Russia's biggest coal producer, Suek, found the bond market receptive to its debut deal on Wednesday as buyers ignored the environmental stigma of its business to lap up its debut US$500m five-year offering.
While the deal was overwhelmingly bought by onshore or offshore Russian investors, the book size suggested that some international accounts were also interested despite the ESG controversy and what one observer alleged was a "home run of stupidity" on the part of the banks involved.
Irrespective of the buyer base, the company achieved its goal of raising funds to refinance debt at an attractive price.
Suek turned to bonds after seeing liquidity in the loan market available to it shrink over the last three years, most likely pushing up its cost of financing in that market. Even those banks that can still lend to Russian borrowers are finding it increasingly difficult to finance the coal industry.
“It’s been a challenge for Suek in the loan market for the last three years. They realise there is less liquidity available to them now with only certain banks left that can lend to them,” said one loans banker. “We can’t do it any more. If banks want to be seen to be green, they can’t have clients like Suek."
While that might be the case for many lending institutions, the company said it turned to the US dollar bond market because it offered a different source of funding to its usual channels, rather than because it was forced to.
"All our traditional sources of funding – pre-export syndicated loans, ECAs, bilateral loans, Russian bonds – remain accessible to us," said Olga Ilina, head of investor relations at Suek.
However, Suek (Ba2/–/BB) sought to take advantage of "the favourable window in the public debt market to further diversify our debt portfolio", said Ilina.
Local support
The debate around the company's ESG credentials played its part in the bond transaction, though ultimately the outcome was very typical of a Russian corporate bond deal in that it came at a very tight level thanks to the support of local investors.
The leads, Alfa-Bank, Bank of America, Bank of China, Citigroup, Commerzbank, Gazprombank, Renaissance Capital, Sberbank CIB and VTB Capital, opened books at 3.75%–3.875%. But with orders of over US$1.8bn flooding in, including US$280m from the leads, pricing was ground down for a launch at 3.375%.
While the geographical breakdown of the allocations was not published by the time IFR went to press, 170 accounts placed orders and leads were adamant that there was some international interest.
"The book was Russia and Cyprus skewed but Americans and Europeans played in this," said a banker at one of the local leads. "I was surprised there was such huge demand. And the company understands that because of ESG and coal in a few years it won't be able to raise money in international markets – they are the last of the Mohicans."
While some international investors shunned the deal solely on ESG grounds, others declined simply because of the tight pricing. "Quite a few refused because of the ESG risk, but investors are greedy animals," said the banker. "Some said, if you increase the price, we will play."
One investor at an international investment firm admitted to IFR that it was the tight pricing that was the main obstacle to her participating in the deal. "There was no 'dirty business' premium and the final yield was low for a Double B name if you look globally," she said.
While local investors were happy to take the bond down at a yield as low as 3.125%, said the banker, international accounts looking at the deal were unwilling to go much below 3.75%.
"It was probably the right price – a compromise between the two pools of investors," said the banker.
"Home run of stupidity"
Some observers were very critical of the deal and the role played by the banks.
"It is a home run of stupidity for banks to think that it is a good idea to lead what is effectively an inaugural US dollar bond for a coal company,” said Ulf Erlandsson, executive chair of Anthropocene Fixed Income Institute, a Sweden-based think-tank focused on climate impact in capital markets.
Spokespeople for the banks declined to comment or did not respond but many of the banks have publicly stated that they are working through a transition phase whereby they can help coal companies refinance until 2025, but not fund expansion of operations.
A banker away from the deal said investing in Suek isn't necessarily a black and white story given its area of operations in Siberia, where there are no alternative means to source heating.
"The company is profitable and has high quality shareholders, and it just happens to be that there's no other way to make electricity in Siberia and people there need to somehow get heating – ESG has its blind spots," he said.
Ilina said: "Suek has a world-class ESG policy and disclosures in line with international ISO standards and evaluated by international rating agencies above the industry average. We are committed to the wellbeing of our employees, local communities and environment."