Sunday, 19 August 2018

Still rocking

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Western banks are still enjoying lively conditions in Russian syndicated loans but how long can it be before the vice-like grip of the credit crunch squeezes the life out of it? The business is experiencing threats from all sides, including the maturing bond market and local banks who hope they can one day become the key players in Russian loans, as Solomon Teague reports.

At the end of the first quarter of 2008 market conditions are clearly much harder – in all asset classes – than was the case at this stage of 2007. In the world of corporate loans liquidity has vanished like water on hot sand.

But according to Andrew Dell, head of emerging markets debt finance at HSBC, unlike in previous cycles, where global financial problems were amplified in emerging markets, since the summer of 2007 those same markets have been relative oases of calm and have shown more resilience than developed economies.

“The money is still there but investor needs are not the same,” said Steven Fisher, managing director and corporate banking head for Russia and the CIS at Citi. “Investors have different demands now. They are looking for higher yield for the risk taken.”

Andrew Chulack, managing director and head of global investment banking Russia and CIS for Deutsche Bank in Moscow, sees the issue as more on the supply side. “Financing used to be available very quickly but not any more,” he said. “Risk has repriced but we have also seen the market disjoint from the West, which has caused Russia problems.”

Debt levels in a country are an indicator of the wealth it feels, said Guy Warren, executive vice president of core banking at technology vendor Misys. By this measure Russia is clearly feeling good about itself, as indebtedness levels are increasing steadily.

Dell agreed: “Russian borrowers still want money,” he said. According to him, it is just a question of whether they look to raise it in the loan or bond market, with the former currently seeing more of the action.

The longer tenors available in the bond market – loans tend to be made on a shorter term basis, which does not always match the liabilities of the borrower – may see loans lose market share to bonds. “Loans are adverse to longer tenors and usually have a floating reference point,” said Dell. As market conditions deteriorate, he said, it is getting harder to arrange loans with tenors longer than five years – even for stronger names.

Of course, the big companies will always have access to funds if they are willing to pay for it. The biggest problems are for smaller companies, who will have to find radical ways to gain access to funding. One solution is consolidation.

Russian banks have found it very difficult to be competitive in the loan markets due to their relative cost of funding, according to Brian Lazell at Renaissance Capital in Moscow. But it remains a target for many domestic players. Chulack has seen some domestic banks make forays into the market to fill the loans vacuum, making considerable efforts to boost their deposits to fund this drive. They are doing it with their eyes wide open and a commitment to assess thoroughly the risks involved, he added.

Uralsib is one Russian bank that has made inroads into the loan markets, especially to smaller and medium sized companies, said Fuad Mekhti, its director of corporate finance and investment banking. It is an important element of the strategy for the bank, he said, because the smaller companies of today will grow, and their relationship will grow with them.

Uralsib can compete with major international banks, said Mekhti, as well as participating alongside other Russian and foreign banks in major syndications.

However, it is undeniable that Russian banks have been more involved in the loan markets as borrowers than as lenders in the largest transactions. In March this year, Gazprombank found its US$450m financing requirements met by a syndicate of foreign banks including BNP Paribas, Bank of Tokyo-Mitsubishi UFJ, Barclays, ING, Banca Intesa and SMBCE, with a two-tranche loan: a one-year US$150m tranche that paid 45bp; and a three-year tranche of US$300m that paid 65bp.

Equally, the biggest corporate deals have been mandated to the foreign banks. Also in March, Rosneft raised US$3bn through ABN AMRO, Bank of Tokyo-Mitsubishi UFJ, Barclays, BayernLB, BBVA, BNP Paribas, Deutsche Bank, ING, Nordea, JPMorgan, Mizuho Corporate Bank, SG, SMBCE and WestLB with US$200m tickets each as MLAs, and DZ Bank and Calyon acting as arrangers on US$100m tickets.

And in late 2007 Gazpromneft raised its US$2.2bn three-year facility through MLAs ABN AMRO, Calyon, Citi and Commerzbank, paying 75bp over Libor, with lenders invited to join on a top ticket of US$200m for 70bp or general tickets of US$100m for 60bp, US$50m for 55bp or US$25m for 50bp.

Unlike in the West, loans in Russia tend to be bilateral, with syndications much less common, said Anton Klimenko, head of investor relations at Sistema Hals. Until 2005 virtually all loans to Russian corporates were secured and were mostly given to commodities companies, but Fisher said that year was a turning point, as there was a marked increase in profitability across the country, hand-in-hand with several sovereign and corporate rating upgrades.

By 2007, Fisher estimated, around 50% of larger scale corporate lending in Russia was unsecured. This trend has now reversed somewhat, with the onset of the global liquidity tightening. Loans with longer tenors – especially beyond three years – are much more likely to be secured, Fisher said.

“Russian banks can charge higher margins than foreign banks,” said Sergey Komolov, partner at Hogan & Hartson in Moscow. He has seen a concentration of loans made by Russian institutions at the short end – 10 years would be considered a long duration loan, but one to three years is more typical, said Komolov – and tending to be heavily collateralised.

This reluctance existed before the global credit tightening, Komolov said, but has grown more pronounced since. This is despite the relatively small proportion of exports made to the US, and the absence of a sub-prime market in Russia.

“There is effectively no exposure to US or European sub-prime in Russian banks. Levels of bad debt in the Russian banking system are very low,” said Stephen Cohen, managing director of asset management at Troika Dialog UK.

Either way, rates for loans made by Russian banks have soared to around 11%-12%, Komolov said – and that for the good quality recipients.

But even on those terms Russian banks are making some progress increasing their market share in loans to Russian corporates. Foreign banks are pulling back from all but the most compelling business, Komolov said, which is creating a vacuum which Russian banks are happy to fill.

It is not just the vacuum left by retreating foreign banks that is enticing Russian corporates to deal with Russian banks, said Komolov. Dealing with Russian banks is easier, because the due diligence is less onerous and there is less paperwork. “Russian banks are more pragmatic,” he said. “There is less paperwork and more receivables. That makes it quicker.”

In terms of the receivables under consideration, Russian banks are evolving too, Komolov said. Where 10 years ago real estate would not have been eligible as collateral, now MBS is usually acceptable, regulatory changes having paved the way for this change three years ago. “Banks have been looking for business and considering new things as part of this,” he explained, for example mezzanine finance, something that two years ago was not a feature of the Russian domestic loans scene.

Further maturing of the Russian loans market is in prospect as there has been a proposal to allow banks to term deposits and lock-ups. Currently depositors can withdraw money at any time which makes it very difficult for Russian banks to utilise the money, without risking an inability to meet redemption requests at any given time. This development will give them far more funding flexibility and allow them to reduce their maturity spreads. However, it is impossible to predict if and when this proposal will emerge onto the statute books: sometimes these proposals can float around for some years before they make it into law, said Komolov.

Private equity companies offer another solution, Chulack said, with their expertise in financial engineering.

“Businesses in Russia tend to be under-leveraged,” said James Cook, director at private equity firm Aurora Russia. There is much scope for an extension of the loan markets in Russia as more companies use leverage.

In the current credit climate, that is obviously a challenge, conceded Cook, but it is not impossible to find. “There is money out there,” he said. “It is more difficult to find it now but it isn’t impossible. We have contacts at our disposal; it is the pricing that is the biggest change. It is more expensive but people are interested in getting exposure to Russia.”

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