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Friday, 24 November 2017

Emerging EMEA Bond

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The bear roars again: Russia’s offering at the end of the first quarter was the most eagerly awaited deal in EEMEA, especially after its last transaction in 2010 left a sour taste in investors’ mouths. This time, investors were pleasantly surprised by both the price and structure. The deal wins IFR’s Emerging EMEA Bond of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

In a year when the number of CEEMEA deals broke the 200 mark (if each tranche is considered as a separate transaction), it’s no easy task to judge the best, especially as the second half of 2012 witnessed a number of issuances that set a new benchmark one way or another, spurred by the ECB’s Outright Monetary Transactions programme.

There were some dominant themes too, with bank capital transactions by VTB, Gazprombank and Abu Dhabi Islamic Bank pushing structural boundaries. In the corporate sector, the high-yield market saw some standout deals from commodity firms in particular, while higher up the credit spectrum, Turkish brewer Efes even managed to price inside the sovereign’s curve.

But the deal of the year goes to Russia’s US$7bn triple tranche bond, a trade that priced at the end of the first quarter when issuance conditions were trickier, albeit after the ECB’s long-term refinancing operation had lifted sentiment from the depths of the previous year.

It is easy to forget just how much was riding on Russia executing a great deal. In 2010, when Russia returned to the international bond markets after an absence of more than a decade, it should have walked the deal of the year award. Instead, the transaction flopped as investors balked at the way Russia bulldozed its way into the market.

Russia could not afford to make the same mistake again and, luckily, it didn’t. Taking advantage of limited supply from the CEEMEA region at the time, the transaction garnered a remarkable US$24.1bn order book from more than 600 accounts as the sovereign (Baa1/BBB/BBB) proved that it had learnt its lesson. It was arguably the first emerging EMEA deal (along with a trade from Saudi Electricity that priced the same week and also generated a huge book) to highlight the liquidity theme that has dominated the region’s bond market ever since.

But it was not just the overall size or level of demand that stood out. The deal was divided into five-year, 10-year and 30-year tranches, and it was the sovereign’s decision to include the long piece that paid off as it became the biggest bond issued by an emerging markets sovereign at that tenor. Remarkably, the 30-year tranche was bigger than the other two shorter-dated notes.

The 5.625% US$3bn bond saw US$11.6bn of orders from 430 accounts, with US real-money managers desperate for long-duration bonds acting as the driving force.

“Russia is the one major country without a 30-year bond and they finally accepted the need to change,” said Helene Williamson, head of emerging markets debt at First State Investment.

While the US$2bn 3.25% 2017s and the US$2bn 4.5% 2022s were successful notes in their own right, it was clear from the outset that it was the 30-year tranche that had investors salivating.

Pricing, too, was fairer than many investors had expected. “Last time they put out their bonds according to their own rules and regulations, irrespective of investor concerns. This time guidance was manageable, though not cheap,” said one fund manager.

Based on initial guidance, the new-issue premium for the five-year bond was about 35bp and for the 10-year issue it was 20bp–25bp on a mid-swaps basis. Both notes were subsequently tightened by 5bp, while the 30-year tranche was tightened by 15bp from its initial level.

All three tranches have performed incredibly well since they were printed, with the 2042 note trading at a bid offer of 121.124 in mid-November, compared with a reoffer price of 97.553.

Twenty-two banks pitched for the transaction, including virtually every leading international firm and the top domestic houses. The government chose BNP Paribas, Citigroup (the only survivor from the 2010 deal), Deutsche Bank, Sberbank and VTB Capital.

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