In demand: Gazprom's headquarters in Moscow
Gazprom, one of the world's largest energy companies, has responded to its downgraded ratings with an ambitious issue of commercial paper in western Europe. The surprising outcome may have implications for years to come. Writer Edward Russell-Walling
When the news got out that Gazprom was planning its debut issue of commercial paper (CP), the market was sceptical. Some thought the sheer volume of homework required for this, a Russian credit, would put off investors. They were wrong, largely because the enthusiastic investors who bought the paper were not the usual suspects.
Gazprom, as it likes to remind us, is one of the world's largest energy companies, producing about one-sixth of the world's natural gas. Its ambitions do not stop there and it has a string of major development projects, including Shtokman in the Barents Sea and Sakhalin II on Sakhalin Island, north of Japan. When these two projects alone are completed, Gazprom should have 20% of the world's liquefied natural gas market.
The result is a substantial capital expenditure budget that runs to Rbs761bn ($27bn) for 2009. With 2008 sales of Rbs3519bn, the company also has an active, and what it calls "strategic", fundraising programme in the international capital markets. This year it has already issued more than $5.2bn equivalent via its European medium-term note programme, in Swiss francs, US dollars and euros, including the first euro benchmark from a Russian issuer since the Lehman collapse. Net debt at the end of the last quarter was Rbs1,191bn, 17% ahead of the previous quarter in rouble terms, largely because of foreign exchange movements.
DCM focus
Since the reorganisation of its equity structure in 2006, Gazprom has focused its funding efforts on debt capital markets, according to CFO Andrey Kruglov. "Our strategy is to balance our short-term cash-flow and liquidity needs against the more strategic funding challenges of our globally significant projects," he says. "The European Commercial Paper [ECP] programme was launched as a multi-stage cash and liquidity management tool."
The ECP's attractions to Gazprom are that it provides cheaper funding than longer-term bond issuance while having no negative effects on its higher-level Eurobond programmes. "It is important to note that the ECP is unconditionally guaranteed debt, therefore providing an extremely secure investment, available to both retail and corporate investors," says Mr Kruglov.
Moreover, Gazprom was keen to join the ECP club for reputational reasons. All of the European oil and gas majors, as well as some of the best-known US and emerging market names, have ECP programmes which they use to manage seasonal short-term funding. However, investor demand for ECP is generally confined to the safest credits.
Gazprom ratings have been downgraded by Moody's and placed on negative outlook by Standard & Poor's and Fitch. This was in line with general concerns over the Russian economy and the ability of the Russian state - which owns just over 50% of Gazprom - to bail it out in an emergency.
Connecting with investors
So the $4bn programme kicked off in September with no guarantees of success. It was preceded by a week-long roadshow, led by Mr Kruglov, which connected the company with more than 50 investors in Zurich, Frankfurt and London. Shrewdly, the marketing process targeted the private wealth market rather than traditional CP investors, and the results were impressive. Retail investors were clearly attracted by the three-month paper's risk-return trade-off.
With UBS as sole arranger and bookrunner, the first drawdown was offered with initial yield guidance of 3.5% to 3.75%. The "very pleasing" demand of more than $1bn within 24 hours of the September 11 launch allowed final yield to tighten to 3.4% or three-month Libor plus 310 basis points (bps) - inside the implied Gazprom credit curve. It also prompted an increase in the planned transaction size from $500m to $600m.
Illustrating the nature of the demand, 94% went to retail investors, with Switzerland taking 89% of the geographic distribution. Gazprom and UBS wasted no time in offering a second $600m drawdown of two-month paper, in October, after roadshows in Geneva and Vienna. This time the order book was oversubscribed within four hours, with the yield set at 3.2%, or 295bps over two-month Libor. Asian private banking investors took 18%, with Switzerland accounting for 80%.
"Both tranches were significantly oversubscribed and we are aware that there remains significant investor appetite for the next stages in the programme," says Mr Kruglov. He adds that the company has had some "really great" feedback, including, "we do not have that many issuers from eastern Europe of that quality" and "we think it's a great deal - please keep us informed of the timing of the next tranche".
No doubt Gazprom will be happy to oblige. Mr Kruglov certainly sounds optimistic. "I'm sure that the rest of the programme will be as successful as this one," he says.
