IMF World Bank 2006: ABS growt
After a sluggish start to 2006 Russian Eurobond supply picked up impressively with 30 corporate and bank deals raising over US$8.5bn. Issuance slowed to a trickle during the May/June EM correction and traditional summer lull but supply is poised to take off again with loan market indigestion boosting bond activity while the rapidly expanding securitisation market will take a growing slice of the issuance cake. John Weavers reports.
Banks will continue to dominate the Russian issuance space as cash rich commodity-based companies simply do not need to come to the bond market except to maintain a profile. Banks on the other hand require substantial external financing to fund the sector's extraordinary expansion.
Another reason to expect an upturn in bank supply is the loan market's waning appetite for Russian financial institution paper. Lenders are having a problem with credit limits, which credit committees are refusing to increase as spreads tighten to extremely low levels.
For example, Sberbank's recent US$1bn syndicated loan was priced at less than 30bp over Libor, much to the annoyance of Western banks obliged to participate who are putting pressure on Russian financials to switch to bonds for funding.
Of the three big Eurobond issuers of 2005, Sberbank, VTB and Russian Standard Bank have been active again this year while other regular visitors, Gazprombank, Bank of Moscow, Alfa, and MDM Bank, also returned to the market alongside a number of debutants including BIN Bank, Nomos Bank and Absolut Bank.
"A big backlog built up through May and June and several origination desks are preparing to announce up to half a dozen mandates each," said one manager, who expects a scramble to get deals done during September and October.
As a result Russian bank supply should at least match 2005's total when 22 banks printed 41 deals totalling US$9.7bn, a huge increase from US$3.29bn in 2004 and US$1.69bn in 2003.
With so many Russian banks coming to the market all at once there is clearly going to be something of an indigestion problem that will put upward pressure on yields, particularly for second-tier banks.
"You may need to offer a bit of a premium in the market," the syndication manager stressed. This was clearly the case at the few summer offerings where guidance was widened or additional comfort provided via put options etc. IIB and MDM Bank launched with 9.50% and 9.75% coupons last month for their US$100m three put 18-month and US$200m five-year issues respectively.
On the demand side a lot will depend on the extent to which investors who had their fingers burnt during the May sell-off are willing return to the market. Hedge funds are expected to fully participate again, especially for high beta, longer dated issues that offer a bit of yield though several Asian private bank investors may continue to lick their wounds from the sidelines.
Booming Eurobond supply means cash-rich investors will have plenty of alternatives to park their money. "Quasi-sovereigns are bound to receive a favourable reception given the continued absence of sovereign supply," said Commerzbank analyst Paul Timmons.
Some Single B rated credits including Moscow Bank for Reconstruction & Development (MBRD) have shown a preference for the less regulated CLN market where due diligence is lighter and ratings are not required. The problem here is that this market is closed to several important investors and so large books can be hard to come by.
The Central Bank of Russia's (CBR) cautious approach to subordinated debt has been cited as an obstacle to issuance in this area. In contrast to the Kazakhstan authorities that have been eager to adopt European and global banking norms, CBR has been reluctant to approve additional instruments/levels to international bonds with the 2004 mini-banking crisis fresh in the memory.
This was underlined last December when Russian Standard Bank delayed its US$200m 10-year, non-call five Lower Tier II subordinated Eurobond after the CBR recommended it alter the step-up on the call so the penalty would be 150bp rather than 150%.
Upper Tier II or Tier I transactions are still off-limits despite repeated representations by local and Western banks. Approval looks far from imminent with no indication given when even upper Tier II deals will be allowed.
However, "If this didn't prevent supply last year, why should it do so now?" a London-based EEMEA syndication manager argued. "It is not a choice between Upper Tier I or Tier I and no issuance. These banks are willing and very able to raise funds from the international bond market to meet their expanding financing needs," he added.
Russian credits are following their Brazilian and Turkish counterparts into emerging markets securitisations where they can secure ratings above senior international bonds and sovereign ceilings.
While Gazprom and the railways have offered the corporate side of securitisation, it is Russia's banks that are now lining up to follow their vanilla bond issuance with something rather more exotic.
Securitisations in Russia have provided US$1bn of bond business so far in 2006, and the likely issuance for the rest of the year should at least double this amount. Mainly an onshore business, the expansion in the number of deals has attracted regular EM bankers and investors as well as their securitisation cohorts to buy into the business.
The pipeline is building rapidly. Russian Standard Bank has mandated HVB and JPMorgan as joint arrangers for an inaugural US$400m equivalent Reg S only Eurobond auto loan securitisation. The roadshow, which is due to take place at the end of September/early October, will be focused on European investors and will probably be denominated in euros, depending on market conditions.
Russian Standard Bank's unsecured rating is Ba2, though the securitisation is likely to be rated above the Russian sovereign (BBB/Baa2), according to the leads. The Russian bank has also mandated ABN AMRO and HVB as joint bookrunners for a probable five-year US dollar or (more likely) euro-denominated Eurobond of around US$400m equivalent backed by credit card receivables that will be launched after the auto loan securitisation.
Elsewhere, Dresdner Kleinwort and Merrill Lynch have been mandated MDM Bank's US$300m DPR and US$400m auto sector offerings.
Many similar deals are certain to follow, according to origination desks. The benefits to issuers are obvious as they are able to optimise their balance sheets, boost capital and secure healthy margins between the high fees for domestic mortgage and credit card payments (around 20% for the latter) and cheap international funding for securitised bonds that have higher ratings than plain vanilla bonds.
Securitisation also provides a way of diversifying an EM credit's investor base as non-traditional EM accounts, notably ABS and MBS dedicated investors, gain exposure to the asset class. The mix between EM and crossover accounts will depend on deal specifics, though as a rule of thumb US investors tend to be more EM specialists while in Europe structured investors are bigger players.
Investors are keen to secure access to a high quality pool of assets that deliver diversity (exposure to 2,000 individual mortgage holders owing US$100,000 each is clearly preferable to a single credit owing US$200m) and at a good yield.
Country-specific factors need to be considered. Compared with Turkey and Brazil, Russian companies do not typically generate huge offshore cashflows, aside from state-owned giants such as Gazprom that are obviously extremely liquid and already sovereign grade. Apart from its huge commodity exports, Russia remains largely a self-contained economy and thus securitisation opportunities are generally restricted to domestic receivables, domestically sold in the international market rather than future flows.
Furthermore, Russian laws for selling future receivables are considered far from satisfactory, notably by the rating agencies, so this limits rating arbitrage to just one notch for such deals. There is also no history to assess interest rate risk for long-dated fixed-rate structures.
Making the domestic asset deal work is where the deal flow will come from, said one ABS origination manager. There are political risks to weigh and all these factors make Russian securitisations harder to finalise and execute. "The technology to transfer local currency receivables from emerging markets into hard currency bonds is very new," he stressed.
Nevertheless, with up to a dozen deals expected in the markets over the next 18 months the manager predicts Russian securitisations totalling about US$4bn in 2007 – similar to the whole of the non-Japanese Asian securitisation market in 2005. This will be dominated by domestic cashflow deals sold in international markets, he believes, like the Russian Standard Bank three-tranche euro securitisation in March that totalled about €300m.
So far monoline/credit wrapping companies have avoided the Russian market as they are uncomfortable with the geo-political risk profile. Deals so far have been successful without wrapping and it is debatable that this security would add anything to deals except higher ratings, ABS desks suggest.