m five year PXF, should lead to peers raising loans. "They'll be watching Mechel's facility very carefully," said Lofts. "If it goes well, other borrowers will come out on its tails."

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Title Author Publication title Publication year Publication date Year Publisher Publisher Place of publication Country of publication Journal subject ISSN Source type Language of publication Document type ProQuest document ID Document URL Copyright Last updated Database Russia returns to loans as macro environment takes positive turn Anonymous Euroweek 2010 Aug 6, 2010 2010 London Euromoney Trading Limited London United Kingdom Business And Economics 09527036 Trade Journals English News 750349203 http://search.proquest.com/docview/750349203?accountid=12253 ( (c) Euromoney Institutional Investor PLC Aug 2010) 2010-09-13 2 databases -ABI/INFORM Global -ABI/INFORM Trade&Industry

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