Bank of Moscow is one of the largest banks in Russia. It has been embroiled in controversy since late September 2010, when the former mayor of Moscow, Yuri Luzhkov, was ousted amid allegations that he had been running the city as a personal fiefdom. The bank’s chief executive, Andrei Borodin, was a close ally of Mr Luzhkov and, immediately after the mayor’s exit, credit rating agency Fitch put the bank on negative watch.
Four months later, in January 2011, Moody’s downgraded the Bank of Moscow from Baa1 to Baa2 and assigned a 'negative' outlook on all long-term ratings. Adding to the uncertainty, another Russian bank, VTB, has been trying for months to wrest control of its long-term rival in a fiercely contested battle with Mr Luzhkov. In February, VTB succeeded in securing a 46.48% stake.
Such a backdrop is hardly conducive to the smooth issuance of a bond transaction, particularly in a new currency and region. Yet this was precisely the environment in which Bank of Moscow launched its recent debut Singapore dollar deal.
Attractive price
“We wanted to tap the Singapore market to improve local investors’ knowledge of our bank and diversify our funding base. The pricing also looked attractive,” says Tatiana Priimak, deputy head of funding and investor relations at the Bank of Moscow.
The bank began to consider a Singapore dollar deal last October, just two months after VTB debuted in the country with a S$400m ($312m) transaction. Bank of Moscow was keen to find out whether it, too, could tap this market, and approached ING and UBS to assess whether they could arrange an attractive swap into US dollars.
The swap worked, but Bank of Moscow was keen for investors to become familiar with its name before issuing a bond, particularly as the Singapore bond market has a strong retail bias. “We went on a non-deal roadshow and talked to investors at the end of October. The feedback was very positive but then, due to excess liquidity at the bank, we decided [not] to proceed [until] the beginning of 2011,” says Ms Priimak.
Market perceptions
However, by the beginning of this year, the perception of the bank in the market had changed – and not for the better. Not only had it been tarnished by the allegations surrounding Mr Luzhkov, but the Moscow city government was discussing a sale of its 46.5% stake to VTB.
As Bank of Moscow attempted to market a deal, its ownership was in a state of flux and its credit rating was beginning to deteriorate. And, even though the new rating was only one notch below the old one, it had an adverse effect on investor confidence.
Nonetheless, the bank, supported by ING and UBS, pressed ahead with its plans. The team re-engaged with investors and offered one-on-one discussions with anyone who felt they needed extra reassurance. The strategy proved effective, and days before the Chinese New Year, Bank of Moscow issued a S$150m two-year deal with a coupon of 4.25%.
Lower coupon
Initially, a lower coupon had been mooted, but the official guidance at launch was 4.25% to 4.5%. Ultimately, the transaction was priced at the bottom of this range and the deal was over-subscribed, with more than 40 accounts bidding for about S$200m of bonds.
Sources close to the bank admit that the pricing would have been tighter had the deal been issued after the initial roadshow, but overall, the swap terms were still beneficial, and the bank’s treasury team was pleased with the end result. Among the buyers, nearly 90% were from Asia, and the rest from Europe. Interest was primarily from high-net-worth individuals and other retail-orientated accounts, and 55% of the bonds went directly to private banks, 25% to other banks and 20% to fund managers.
“It was a different market than we are used to – smaller and with a much more local feel to it,” says Ms Priimak.
Better terms
Frustratingly for the bank, VTB managed to achieve rather better terms. Its deal was more than twice the size, the coupon was 4.2%, and the price moved ahead considerably in the secondary market, giving a yield of about 3% at the time of the Bank of Moscow transaction. But VTB is more highly rated, and launched its transaction against a more benign background.
For Bank of Moscow, the task of completing its deal was challenging enough, particularly in an entirely new market. The success of the bond may have been due, in part, to the extremely low rates of interest that were on offer from conventional Singapore dollar savings products, but it was also the result of considerable effort from the bookrunners ING and UBS as well as the Bank of Moscow team.
“We are proud that this deal was the first Eurobond issuance of a Russian financial institution in 2011. It was also only the second issuance from a Russian bank on the Singapore market,” says Ms Priimak.