As if it were a terrible vice, syndicated loan bankers spent the first part of this decade swearing they would never go back to Russia, says Loanradar’s Tom Freke. With many fingers burnt to a crisp in 1998, and having a long collective memory, Western bankers took years to return to Russia.
However, oil and gas money has brought “billions of dollars worth of reasons to forgive and forget”, and so many European and American banks have been making the flight out east, seeking to partner up with the strengthening Russian state, he notes.
It has been a profitable relationship. Western banks have underwritten some of the Putin government’s boldest acts, including the break-up of Yukos. In return, the banks have formed links with fast-growing Russian commodity companies, who have needed international bank support and debt financing. A string of lucrative IPOs lay around the corner.
This was until last summer’s credit crisis. “Suddenly, the bond market was closed to Russian borrowers and the prospect for profitable IPOs dwindled”, notes Freke.
Still, he adds, commodity prices remain solid, domestic economic growth is robust and the Russian financial system is very gradually strengthening.
As a result, Russians’ plans for M&A deals, bond issues and IPOs all remain in place. However, only one capital market is open to provide the financing, according to Freke: the syndicated loan market.
Currently, among noteworthy deals in the market, according to Loanradar, is a $4.5bn acquisition loan for aluminium firm Rusal, a $1.1bn pre-IPO deal for retailer X5, a $3.214bn post-acquisition loan for steel firm Evraz, as well as a 350m euro deal for Severstal and $350m for Alrosa.
In the pipeline, meanwhile, is a $2bn refinancing deal for Rosneft, a $1bn capex loan for Russian Railways, a $3.5bn M&A deal for Vimpelcom, $2bn for Tatneft, $1bn for NLMK, up to $1bn for Novatek and a rumoured $500m for SUEK.
In total, the deals listed above total in excess of $20bn, and this is not thought to be a comprehensive list of upcoming deals.
These are “big numbers, but bankers doing the deals say that they have the balance sheet, profitable opportunities are on offer and they have spread the risk”, notes Freke.
For many of these deals larger than normal groups of arranging banks have formed. With the lead banks having agreed to lend the vast majority of the loans, there is little more that needs to be raised from the market.
“There are a core group of 10-15 banks happy with Russian corporate risk and these banks are at the top of pretty much every deal,” one banker told Loanradar.
Given the unprecedented scale of this lending, it might seem as though the credit crisis was not happening, says Freke, “but these banks believe that their faith in these companies will pay off in the end”.
And they are not lending for free. Pricing on these loans has risen sharply over the last few months, going up by 0.5-1 per cent for even the strongest names. Russia’s biggest companies are now paying similar margins on their loans as private-equity owned companies in the West laden with LBO debt.
Unsurprisingly, borrowers have been less keen to allow pricing to move higher, but in recent times some are said to have resigned themselves to banks’ demands.
Arranging banks hope that the increased pricing will not only help their bottom lines, but help them syndicate the debt to other banks, he adds:
The current level of appetite amongst banks for small chunks of Russian corporate debt is untested, with the first deals since the summer just coming into the market now.
If there is limited sell-down potential, then this is likely to depress future deal flow, as it will mean arranging banks will have to sit on large holds, taking up scarce budgets.
And budget pressures are not helped by the state of the eurobond and equity markets. There have been no Russian deals in the eurobond market since October, when the market reopened briefly. Apart from that moment, the market has effectively been closed since July 2007.
However, many Russian companies and banks had predicated their borrowing strategies on being able to tap the eurobond market, explains Freke, and a number of bridge facilities have been built around the same presumption. Others had assumed replacement financings in the equity market, he adds.
As a result, he says, “borrowers are expecting banks to shoulder more of the burden until these other markets come back on line”.
The X5 deal is an example of such a deal, a bank loan put in place to refinance a bridge that had been expected to be taken-out in the equity or bond markets.
At present, however, there is little sign of any take-out deal coming soon. Sources in the bond market say the market could stay closed until the third or even fourth quarter before borrowers would feel forced to the market. Until then, they are waiting for market conditions to ease, CDS pricing to come in and the top state borrowers to make a move.
Meanwhile, all are exploring alternative funding sources, such as the domestic market and private placements. But over-capacity remains a problem. While there is more rouble-denominated capacity than ever before, “it is untested and likely to be sporadic”.
The syndicated loan market, on the other hand, is the opposite: it has the capacity and the track record, says Freke.
So, despite the events of 10 years ago, expect the loan market to be the market of first resort for Russian borrowers, he concludes, “for as long as banks’ budgets allow”.