Page 100 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
The rise of bank Eurobonds
The first bond of any kind to be issued post-crisis was by Moscow City. The first commercial bond to be issued post-crisis was from Rosneft in November 2001, which was a US$150m five-year bond with a coupon rate of 12.75%. This was followed by Gazprombank in December 2001, with a US$200m two-year bond at 9.75%.
Gazprombank took another gamble and broke the ice again in 2004, uncertain of how interna- tional capital markets would receive a Russian Eurobond. But its four-year US$300m Eurobond – technically a reopening of its US$750m Eurobond offer from October 2003 – was one-and-a-half times oversubscribed, with a low yield of 7.25%.
As many investors see Gazprom as little more than the ‘Ministry of Gas’, the company’s bank enjoys a sound standing with investors but it also boosted the confidence of other banks and companies. Russia-watchers were following the issue closely, afraid that the Kremlin’s political bludgeoning of one-time portfolio investors’ darling oil company Yukos had permanently dented Russia’s investment climate.
Despite the arrest of Yukos owner Mikhail Khodorkovsky, the enthusiasm for Gazprombank’s bond showed investors were taking President Putin at his word and saw the whole fracas as a one- off political fight, rather than the beginning of the end of liberal reform.
Alfa Bank was the first of the commercial banks to issue a Eurobond in November 2002, a three- year US$175m bond with a 10.75% yield. Alfa’s issue was shortly followed by MDM’s three-year US$125m bond, also at 10.75%.
With yields over 10%, Eurobonds are not a very effective source of capital for Russian banks, which last year could raise funds more cheaply from foreign trade credit agencies or on the domestic market. But all the banks were interested in building up a credit history and bringing down the cost of borrowing in anticipation of Russia's strong economic growth and a rising demand for cheaper, longer-term money.
Even retail giant Sberbank could not resist and, having ignored the bond market for most of the last decade, placed a three-year US$1bn Eurobond at Libor plus 1.75% – by far the largest and cheapest Russian bank Eurobond ever issued.
By 2005, most of the leading 20 banks had issued Eurobonds, which have now become a major source of financing for consumer-oriented banks such as Russian Standard (Russky Standart) and Rosbank, both of which have large retail portfolios.
Municipal and other bonds
Russian regions were banned from selling bonds after the 1998 crisis unless they paid off previous ones. Moscow City has become a monster in this business (as it was during the final days of Imperia Russia) and is the de facto benchmark.
In 2006, the sub-federal sector of the local bond market saw its lowest growth in the last four years. The total volume of traded bonds increased US$1.06bn in 2006, compared with US$1.16bn in 2005 and more than US$1.5bn in the prior two years.
The slowdown was due to the falling appetite for debt by the Moscow City government, which has been the biggest issuer of debt in recent years and accounted for 37% of the whole sub-federal bond market as of the start of 2007. Like the federal government, the city is flush with cash as it achieved a strong budget surplus and good liquidity in 2006.
Hanging on the wall of the Moscow City Debt Committee offices is the bond certificate from the city’s first ever international offering. In 1908, the city fathers raised £188,956 in London with a 5% note, to pay for a new tram system, improvements to the city’s water supply and money to build 10 new schools. Just under 100 years later, the city government issued another bond, this time Russia’s biggest and longest regional note, for much the same purposes.
Moscow City bonds are by far the strongest and most liquid of Russia’s regional bonds and with over 50 issues under its belt since 1992 its fixed income paper has established such a strong reputation that its notes have become a benchmark for other regional issues.
93