Credit Suisse First Boston, in its role as joint lead manager, worked to overcome Russia’s challenging economic conditions to strike Rosbank’s first international capital markets deal. Geraldine Lambe meets its pioneering team.
In the same month that asset-backed bond issuance in the US reached record levels and looked set to overtake traditional corporate issuance for the first time, Russia also struck a first. Rosbank, part of the Interros Group, issued the first ever bond out of Russia to be backed by credit card receivables. The $225m, five-year, amortising issue, through a special purpose vehicle called Russian International Card Finance, was lead managed by Credit Suisse First Boston and Merrill Lynch.
In an ideal world, investor appetite matches supply perfectly and economic and political conditions provide a flawless deal environment. The bankers on this deal had a more challenging backdrop: Russian banks had suffered a liquidity squeeze in the summer that made investors nervous and brought back memories of the 1998 Russian crisis, when Rosbank’s predecessor, Uneximbank, went under. With commodities riding high, institutional investors were more interested in oil and gas credits and the deal came on the back of seven previous Russian bank issues.
“Given the summer’s environment, getting in front of the investors was one of the biggest challenges,” says Chris Tuffey, managing director and head of emerging market syndicate. But necessity is the mother of invention. To entice investors, the lead banks had to devise an innovative structure. “Rosbank wanted a degree of flexibility while we wanted to create as watertight a structure as possible to attract investors and to guarantee the best pricing and execution,” Mr Tuffey adds.
The solution the bankers came up with satisfied all the criteria. Structural enhancement relative to Rosbank’s credit was achieved primarily through securitisation of the international credit card cashflows from Visa and Mastercard (the flows from transactions carried out in Russia, by foreign credit card holders) within the context of a matrix of triggers regarding early amortisation. Such flows are processed by United Card Services (UCS), also part of the Interros Group, which commands 90% of the international credit card market in Russia. Under the structure, the credit card companies make payments to the Bank of New York, as trustee, making the transaction an offshore capture of hard currency flows that never enter Russia, thereby avoiding Russia-related risks.
Additional enhancements to Rosbank’s credit included a pledge of 100% of UCS shares to the Bank of New York, as trustee, in the event of default, and a debt service cash reserve fund that was set at three months’ worth of interest, available to investors in the event of any cash shortfalls.
Unique collateral value
According to Surjan Singh, associate, credit and insurance structuring at Credit Suisse First Boston, the value of UCS shares was key to the deal. “Because the processor, UCS, and the settlement bank, Rosbank, are separate legal entities, in the worst case scenario the Bank of New York, as trustee, could take ownership of UCS, which has direct relationships with the majority of high volume Russian merchants,” he says. “In a market where there are such high barriers to entry, this offers unique collateral value to investors.”
Similarly, generous cash reserves and early amortisation triggers whetted investor appetite and provided an extra level of comfort. Stella Tansengco, director, fixed income at Credit Suisse First Boston, explains: “The initial cash reserve already offers a quarter’s interest coverage. If there was a change in outlook to negative by Moody’s, then the required reserve increases to nine months of interest to give investors further protection.”
Certain events, including Rosbank being downgraded below its current Moody’s rating, would trigger early amortisation whereby a larger proportion of the payment of cashflows from Visa and Mastercard would be used to pay down the principal. “These security features enabled the transaction to be rated one notch higher than the unsecured ratings of the bank,” says Cinzia Basile, vice-president, fixed income.
Even with the tempting structure, a roadshow played an important role in showcasing the benefits of the deal to investors, says Dimitry Kabysh, vice-president, investment banking. “Rosbank had two teams running in parallel throughout the roadshow. They were very professional and were able to talk comprehensively about future growth areas for Russian banks. They were able to talk in great detail about the structure of the offering and the bank’s profile in the Russian market, which was key to persuading investors of the attractions of the deal. Also, the deputy chairman of the Interros Group, Andrey Bugrov, was there to underscore his support for the transaction and for Rosbank,” says Mr Kabysh.
Pricing implications
Pricing the deal was another challenge. It was difficult to value the transaction because it had no precedent in Russia. “When we go to clients with a new deal, we must have an idea of the relative value positioning,” says Mr Tuffey. “But when there is no comparable transaction in the market, the ability to sound out investors is difficult.”
The teams therefore had to derive a price based on where outstanding, unsecured Russian bank and corporate issuance – and mezzanine or deeply subordinated non-emerging market ABS paper – was trading. They centred on a price in the high nines. “With wider pricing, we could have built an even bigger book,” says Mr Tuffey. “There was a lot of interest at the 10% mark but Rosbank wanted better pricing so we aimed for the higher nines, finishing at 9.75%.”
Getting the book and price right meant generating a little tension between investors. Essentially, the bankers had built an order book – of more than $400m at pricing – in which accounts were almost bidding against each other. “We did lose a couple of investors who said they wouldn’t go below 10% and said our pricing was too tight,” says Mr Tuffey.
Fine tuning
The accuracy of the pricing has been proven in the aftermarket, however. “The paper has performed extremely well,” says Mr Tuffey. “It has slightly outperformed the broader market. Since we executed the transaction, Russia, the emerging markets and the broader credit markets have performed well and this transaction has kept pace.”
The deal was upsized from $150m to $225m. This was a delicate balancing act. Upsizing too much and pushing the pricing too tight can lead to poor performance in the aftermarket and leave a sour taste in the mouth for investors and issuers. Investors argue that the significant upsizing of issues causes weak performance in the secondary market.
“This is not an endless process,” says Mr Tuffey. “Our team and the team at Merrill Lynch believed that, for this deal, $225m gave us the best tension between getting an attractive price without undermining the quality or the size of the book. If we had pushed it higher, the pricing would have suffered.”
The final book of more than 60 investors, spread across specialists in Russian and emerging markets paper, asset-backed securities players and Asian private banks, is proof that both teams got the fine tuning right.
Equally, the deal ensured that Rosbank diversified its source of funding with a successful issue. “It is always key that we get all the elements of a deal right,” says Mr Kabysh. “But in this case, as it was Rosbank’s first international capital markets deal, it was crucial that we helped it to make a successful debut.”
