The debt specialists at Merrill Lynch have been busy blazing new trails in the emerging markets. Edward Russell-Walling reports.

One of the sure signs that an emerging economy is really emerging is when its citizens start to borrow money from the bank. This means the bank has to think of new ways of raising funds and capital. When it does, don’t be surprised to find a team from Merrill Lynch somewhere in the vicinity.

The Merrill Lynch debt specialists who cover central and eastern Europe, the Middle East and Africa (CEEMEA) are developing a reputation as bringers of first-ever, sole-led deals to market. As often as not, the clients are financial institutions, a segment in which the house already has an admirable track record.

This year, the emerging markets debt team has already completed a succession of ground-breaking transactions from jurisdictions including Georgia, Nigeria, Turkey and Russia. As these economies develop and grow, domestic banks are expanding their retail lending activities, catering to rising consumer demand for loans and credit cards.

Georgia’s turn

Georgia, where the economy grew by an estimated 10% in 2006, is no exception. Bank of Georgia, the country’s largest bank by assets and The Banker’s Bank of the Year 2006 for Georgia, floated on the London Stock Exchange last year – the first Georgian company and the second bank from the Commonwealth of Independent States to do so since 1999. It is already listed in Tbilisi, where it has been much favoured by foreign investors, accounting for more than 40% of the market’s turnover.

The bank has 99 branches and more than 380,000 retail clients on top of its corporate and investment banking operations, and has 24% of the local insurance market via a wholly owned subsidiary. As its balance sheet grows, so does its need for funds. Late last year, Merrill Lynch organised a Georgian investment conference in London.

Among those present, besides the Georgian prime minister, was Bank of Georgia chairman Lado Gurgenidze, the former western investment banker under whose leadership the institution has been transformed. “We helped to show him there was investor demand, and that the bank could get something done in the international capital markets,” says Alex von Sponeck, Merrill’s head of CEEMEA debt origination.

There certainly is investor demand. The diversification of emerging markets issuers and geography has been a big theme in the market this year, fuelled partly by the ‘not another Russian bank’ syndrome. Spreads on emerging markets’ sovereign debt have tightened, making it harder for fund managers to generate the kind of returns that justify their fees. So they are more and more responsive to new names from new countries.

Bank of Georgia represents both. Its $200m senior debt issue was the first ever Eurobond out of Georgia – there has been no sovereign paper as yet.

Higher profile

“Three years ago no-one had ever heard of Georgia, and even those in the know wouldn’t go there,” says Mr von Sponeck. Things have changed, and some 80 investors participated in the roadshow. Many of their questions had to do with the Georgian economy, which, as Mr Gurgenidze told them, pretty much sells itself, with rising per capita GDP, falling inflation and government spending-to-GDP ratio, and a currency that is strengthening against the dollar.

The issue enjoyed five notches of upgrade from two separate agencies during the roadshow and was finally rated B+/Ba2/B. The original idea was to do a $150m deal.

“Initial price talk was in the 9.5% area,” says Julian Trott, Merrill’s head of emerging markets syndicate. “That was revised to 9%-9.25%, and the deal was done at 9% at par.” As interest crystallised, orders worth $600m were booked and the size increased, as a result, to $200m and the term from a three-year to a five-year bullet. In all, more than 100 accounts took part, some of whom already owned the bank’s shares.

If the Georgian issue was relatively straightforward, the Merrill team displayed its talent for hard work to better effect with BB-/B+ rated First Bank of Nigeria. Like Georgia, Nigeria’s is an economy that is coming good, helped by high oil prices. Per capita GDP is on the up and there has been substantial growth in retail banking. The banking sector has been overhauled, and an original 89 banks have been whittled down into 25 bigger and more sustainable institutions.

The oldest and biggest is First Bank of Nigeria, which didn’t need senior debt, but did need capital. “First Bank of Nigeria needed to find ways to fund its growth, ideally without diluting existing shareholders,” says Mr von Sponeck. “Hybrid capital is a very interesting way of doing that.”

Merrill worked with the Central Bank of Nigeria on its rules of what would qualify as Tier 2 debt, and began marketing a $175m subordinated 10 non-call 5 lower Tier 2 transaction. This was the first subordinated deal from a Nigerian bank and the first hybrid capital offering out of sub-Saharan Africa.

It was not, however, the first debt issue by a Nigerian bank. Guaranty Trust Bank had led the way in January and left something of a pothole in the road. GTB had priced a $350m five-year issue of senior debt at 8.5%, led by Standard Bank and Afrinvest. The deal appears to have been too large and too tightly priced, however, since it took a beating in the secondary market, widening to 9.8% and leaving some rather underwhelmed investors.

Re-education necessary

First Bank and Merrill had to navigate their way around this, re-educating investors on Nigeria and its banking sector. Merrill says this was so successful that it even had a positive effect on the price of GTB’s paper. The First Bank book was twice oversubscribed, but First Bank decided not to push its luck. The size stayed where it was, even though Merrill believes it could have printed another $30m, and pricing remained in line with guidance at 10% (9.75% coupon).

Another milestone deal involving the Merrill team came from Garanti Bank, Turkey’s third largest private bank.

It priced $500m in 10 non-call 5 subordinated fixed rate notes, with political insurance that boosted the Moody’s rating to Baa1.

This was Garanti’s first subordinated issue and the largest ever hybrid capital transaction from Turkey to be placed in the capital markets. The deal was twice oversubscribed, and priced inside guidance at 207.7 basis points (bp) over five-year US Treasuries. The coupon is 6.95% with a 100bp step-up after year five. Merrill and Deutsche Bank were joint lead managers.

Russian first

Merrill was joint lead again (with Dresdner Kleinwort) on the first Russian securitisation of diversified payment rights (DPR) to be rated investment grade from Alfa Bank. The dual tranche transaction was Alfa’s third DPR securitisation. The amounts raised were €145m and $200m, paying 190bp over three-month Euribor and 200bp over three-month Libor respectively.

Back in sole mandate territory, the team brought a new Turkish corporate name to market recently in the shape of Calik, a privately owned and fast-growing conglomerate that is active in textiles, construction, energy and telecoms.

Calik is Turkey’s largest exporter of denim and the licence-holder for the construction of the trans-Anatolian oil pipeline. It builds power stations and is acquiring a majority stake in Albanian Telecom. Calik successfully launched a $200m (increased from $150m) five-year bond, priced tighter than guidance at 8.625%. The issue was rated B+.

“In emerging markets there are some fantastic companies and banks whose ratings are constrained by the national environment,” says Mr von Sponeck. “If Calik had been a UK company it would have been rated much higher.”

Merrill Lynch’s emerging markets effort across global markets and investment banking has been adding muscle over the past four years. Having started with three people in DCM, it now runs to well over 50 staff across GMI. It will no doubt be back in the market before long with yet another definitive emerging markets transaction.

“We need to do flow business for market visibility, but the fees are minimal,” says Mr von Sponeck. “In some of the new countries, you get the visibility of being in new markets. It’s harder to execute but the fees are better, and it’s more intellectually satisfying, and more fun.”

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