A better bet

IFR IMF Special Report 2011
9 min read

Russia is seen as a safe haven amid the turmoil

To view the digital version of this report, please click here.

Lenders’ strategies for the Central and Eastern Europe, the Middle East and Africa syndicated loan markets have been cautiously adjusted amid renewed concerns on the economy, fuelled by the US and European debt crisis. Many, however, plan to take advantage of the relative stability in Eastern Europe – notably Russia.

Economic balance and commodity strength means Russia is increasingly viewed by international lenders as a safe haven, separated from the economic volatility of the US and Europe. A string of record loans for the country’s banks, together with a number of deals for blue-chip commodity borrowers have consolidated Russia’s position as the CEEMEA hotspot.

Amid the financial turmoil, “Russia is a quiet little world by comparison,” a senior banker said.

Russia accounts for 29% of all loan volume in CEEMEA so far in 2011, with US$22.7bn of the US$77.8bn CEEMEA total. Volume generated in Central and Eastern Europe is US$46bn, or 59% of the CEEMEA total.

Refinancings continue to dominate deal flow, as in the rest of Europe and total US$48.4bn, or 62% of total CEEMEA volume so far in 2011. In Russia, refinancings total US$15bn, or two-thirds of the country’s year-to-date loan volume.

“Companies are trying to refinance earlier, from approximately two years of their maturities to avoid a refinancing wave and to reduce the borrowers’ refinancing risk,” considering the European liquidity concerns, a European banker said.

“One of the biggest constraints for the emerging market is not related to Russian borrowers. The risk is that you won’t raise money because some European banks have problems lending”

State-owned banks and large commodity companies have driven Russian deal volume. VTB’s US$3.13bn, three-year, three-day loan – the biggest loan for a Central and Eastern European bank – closed in July, shortly after state development bank VEB secured a US$2.45bn, three-year deal. Meanwhile, oil firm TNK-BP secured a US$1.5bn, four-year club loan with 10 banks.

Growing liquidity concerns across the European banking sector threaten to curtail activity, though appetite for Russia should remain steady.

Lower pricing on several deals has caused additional challenges for lenders. VTB, VEB and TNK-BP all carry a margin of 130bp, establishing a lower benchmark for both financial institutions and corporate deals. VEB and TNK-BP’s last deals closed at 190bp in November 2010 and 175bp October 2010, respectively.

Nevertheless, an incentive to continue lending relationships with Russian companies for “as long as possible” means the loan market has a larger buffer against the current economic difficulties than other debt capital markets, a banker said.

Corporate preference

Appetite for financial institutions’ borrowing in Russia has been largely satisfied by a handful of sizeable deals. Aside from VTB and VEB, Gazprombank and ZAO UniCredit signed three-year deals in August worth US$1.2bn and US$300m, respectively.

Many lenders are hoping for more lending opportunities from Russia and Eastern Europe’s corporate sector, which is being fuelled by growing internal demand.

“There is a willingness to put a lot of money into corporate loans,” a banker said, which is being encouraged by pricing haircuts. “Russia has cash, but they are going to take cheap money when they can.”

Rusal, the world’s largest aluminium producer, agreed a US$4.75bn, five-year, pre-export loan in August, with an initial margin of 235bp over Libor. Aggressive pricing means that deals are taking longer to conclude, bankers said, but the deal size demonstrates the amount of capacity that exists for Russian paper.

Other Russian commodity borrowers that have tapped the loan market this year include oil firm Tatneft, which signed a US$550m, three-year unsecured deal in June, and steel producer NLMK, a subsidiary of NLMK Europe, which completed a €400m, four-year syndicated borrowing base facility in August that was increased from €325m after an oversubscription.

Oil company Slavneft returned to then loan market for the first time since 2003, securing a US$590m deal in August.

One area of disappointment among lenders in Russia is M&A, for which there have been no loans this year. The closest opportunity came when the country’s largest steelmaker Severstal entered into talks with banks for a US$5bn loan, but those negotiations collapsed in June amid reports that the company decided against buying miner Raspadskaya.

Recovering US and European economies may boost M&A deal flow towards the end of 2011, but little activity is expected in the short-term.

“M&A activity is surrounded by lots of talks, potentials and maybes,” said Charles Griffiths,Bank of Tokyo-Mitsubishi UFJ’s Head of Origination for Europe.

Eastern activity

Loan activity in Eastern Europe remains steady, with particularly strong interest in Turkey, Ukraine and Kazakhstan.

“There is still quite a lot of growth in these markets,” a banker said.

Kazakh state oil and gas company KazMunaiGas signed a US$1bn, five-year bullet term loan in August – the financing pays a margin of 210bp over Libor, from the 90bp paid on KMG’s last syndicated loan, a US$3.1bn unsecured bridge loan from January 2008.

Meanwhile, Ukraine’s mining and steel group Metinvest signed an US$850m, five-year pre-export financing in August ahead of a wider phase of syndication. The deal pays 300bp over Libor, down from 550bp Metinvest paid in 2010 for a US$700m deal.

Also in Ukraine, the agribusiness company Kernel in August launched a US$500m dual-tranche refinancing loan. The loan comprises a US$278m long-term facility, available until 31 July 2014, and a US$222m short-term facility, available until 31 July 2012.

Middle East diverts deals

Political tensions in the Middle East have redirected some deal flow to Eastern Europe, primarily Russia and Turkey. Middle Eastern loan volume totals US$18.3bn, or 24% of the total CEEMEA volume for 2011, which is significantly lower than in 2007, when Middle Eastern borrowers secured US$108bn of loans for the full year.

So far in 2011 M&A financing is very quiet, with Israeli Teva Pharmaceuticals’ US$3bn acquisition tranche agreed in June the only deal so far. However, companies’ strategies should shift going forward.

“Volumes for the rest of the year are likely to be M&A driven,” said Rizwan Shaikh, Citigroup’s Managing Director of CEEMEA Debt Markets.

Greater lending appetite for M&A loans is more likely following a handful of large financing deals in the first half of 2011, and these suggest the region’s international syndicated loan market has tentatively reopened.

A US$2.8bn loan refinancing for Dubai’s sovereign wealth arm, Investment Corp of Dubai, raised US$4bn from the market before being cancelled in August when the company decided to repay its debts from cash. Although surprised, bankers said that ICD’s move was a positive reflection of Dubai’s stability.

“It’s a good demonstration that Dubai can repay its debts,” especially at a time when the US and eurozone are experiencing financial difficulties, a banker close to the deal said.

Carrying a margin of 350bp, ICD faced a significant rise in its borrowing costs from 125bp–150bp on its existing US$6bn loan, though pricing was not the reason the deal was pulled, bankers said.

ICD’s ability to repay amid a string of debt repayments or rescheduling of maturities this year and the successful conclusion in March to Dubai World’s US$25bn restructuring agreement, combined with Dubai’s perception as a safe-haven amid regional political strife, have lifted investor sentiment on the emirate.

In July, the Dubai Department of Finance closed an US$800m, six-year Salik securitisation, which was initially marketed with a margin of 350bp, but was reduced to 325bp because of high demand. (See “Secured solutions”)

Elsewhere, Abu Dhabi’s IPIC signed a $1.5bn bridge, one-year facility in August, offering 50bp for the first year, stepping up to 75bp if a six-month extension is exercised. Despite the extremely low margin, a couple of relationship lenders joined the deal, taking some of the exposure off the three bookrunners that underwrote the transaction.

A worker stores aluminium ingots at the Rusal Krasnoyarsk aluminium smelter in the Siberian city of