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Thursday, 23 November 2017

Top 250 2005 - Stake sale caps borrowing

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The decision to sell a 10.74% shareholding in Gazprom to the government was enough to bring the oil and gas giant’s 2005 new borrowing programme to an end. After raising around half of the budgeted target of Rbs110bn (US$3.85bn), the company will receive around US$7.15bn from the government, limiting its desire for anything other than refinancing. Richard Jory reports.

The cash injection was agreed just after the company had postponed a second, Rbs5bn domestic bond of the year that had been planned for June 16. News that a second (four-year) bond would be launched on July 7 was put in doubt by an official at the company, when affirming that funds from the stake sale would probably cap new borrowings for the year.

But the potential cancellation of the domestic bond now due for early July should mark the end of this year’s domestic financing plans, according to the official. While the company has announced plans to raise a lesser, Rbs90bn next year, it is likely to split the financings equally between the international bond and syndicated loan markets, continued the official, who emphasised his obligation to raise the “cheapest dollar possible”.

Concerns over the local market are generally to do with uncertainties over the exchange rate, said the official, who also noted the inefficiencies of a local market for which the registration and issuance process are unwieldy, and also its limited capacity for the kind of new issuance programme Gazprom regularly entertains.

The news that Gazprom will be all cashed up following the stake sale is not good for banks, which have courted the company assiduously and with some success since the end of the 1990s. Since that time, the company has turn a portfolio of local and international bilateral loans into bonds and syndicated loans.

Last year, the company took the great leap forward of matching the long-term assets that secured its generally short to medium-term (four to five-year) international syndicated loans and using the assets to support a long-term bond. The result, a structured export note (SEN), matched the assets supporting the loans (export contracts) more closely with its new issuance.

The company added to its international lending with a US$972m unsecured loan, signed in the last week of May: a US$700m three-year, three-month tranche pays 125bp over Libor and a US$272m five-year tranche 150bp.

This year’s plan, before the stake sale, had been to match its international issuance programme more closely with its operational international currency flows: international revenues split out at 40% euro and 60% US dollar.

With a desired aim of avoiding risk wherever possible, the company has ignored all overtures to use derivative financing to balance its international lending portfolio, said the official. The most secure way of managing this risk is with new issuance, he continued. “Gazprom’s main funding priorities in 2005 are to continue to extend maturity in both the loan and bond markets and to increase its proportion of euro-denominated liabilities,” said Mike Elliff, head of CEEMEA fixed-income capital markets at ABN AMRO.

The result was a 1bn Reg S 144a 10-year bond issued on May 20. The bond was issued at par with a coupon of 5.875%. “The euro 10-year was a breakthrough, with the bond attracting a book of €4bn, and showed the depth of the euro market but also the demand in that market for Gazprom,” said Peter Malik, MD and head of EEMEA origination at CSFB.

The combination of a developed and liquid curve and regular visits to the international bond market have ensured that, although there is room for the credit story to develop, Gazprom would appear to have an almost unfettered access to the markets.

The amount and the size of the bonds that Gazprom has so far issued have led to the creation of a lengthy and liquid yield curve. Traders suggest that the company’s curve is more liquid than the sovereign’s, at least at the front end. The sovereign bonds trade well inside Gazprom’s, although traders and bankers suggest this is more to do with the fact that the sovereign has not issued bonds since the country’s financial crisis.

JP Morgan believes Gazprom's premium over the sovereign curve should narrow to 30bp-50bp this year. While Morgan Stanley and Dresdner KW valued the stake bought by the government at US$8.4bn-$11.5bn before the sale, JPM believes the low purchase price is positive for bonds as supply risk from a large payment by Rosneft would have a bigger negative impact on credit markets than the positive impact from Gazprom receiving high sales proceeds. JPM remains constructive of Gazprom bonds with any Rosneft default not representing a trigger event under Gazprom CDS contracts.

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