Citi’s debt capital markets team switched nimbly between reopening Russian markets when risk appetite was high and placing Gulf state sukuk when investors searched for safety.

If timing is generally half the battle when issuing in the debt capital markets (DCM), it has been absolutely key to success during the past couple of months. Good timing requires patience, fortitude and luck. In 2012, Citi’s central and eastern Europe, Middle East and Africa (CEEMEA) debt team has benefited from all three.

By the second week of June, the 10-strong DCM team was ahead of the field in CEEMEA bond issuance for the year-to-date with a clear lead over Barclays Capital and Deutsche Bank, according to Bloomberg figures. The CEEMEA countries, of course, represent a very mixed bag of economic characteristics, political developments and shades of risk. This very diversity allowed CEEMEA teams covering both sovereign and corporate debt to remain busy even as volatility returned to the markets, exploiting specific windows of opportunity as they opened, then moving on to fresher fields as the windows started to close again.

In the first few months of the year, Citi was noticeably active in Russia. The second half of 2011 had been as dismal for Russian issuance as it was elsewhere. Even as the new year got under way, investors remained nervous about the upcoming Russian presidential election and the possibility of civil disturbance. Conflicting ministerial statements about a possible new withholding tax on Eurobond interest payments to non-residents – the burden of which would typically fall on borrowers – further dampened any urge to issue.

As general investor confidence staged its exuberant new year revival, however, worries over the mood on Russia’s streets subsided and the tax situation was clarified. This reopened the way for Russian investment grade issuers, and Citi co-led a number of early 2012 transactions. They included a dual-tranche $1.5bn, 10-year deal from Sberbank and a Rbs10bn ($300m), five-year issue from Russian Agricultural Bank – the latter showing how international investor appetite was now willing to swallow currency as well as credit risk.

Reviving subordinated debt

Citi was joint bookrunner, alongside BNP Paribas, Deutsche Bank, Troika Dialog and VTB Capital, in the Russian Federation’s well-flagged $7bn multi-tranche jumbo sovereign offering in March, which equalled the all-time record for an emerging market bond issue. Lower-rated Russian issuers were now beginning to return to market and a particular highlight was a lower-Tier 2 issue from the second largest private sector bank, Nomos, reopening the Russian subordinated debt market after nearly a year.

Nomos released its mandate in July 2011. The bank, listed in London and Moscow and rated Ba3/BB (Moody’s/Fitch) with a stable outlook, is perfectly capable of funding itself domestically, but it wanted to raise capital in order to grow its loan book, and hoped for a window in quarter three when it could transact in US dollars.

We have done a lot of firsts in central Europe in the past year. They have included the first US dollar transactions for Romania, Latvia and Slovakia 

Marzena Niziol

“There were a number of stars that needed to be aligned,” says Vassiliy Tengayev, a Citi vice-president responsible for Russian and Commonwealth of Independent States financial institutions DCM. “One was market environment, and another was a Central Bank of Russia [CBR] regulation that was effectively preventing banks from including subordinated debt in their capital structure.”

Though the consequences seem to have been unintended, the regulation insisted that if subordinated debt was to be counted as capital, its yield should be aligned with comparable market precedents in the previous calendar quarter. Since there were no deals in the previous quarter, there was no such precedent. Instead, by referencing the CBR’s own refinancing rate, the official tax code obliged would-be US dollar issuers to limit yields to between 6.4% and 6.6%, impossibly low for subordinated debt.

Nomos and its bankers, with other market participants, began a series of discussions with the CBR. “It was very important to have this dialogue with the central bank,” says William Weaver, Citi’s head of CEEMEA DCM. “Banks were looking to capitalise themselves but the regulations were preventing it. The CBR was open to discussion because it recognised that this was in its own interest.”

While these talks progressed, the quarter-three window never materialised. “Nomos is very market savvy,” says Mr Tengayev, “and it realised early on that the level at which it could print did not make sense for it commercially.” It was the end of February 2012 before a transaction, jointly led by Citi, JPMorgan, VTB Capital and Nomos itself, began to look viable.

Nomos had previously done only Reg S deals in the international market but now, to reach a broader investor base, it decided to issue under Rule 144A as well. It also opted for a non-call life structure, partly because investors had been alienated by Russian banks’ history of not calling their issues (with Nomos as the honourable exception).

Setting a precedent

The transaction was announced in the second week of April. The team believed that, with volatility never far away, speed was now of the essence and restricted the roadshow to three days, with two teams visiting Europe and the US (a non-deal roadshow had called on Hong Kong and Singapore a few weeks earlier). Russian subordinated debt declines by 20% annually in terms of the uplift to credit ratings over the final five years to maturity, so Nomos was looking to issue for longer to enjoy a period of full capital treatment. Roadshow feedback suggested a slight preference for seven rather than 10 years, and so seven it was.

After waiting for an auction of Spanish 10-year bonds to pass off – uneventfully – the syndicates released the initial price guidance of 10% to 10.25%. With an orderbook of more than $900m, the offering was then priced the following day at 10% and sized at $500m. US investors liked the size, which promised some liquidity, and the transparency afforded by the London listing. “US emerging market funds took 20% of the issue,” says Peter Charles, Citi’s head of Europe, Middle East and Africa fixed-income syndicate. Russia took 25%, UK and Asia 9% each, and the rest of Europe 34%.

This was the first lower-Tier 2 deal from a Russian bank since July 2010, and it went ahead on the understanding that the CBR would be more constructive in applying the regulations. Since the central bank will only officially recognise debt as capital after the fact, Nomos has the option to recall the bonds if confirmation is not forthcoming. However, the CBR is expected to announce changes to the rules in July 2012.

The deal prompted speculation that it would be followed by a wave of Russian bank subordinated debt issuance. Indeed, a week later, the larger Gazprombank successfully brought its own $500m, seven-year subordinated deal to market, albeit with a tighter 7.25% coupon. But in early May, the Greek elections brought the euro crisis back into focus and, as investors retreated, emerging markets were not immune.

“With risk appetite declining, our business changed,” says Mr Weaver. “So we repositioned ourselves for the type of markets we are in.”

Sukuk demand

Strong local demand for Middle Eastern sukuk paved the way in May for a $1.25bn dual-tranche deal for Dubai and a $750m transaction for Banque Saudi Fransi, with Citi as joint lead manager on both. With Barclays Capital and JPMorgan, the bank was joint bookrunner on the (investment grade) Slovak Republic’s inaugural $1.5bn 10-year offering, twice oversubscribed.

“We have done a lot of firsts in central Europe in the past year,” says Marzena Niziol, Citi’s head of central and eastern Europe DCM. “They have included the first US dollar transactions for Romania, Latvia and Slovakia.”

Some countries in the region are becoming ports in the European storm, and none more so than Poland, which pulled off a €1.5bn long 10-year deal in the second week of June. Again, timing was crucial. Poland had been contemplating a benchmark issue since March, and struck immediately after news of a Spanish bailout cheered the market, achieving its lowest ever new issue premium of only two basis points. Citi, Barclays Capital, Erste Bank and ING were joint leads.

“The issuer was patient and waited for the right moment in the market,” says Mr Weaver, adding that execution was extremely swift. “We talk about intraday execution, but this was intra-morning execution. The books closed after two hours. There is volatility, but when you find a window, investors are long of cash, so you can take advantage of the strong technical position and get the deal done.”

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