With more than $11bn raised in 2004, an increasing number of Russian corporates recognise the value of the international syndicated loan market as a ready source of capital to finance their growing operations. But for every blue-chip borrower taking advantage of Western lenders’ desire for high-yielding Russian exposure, dozens of second and third-tier companies are shut out from similar funding structures, largely for reasons of credit and size.
Russian banks have largely failed to deliver when it comes to arranging domestic market syndicated loans for their corporate clients. But 2005 looks as though it will be the year when the financing tool will become common on the local market.
Critical mass
“Many Russian banks have begun creating syndicated loan desks and critical mass is in the process of being built,” says Anatoly Lempert, head of capital markets at Bank of Moscow, which expects to bring two deals to market soon and has more in the pipeline. “With the ups and downs of the bond market, more companies are looking at syndicated loans as a means of diversifying their funding sources.”
Even news of a liquidity crunch in the local banking system at mid-year could not slow the deal onslaught, with the total volume of loans syndicated for Russian borrowers growing by 54% above 2003 levels. It also marked the first time since the 1998 currency crisis that issuance breached the $10bn peak achieved the year before the rouble collapsed. And bankers in Russia and those targeting the market from abroad expect deal flow over the coming year to be even heavier, thanks to continued economic growth, currency stability, the introduction of new names and refinancing by regular borrowers.
Ground-breaking deal
In October, a consortium led by the Raiffeisen banking group, ABN AMRO, ING and HSBC arranged a $600m loan for telecom provider Mobile TeleSystems (MTS). The three-year deal, paying Libor+250 basis points, was the first unsecured loan to a Russian corporate outside the commodities sector. The high level of international interest enabled the company to draw an extra $100m from the 24 banks taking part in the syndicate. Still, how the growing tolerance among lenders for financing companies whose incomes largely are based on domestic revenues will affect the local market is subject to speculation.
“While it’s true that syndication in the local market is stagnating, it is equally true that it never really has got going,” says Pavel Gourine, a board member and head of corporate banking at Raiffeisen Bank Russia. “And that is because local syndications are difficult to execute both from a legal perspective and because the bond market offers a more efficient way to raise capital.
“Most Russian banks have liabilities that are weighted to the short term, so syndicating loans at longer tenors works against their balance sheet. If a bank wants to provide a client with financing and can do it with liquid, tradeable securities, it is hard to see why it would choose a more difficult option.”
Concern about the stability of the currency also slowed the market’s development. However, as the MTS loan proved, this fear is abating, thanks to high oil prices and soaring foreign investment levels, which have enabled Russia’s central bank to boost reserves to record highs.
The door opens
With full rouble convertibility expected in 2006, the MTS deal opens the door for more Russian companies with rouble-only revenue streams to tap international capital markets to fund their growing operations. It also makes domestic loans secured by rouble receivables a more attractive funding option for local corporates and the banks that serve them. And because a stronger rouble will let companies achieve finer pricing in international loan markets, yield-hungry Western banks may well begin plumbing the domestic market for juicier deals if the trend strengthens. Hence the effort among locals to develop the technique before competition pushes borrowers beyond their reach.
“For some small and medium-sized companies, this is a good opportunity,” says Evgeny Yarivikov, head of financial institutions at Rosbank. “Price is the most important consideration, but the major drawback is that lenders tend to hold on to these loans as they mature.
“While the bond market provides liquidity (or at least the impression of liquidity), many SMEs [small and medium-sized enterprises] simply do not need the $20m that is the minimum for a bond issue. While many have relationships with just one or two banks, syndicated lending provides an opportunity to reach new sources of capital. And because it is part of a full-service offering, banks have to have professionals in place to provide this kind of finance.”
