Central and Eastern European financial markets have benefited from the combination of accession-driven convergence towards global markets and a host of successful structural reform programmes in the major and second-tier countries of the former Eastern bloc.
The global search for yield has driven mainstream European hedge funds and real money investors to look East, which has led to consistent asset price inflation and yield compression as price anomalies are arbitraged out. Political risk factors are seen broadly as being de minimis, benefiting equity, bond and currency markets.
As yet, primary capital market activity from the region has not kept pace with investors’ interest levels, and there remains a solid bid for the right name at the right price, whether in debt or equity. One of the issues here is the fact that capital requirements remain relatively slight, and there is a dearth of companies of sufficient stature to require international investor patronage in size.
Many of the region’s governments are able to fund domestically through their own Treasury markets, and have therefore not provided solid and liquid benchmarks across the maturity spectrum. Meanwhile corporate bonds from the region remain noteworthy events, given their paucity.
Securitisation has finally made its way to Eastern Europe and Russia in a meaningful way, and this remains an instrument with huge potential. Much of the new-issue activity in the debt market of late has been ABS or MBS.
On the ECM side, activity has picked up in the past year or so, and origination professionals have been successful in putting together a decent pipeline of deals from throughout the region.
Russia is the principal focus of attention, of investors, underwriters and corporate finance professionals. There is now healthy appetite for rouble equity and fixed-income assets from the more adventurous buyside accounts, while the Russian ECM pipeline is impressive. The Rosneft IPO, due at the end of the second quarter and sized at up to US$10bn, is not just the centrepiece of the regional deal roster, but also front of mind for the entire international ECM community.
On the lending front, international banks have stampeded into Russia over the last two years to pick up what used to be hefty margins over Libor for short-term paper. But margins have shrunk dramatically, tenors have been pushed out with abandon, and covenants have fallen away as the desire to put assets to work in an economy that has benefited hugely from the global rise in commodity prices has created insatiable appetite.
But even by the standards of the loan market, Russia now looks overbought, and despite its investment-grade ratings, this remains a market that has always had a tendency towards event risk. In essence though, this region has long since passed the stage of being seen as exotic, or only for alternative or dedicated funds, and this IFR Special Report provides an update on the latest steps in the process to build durable economies with stable growth.