Gazprom secured a hit with Russia’s first investment-grade securitisation, and one that will help to drive the country’s asset-backed securities market. Geraldine Lambe talks to ABN AMRO about its part in the deal.

Gazprom’s securitisation of future gas exports at the end of July satisfied on every level. For Russia, it was a ground-breaking deal in terms of structure that is bound to be emulated by other Russian corporates – and it must surely be a huge step forward for the country’s burgeoning asset-backed securities (ABS) market. As the first Russian investment-grade issue, it opened up a whole new investor base and generated massive cost savings for Gazprom. The $1.25bn issue of Structured Export Notes (SEN), yielding 7.201% and due in 2020, was lead-managed by ABN AMRO, Merrill Lynch and Morgan Stanley. The deal’s trailblazing structure was originally developed by ABN AMRO to integrate pre-export financing structures already applied in the Russian bank market. The major challenge was to find a solution which would meet the requirements of the different parties involved, according to ABN’s Freerk Speckmann, executive director, integrated energy, responsible for structuring this transaction with Rob Ward, director, structured capital markets. These included: Gazprom, Gazexport, the state, the international rating agencies, the Russian central bank, the investors and the existing lenders to Gazprom.

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Freerk Speckmann: requirements from the stakeholders left just enough room for manoeuvre “Gazexport, for example, required us not to make any changes to the two dedicated export contracts, with Italy’s ENI and Holland-based Gasunie, making it impossible to use the sort of offshore intermediate trading entities that have been used in various structures in the past. And the Russian taxation laws are unclear whether sale of receivables would trigger a huge VAT liability for Gazprom, ruling out the possibility to use a true sale structure. These and many other requirements from the different stakeholders left us with very little, but just enough, room to manoeuvre,” says Mr Speckmann. Lessons learned The deal was the culmination of lessons learned from previous transactions in Russia and in Latin America, and works with existing precedents from earlier bank and non-bank deals. Mr Ward says: “In the end, we came up with a solution that is a hybrid between the secured structure used for Gazprom’s bank financings, such as the $1.1bn transaction recently led by ABN AMRO, and the local currency loop structure that we developed in 2002 to address the specifics of the Russian market. The resulting structure is one that meets all of the requirements from the different stakeholders and will form the basis for future export-enhanced issuance by both state-owned and privately-owned commodity exporters in Russia.” Gazprom produces 25% of the gas consumed in Europe and 41% of Europe’s gas imports and the note is secured by the two major supply contracts, which enabled the transaction to gain an investment-grade rating. It also gave Gazprom much cheaper funding than it could achieve on an unsecured basis. Mr Ward says: “An unsecured debt trade would have been issued at around 8.37%. This note, at 7.201%, is therefore 120 basis points inside, initially saving around $16m a year in interest and over $100m over the life of the note.” Investor appeal The deal was a phenomenal success with investors: the investment-grade rating opened up a whole new class of investors for the gas giant. Following a two-week roadshow in the US and Europe, the order book approached $6bn, including almost 300 investors worldwide. In the face of such enthusiasm, the transaction size was increased from $1bn to $1.25bn. “The three-notch upgrade by Standard & Poor’s and the two notches by Fitch were sufficient to get an NAIC-2 rating [from the National Association of Insurance Companies]. This enabled very solid high-grade and insurance company take-up, and meant that Gazprom was able to diversify away from its typical funding base,” says George Niedringhaus, director, fixed income syndicate, Financial Markets at ABN. The move to triple B- did put off some traditional emerging market investors, however. “At one point, ABN entertained adding other credit enhancements, such as monoline wraps, but the original structure offered the best balance of super-efficient funding for the issuer, while creating a very successful deal from a demand perspective. The triple B- rating did turn some investors away, especially some of the more yield-hungry EM-dedicateds but, at the end of the day, this trade appealed to a very healthy cross-section of high-grade, EM and asset-backed securities investors,” says Mr Niedringhaus. The rip-roaring success of the transaction is even more of a surprise given the environment in which the paper was issued: credit spreads were widening out throughout the process, the Yukos story was continuing to spiral, investor demand had been patchy since April, when the prospect of higher US interest rates caused a sell off across all emerging markets, and the liquidity crisis in Russia’s banking system had caused further damage to bond prices. So why did Gazprom and the lead managers choose to execute a ground-breaking deal in such an unfriendly environment? “On a new, innovative structure, you don’t really have the luxury of choosing the timing; to an extent, this is dictated by the process,” says Mr Ward. “This has been a massive project, with lots of moving parts – such as all the legal elements – that has been almost a year from genesis to execution. It was therefore not really about choosing a time to issue; it was more about going to market as soon as all the moving pieces were in place.” It was also never a foregone conclusion that Gazprom would make use of this structure. Mr Speckmann says Gazprom is part of a select number of Russian companies that already had easy access to the capital markets at attractive funding costs. Because this deal used such a new structure, Gazprom was naturally constantly evaluating whether or not the SEN route was the most efficient option. “But Gazprom could always see the benefits of a successful execution and these have subsequently been played out. The company has gained access to a new investor base and got cheaper funding, has pushed out the average tenor of outstanding debt and has improved its debt profile,” says Mr Speckmann. Learning curve Before going to market, Mr Niedringhaus says that all the leads had to carry out a serious educative process with their sales teams, and notes that the successful distribution was in large part explained by the level of co-operation between sales and structurers. “At ABN AMRO, the structurers spent a great deal of time explaining the complexities of the deal to the sales force. During the marketing process, the structuring guys were often on the phone to the investor alongside the sales people. This really was a joint effort between the sales force and the structuring team,” he says. Investors too, though enthusiastic about the credit and the paper, needed some hand-holding. Many were new to the Russian oil and gas market and, partly because of the Yukos affair, needed some reassurance that the structure of the deal would protect them. “Some were uncertain about the intricacies of the contracts – such as how the cashflows would work and the nature of the terms. There were also a lot of questions about how the assets would be ring-fenced and the implications of Russian regulations surrounding currency laws and legal and political risk,” says Mr Ward. “But the level of sophistication of the questions proved that we were targeting the right investor bases,” adds Mr Niedringhaus. Investor uptake Ultimately, US investors took around 66%, Europe and Scandinavia around 30%, and Asia 2.8%. By investor, fund managers, insurance companies and pension funds took 49.9%, banks took 19.9%, retail 2.67%, hedge funds 21% and others 6.53%. ABN AMRO captured 39.05% of the book. Importantly for ABN AMRO, the structure it created has been proven and could help to generate business from other issuers. Frank Kuijlaars and Elena Gaevaya, responsible for the bank’s oil and gas clients globally and in Russia, say: “It has already gained a lot of interest from other top-tier Russian firms – particularly those with large expected export cash. There are several for whom this structure, or a variant of it, would be very appropriate. Particularly interesting is that some are non-oil and gas companies – such as those in aviation, banking and metals.”

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