As bond market conditions have deteriorated, corporates have turned increasingly to syndicated loans. Ben Aris reports from Moscow.

Russian companies are hungry for capital. Thanks to the country’s return to grace, they have been able to tap the international capital markets to raise money for investment projects or to replace short-term expensive loans with long-term cheap credits. Last year, Russian corporate Eurobonds were all the rage but this year bonds have been overtaken in popularity by syndicated loans, volumes of which increased from the $700 raised in 2001 to the $6bn raised last year.

At the start of the year, Russia’s companies were borrowing about $1bn a month in the form of Eurobonds but, as the bond market conditions deteriorated quickly mid-year, Russian companies turned to syndicated loans, which are cheaper and easier to raise. In August, Russia’s biggest oil company, Yukos, abandoned plans for a $1bn Eurobond and raised the money as a syndicated loan instead.

Oil and gas dominate

Eight out of 10 of these loans have been made to companies in Russia’s oil and gas sector. More recently, though, the country’s leading commercial banks have begun to tap into the enthusiasm for lending to Russia and are raising syndicated loans, which they pass on to smaller enterprises that are unable to access the international capital markets on their own.

“The ratings upgrades and Russia’s return to grace has made it one of the most attractive loan markets and the ball has rapidly gathered momentum since it started rolling about 18 months ago,” says Steven Fisher, head of syndicated loans in the CIS at Citibank, one of the leading issuers.

With oil prices higher than their historical average of about $20 a barrel, the oil companies have been running huge surpluses. However, after a round of acquisitions and mergers this year, some of the bigger companies have used up their cash reserves and are starting to increase the leverage of their balance sheets. For example, as part of its merger terms, Yukos needs to borrow another $1.5bn before the end of this year. As credits are becoming cheaper, the oil and gas companies have begun retiring expensive short-term debt with long-term, cheaper money.

The foreign banks are happy to oblige. Central banks around the world are cutting interest rates to the bone in the hope of stimulating sluggish growth, so the fat margins on lending to Russian companies and banks look tempting. And with Russian corporate governance improving while sovereign risk is shrinking, the risk-return equation has become ever more tempting.

Banks change attitude

“Until last year only a few banks were working or willing to do deals in Russia, and even these limited their business to trade financing where the yields were good and returns secured by exported commodities. Now there are more banks willing to work in Russia and they no longer have these restrictions,” says Tero Halimari, the European Bank for Reconstruction and Development’s (EBRD) deputy head of syndication.

Russia is no longer the pariah of the international capital markets and has shrugged off its image as a defaulter. However, individual companies still need to prove themselves. Bankers say that some Russian companies have started to borrow money not because they need it, but as part of a long-term strategy that includes selling shares to strategic shareholders or an initial public offering (IPO). Some companies are borrowing so they can build up credit histories that will strengthen their sales pitch.

“Many of Russia’s growing companies are issuing bonds and taking credits, not because they need the money – they don’t – but because they have long-term strategic plans to make an IPO or want to bring in a strategic investor and need to establish a track record,” says Ann Tsivoulina, a Russia analyst at Standard and Poor’s.

Blue chips play well

Russia’s blue chip companies are reaping the rewards of getting into the borrowing game early. Typically they began issuing rouble bonds at the start of 2002 before moving on to a corporate Eurobond at the end of the year. As confidence in Russia’s recovery grows, they are moving on to syndicated loans. Having already established a credit history, the deciding factor has become the cost of money and the maturity of the loan.

Sabina Hampel, senior syndication manager at the EBRD, says: “As more banks start to do business again and the Russians build up a credit history, volumes are rising while margins are falling. We are starting to see three-to-five-year credits with the margins falling to 4%-5% over Libor and 2%-3% for the best Russian corporate names.”

August was an especially busy time for bank syndicates. At the start of the month, state-owned gas monopoly Gazprom announced that it was planning to raise a $300m syndicated loan, managed by Commerzbank, that will be used to fund the construction of new pipelines.

Two weeks later Lukoil announced that it had hired lead managers ABN Amro and Citigroup to organise a $500m syndicated loan, backed by export receivables and underwritten by Crédit Lyonnais. The price of the loan was a reported to be 2%-3% over Libor, the cheapest loan attracted by a Russian company since the 1998 financial crisis. With the first tranche of $200m maturing in five years and the second in seven years, it is also one of the longest syndicated loans.

“The conditions of borrowing are unprecedented. After the default of 1998, no Russian companies managed to raise such cheap loans for such a long period of time,” boasted Lukoil’s director of investor relations Gennady Krasovsky when the loan was announced.

Just two weeks later, Lukoil’s main rival Yukos broke the record with an bigger and cheaper loan. Yukos is in the process of raising $1bn from a group of foreign banks at a reported 1.5%-1.75% over Libor, split into two tranches with three- and five-year maturities. When finalised, it will be both Russia’s biggest ever syndicated loan and the cheapest that a Russian borrower has ever attracted.

Yukos had been planning to issue a Eurobond of the same size but a sharp fall in demand for Russian Eurobonds in recent months means currently syndicated loans are about 3% cheaper and easier to arrange.

Together, the three syndicated loans in August amounted to almost three times the $700m of syndicated loans that all of Russia’s exporters raised between them in 2001, when the first intrepid foreign banks began granting credits to Russian companies again.

Business spreads

The doors are always open to Russia’s top 40 natural resource producers as they can back their debt with exports of oil, gas, metals and minerals. However, the situation for the growing companies one tier down is more difficult.

With competition for the blue chip business increasing, Western banks are starting to step down a tier to the medium-sized enterprises where the margins are bigger. The flurry of rouble bonds issued since 2001 has reduced the risks as more and more companies have some sort of credit history with which they can prove their creditworthiness.

Nevertheless, progress is slow and the natural first port of call should be the Russian commercial banks. “The biggest Russian companies can finance development by going to the foreign banks but if you go one tier below then these companies have no recourse to financing. They should be able to turn to the Russian commercial banks but can’t due to the slow pace of banking reform,” says the EBRD’s Mr Halimari.

Domestic reluctance

An attempt to organise domestic syndication has largely failed. Sobinbank organised Russia’s first all-Russian syndicated loan in 2001, a $25m credit for the Alrosa diamond mine that operates in the icy wastes of Yakutiya. It hoped to tap into the growing pool of liquidity among the regional banks, which had little contact with Russia’s biggest companies, but the idea never caught on and was rapidly overtaken by the burgeoning corporate rouble bond market.

Russian banks are beginning to step into the breach, borrowing abroad on behalf of their better customers by making use of their increasingly good reputations. Alfa Bank raised the first unsecured syndicated loan since the 1998 crisis in December 2001, borrowing $20m in a deal arranged by Standard Bank, priced at 3.75% over Libor but maturing after only 180 days.

Since then, the volumes and maturities have quickly increased while interest rates have fallen – although they remain significantly more expensive than the rates that the blue chip companies enjoy.

In March this year, MDM raised a $50m syndicated loan with a 12 month maturity at 2.95% over Libor. It was arranged by Deutsche Bank and Standard bank, which are both active players on the Russian syndicated loan market. And in July, Rosbank raised a $30m syndicated loan, arranged by HSBC Bank with a two-year maturity at 3.5% over Libor.

The state-owned banks have also entered the syndicated loans game and are benefiting from their political clout. Last month, Vneshtorgbank began talks to extend a $240m one-year syndicated loan that it raised at the end of 2002 from a group of Western banks, and it announced plans to raise another $175m credit.


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