Russian market leaps back to life

Fears that political risk would preclude Russian borrowers from accessing the bond market were dispelled last week when Sberbank and VEB each priced a US dollar trade, re-opening the market for the country’s leading borrowers.

The US$1.5bn five and 10-year issue from Sberbank on Tuesday was the first Russian transaction since development bank VEB pulled its deal in December following protests against parliamentary elections.

But VEB (Baa1/BBB/BBB) proved that investors did not hold a grudge by resurrecting its five-year trade on Thursday, raising US$750m at 5.375%, up from an initial level of the 5.50% area. The initial guidance was tighter than the 5.625% area announced for the December trade – a clear demonstration of its market access.

Sberbank, whose senior unsecured debt is rated A3/BBB (Moody’s/Fitch), saw a good reaction from international investors, who were keen to get their hands on Russian paper after a dearth of supply during the past six months. The order book totalled more than US$4.6bn, with 420 accounts participating across both tranches.

The new issue premium on a yield basis was estimated to be 8bp for the new US$1bn 4.95% 2017s and 9bp for the US$500m 6.125% 2022s. Both tranches, which were priced at par, were up on the break with the five-year quoted at 100.06–100.12 and the longer-tranche at 101.10–101.20 on Wednesday, though the shorter-dated bond was below re-offer price on Friday, tracking a general sell-off in the market.

“This was a real test to see if appetite for Russian risk was there as we approach the [March 4 presidential]election,” said William Weaver, head of CEEMEA debt capital markets at Citigroup, which acted as a bookrunner on the deal together with Barclays Capital, BNP Paribas and Troika Dialog (now part of Sberbank).

“However, after announcing the mandate the US roadshow was packed within a day,” he added.

First time in the US

As Sberbank’s debut Rule 144a transaction it was the first time the bank had roadshowed in the US with a specific issue in mind. “The 144a documentation is a transformational change in the bank’s funding strategy,” said Nick Darrant, head of CEEMEA debt syndicate at BNP Paribas. “It increases the options at their disposal.”

There was disquiet among some investors that Sberbank’s priority was the five-year tranche, which left little on the table for investors, rather than the 10-year – a tenor that US funds in particular prefer.

“In the meetings we had with them we expressly said we wanted to see a 10-year bond,” said one investor, who was disappointed that the shorter-dated paper was given greater emphasis.

“This was a real test to see if appetite for Russian risk was there as we approach the [March 4 presidential] election”

However, he was pleased that the second longer tranche was added later, saying: “It was good that they announced a 10-year bond and they priced it pretty attractively as well. Pricing was a lot better for the 10-year.”

Another investor added: “They tightened the five-year quite a bit but they left more juice on the 10-year, so understandably it is doing better.”

Darrant noted that there was natural demand from European and Asian investors for five-year debt, saying: “That formed the core of the transaction. Once that was done and dusted, Sberbank opportunistically added a longer tranche.”

He added: “Sberbank was very much in the driving seat of this transaction, whether it be the timing, the sharp revision in pricing or the size. We’d shown them a menu of options during the marketing process and gave them investor feedback. But Sberbank has the luxury to choose a la carte.”

In fact, Sberbank returned to the market two days after the original bonds priced to tap the 2022s for a further US$250m, taking advantage of demand, though one investor was critical of the tactic.

“The 10-year Sberbank [tap] was good because that’s what investors were after. However, it’s always disappointing when a deal is tapped within a [couple of days] of being launched,” he said.

VEB, meanwhile, was happy to take out much less than Sberbank to meet its funding requirements. The new issue premium was 22bp to its outstanding November 2017s. The order book was about US$2bn, less than the amount Sberbank garnered for its five-year tranche.

Bankers say, however, that VEB and Sberbank are very different institutions and cannot be directly compared. While the former is a 100%-government owned development bank, Sberbank is a savings bank with a huge deposit base. BNP Paribas, JP Morgan, Morgan Stanley and RBS were the leads on VEB (see Emerging Markets section for allocation details).