Page 101 - IFR Opportunities in Russian capital markets

CHAPTER04
ifrintelligence reports/Opportunities in: Russian Capital Markets
Broadening the borrowing base
The 1998 crisis briefly interrupted the flow of bonds, but the city returned to the market cap in hand in 2000 and concentrated on rebuilding its reputation, and the city's bonds enjoy the same rating as sovereign bonds.
More than 30 regions have been given permission by the Ministry of Finance to issue bonds, but only a dozen have issued paper; Moscow alone accounts for more than half the outstanding volume of regional bonds.
Having built up a lot of experience, the city organises much of its own issue and does not bring in banks as underwriters, instead relying on an informal ‘underwriters club’ of bankers which has grown from four members in 2000 to 23 today.
The City of Moscow does not plan any further bond placements in 2007 as the budget surplus is expected to continue. This deprives the sub-sovereign market of its benchmark bond and will also reduce the liquidity of this section of the market.
In the meantime, Moscow is trying to support interest in its bonds, proposing to exchange short- term issues with low liquidity (Series 31, 42, 40, 43, 29, 36) for more liquid bonds with longer durations (Series 47, 38, 39, 44).
However, as the Russian growth story is increasingly moving into the regions, analysts are expecting other regions to step up to the plate and borrow on the sub-federal market, going part of the way to replacing Moscow City in the market.
During 2006, many of the key rated sub-federal issuers received credit rating upgrades and are expected to take advantage of the falling cost of capital this implies for their bond issues. Among the key regions to receive upgrades were: Bashkortostan, Irkutsk region, Krasnoyarsky Krai, Komi Republic, St. Petersburg, Sverdlovsk region, Tatarstan, HMAO, and YANAO.
Others were assigned ratings for the first time and will form a second wave of bond issues in the medium term, including: Karelia, Kirov region, Nizhniy Novgorod region, and Ryazan region.
Other debt instruments
As the sovereign and corporate bond markets develop, Russian banks are beginning to roll out more sophisticated products to take better advantage of the growing demand for debt.
Credit-linked notes
Russia has over 30,000 registered legal entities, but the problem with the Eurobond market, and to a lesser extent the domestic corporate bond market, is that it is accessible to a relatively small universe of larger companies.
In about 2005 the first CLNs appeared – short-term, high-yielding paper that was sold as a speculative investment to high net worth individuals in the first pass at the market.
Many companies are using CLNs to provide short-term financing for expansion or as working capital, but they are also seen as a short cut to building up a credit reputation that will make issuing corporate rubles easier and cheaper to organise.
Veksels
The so-called veksel promissory notes are still actively traded on the secondary debt market, but the volumes are shrinking as companies move over to more recognisable bonds.
Veksels are unregulated promissory notes (from the German word wechsel, or trade) that were heavily used by companies in the 1990s, as everyone was strapped for cash. The absence of a functioning payment or settlement system meant most of the economic activity was done in terms of barter or by using promissory notes in what academics Barry Ickes and Clifford Gaddy dubbed the "virtual economy."
Gazprom's veksels were the gold standard in this market and made up about one-third of the veksels in circulation as companies actively bought and sold these notes to cover their obligations.
However, veksels are now a dying breed after Gazprom decided to stop offering the notes in 2004 as part of reorganising its debt and moving from short to long-term financing.
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