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Sunday, 22 October 2017

IMF/World Bank 2007: Russia’s cross-over boost

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Growing interest from high grade and cross-over investors in the EEMEA space, particularly for Russian quasi-sovereigns, is an ongoing process that will underpin demand for the better regarded names when the primary market reopens. John Weavers reports.

While the EM pipeline was firmly closed during the global credit crunch, the longer term outlook for the asset class is relatively healthy, supported by a growing army of cross-over investors – led by US pension funds – who will continue to expand their presence in the EM space.

In the absence of new government paper, Russian quasi-sovereign supply has enjoyed particularly broad demand of late with Gazprom's second deal of the 2007 emphasising the upturn in interest from outside the traditional EM world. The A3/BBB rated gas giant attracted stunning books of €2bn and £1.75bn for its €700m October 2014 and £550m October 2013 issues launched in May, little of which came from dedicated EM accounts. Such huge demand enabled both tranches to price at the tight end of revised guidance at 79bp over mid swaps and 115bp over Gilts respectively.

Paul Johnson, head of sterling syndicate at joint bookrunner ABN AMRO, stressed that Gazprom's sterling debut provided the gas giant with a new investor base and gave sterling investors access to a name they had not bought before. "The order book resembled that of a Single A domestic corporate issuer, dominated by dedicated UK money," he said. The sterling bond, which was swapped into US dollars as an intrinsic part of the deal, provided an opportunity to beat the dollar curve. Johnson believes the success of the deal should encourage other Russian benchmark names to look at the sterling market as an attractive proposition.

"Gazprom is pushing away from being an EM name and more towards being a high-grade name," added Nick Darrant, director of EM syndicate at ABN AMRO, while Pierre Lebel, head of corporate bond syndicate at euro bookrunner SG CIB, concurred and lauded the euro deal as a great success. The decision to roadshow in Paris and Milan reaped rewards, he said, as French and Italian investors were allocated an impressive 16% and 9% of the euro piece, respectively.

"Typically there is little EM demand out of France but Gazprom can no longer be considered an EM name, with the majority of attendees certainly not dedicated EM accounts. There was a similarly strong response in Milan where there was standing room only at the investor meetings," Lebel said.

An EM origination manager away from the deal was not surprised by the scale of demand for the sterling tranche. "UK investors have been crying out for non-standard issues and in particular EM credits with good ratings." This was only the second sterling issue from Russia, following the VTB (A2/BBB+) £300m three-year that was launched in March when UK asset managers dominated the book.

Other Russian quasi sovereigns fall within the cross over radar with Transneft (A2/BBB+) even managing to price February's debut US$1.3bn seven-year Reg S 144a Eurobond in line with the sovereign curve at 55bp over midswaps, equivalent to 98.8bp over US Treasuries with US asset managers at the fore. Transneft was unable to repeat the feat for its second visit in June, however, when a dual-tranche five-year Reg S/144a transaction came in 20bp over sovereign CDS.

The credit crunch has created an even more tempting pick up for non-dedicated EM names. Gazprom launched a US$1.25bn 30-year Reg S/144a Eurobond during a brief window of opportunity on August 8 at an attractive 225bp over Treasuries. US investors took 69% of that bond that was printed on the fifth-busiest day ever in the US dollar market in volume terms with 15 deals printed, 14 of which were high-grade US names. "Gazprom was the exception, which is testament to the high regard the company is held in by US investors," Darrant stressed.

Similarly, broad-based demand will underpin other Russian state-owned entities including Sberbank, VTB, RAB and Gazprombank, though pricing must be realistic as the eight banks involved in the inaugural Rosneft deal can testify. While Gazprom has shown itself willing to pay up to secure its financing needs oil giant Rosneft (Baa1/BB+) postponed July's debut transaction of up to US$5bn as management demands to price at or inside the Gazprom curve proved unrealistic. Syndication managers argued that pricing 10bp back from Gazprom was required to get the deal away but Rosneft stood firm and this vanity has proved extremely costly given the surge in EM yields since mid-July.

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