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Banks join party

The rise of the rouble against the dollar and falling bond yields have encouraged some banks to issue Eurobonds for the first time. Ben Aris reports.
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Russian corporate Eurobond issues in recent years were toasted with champagne and cigars on both sides of the table. The companies tapped the market for relatively long-term, cheap money, while the bondholders enjoyed significantly higher yields than their home markets could offer. Russia’s banks refused all invitations because the cost of money was too high. But the relentless rise of the rouble against the dollar and falling yields mean they now want to join the party.

Russia’s first post-crisis bank bond was issued by Gazprombank, a daughter company of state-owned gas monopoly Gazprom, with a two-year E200m bond at 9.67% yield. Gazprombank took another gamble this year, uncertain of how international capital markets would receive a Russian Eurobond, but its four-year $300m tap was one-and-half times oversubscribed with a low yield of 7.25%.

Confidence boost

Gazprom’s deal also boosted the confidence of other banks and companies in the wake of the Yukos affair.

The Russian stock market sold off heavily after Yukos’s biggest shareholder and Russia’s richest man, Mikhail Khodorkovsky, was arrested in October and it has been jittery ever since. But the enthusiasm for Gazprombank’s bond showed that investors see the fracas as a one-off political fight, rather than the beginning of the end of liberal reform.

Other issuers were quick to confirm their Eurobond plans: diamond producer Alrosa wants to issue a $300m bond delayed from last year, telecoms company Sistema has mandated CSFB to place a seven-year $350m bond in the next two months, and the City of Moscow will refinance its E350m bond that matures in October.

What will spur the most interest, though, is the raft of Russian banks stepping into the ring for the first time. “Normally in an emerging market it is the leading banks that issue the first Eurobonds, but typically Russia has done things upside down. The banks are only now floating Eurobonds and they have to offer higher yields, but the corporate and banking yields curves will cross – maybe as soon as next year,” says Michael Workman, the head of fixed income at Trust Investment Bank.

Russia’s leading commercial banks have also been dipping toes in the water. Alfa bank was the first to issue a Eurobond in November 2002, a three-year $175m bond with a 10.75% yield. That was followed by MDM’s three-year $125m bond also at 10.75%.

The hunt for yield

With yields of more than 10%, Eurobonds have not been an effective source of capital for Russian banks, which last year could raise funds more cheaply from foreign trade credit agencies or on the domestic market. But, with global interest rates at record lows, international investors are hunting for yield. With Russia’s economy growing strongly and it’s ratings on the rise, the enthusiasm for Russian debt has driven yields down to the point at which banks have become interested.

Even retail giant Sberbank could not resist: it placed a three-year $1bn Eurobond at Libor plus 1.75% – by far the largest and cheapest Russian bank Eurobond ever issued.

“Sberbank’s timing was fantastic,” says Mr Workman. “They placed it just after Moody’s marked Russia’s rating up to investment grade and, as a state-owned bank, Sberbank was awarded the same rating. They hit the market at the absolute peak.”

Other banks do not have Sberbank’s weight and are offering small amounts to whet the appetite of investors, some of whom still remember the billion dollar bank defaults of 1998, and get them accustomed to the idea of lending to Russian banks again.

“Russian banks are very keen to borrow on the Euromarket because this is about the only place where they can obtain long-term funding at a reasonable price,” says Alexei Moisseev, an economist at Renaissance Capital. “However, due to the much smaller size of issues and higher perception of credit risks, they are not able to match their corporate counterparts either in terms of funding costs, issue volume or tenor. Due to their smaller size, bank bonds are relatively illiquid, and remain a target for a yield-hunting niche investor.”

Following suit

Within a week of Gazprombank’s launch, two more specialist banks were on the road, hawking bonds. LUKoil-controlled Bank Petrocommerce placed a $100m Eurobond at the end of January, after postponing plans for an issue last year. Ranked 16th in Russia by assets, it benefits from the implicit backing of its rich parent and the three-year bond is priced close to the Russian Eurobond yield curve at about 9%. And gold mine trade finance specialist Nomos bank – ranked 18th by assets – placed a three-year $100m bond at 9.1%.

Russian banks have never imported so much foreign currency as they did in the last three months of 2003. What is thought to be only the start of a wave of issues – the Central Bank of Russia estimates that $7.6bn arrived in the country between October and December 2003 – is already twice as much as in the same period of 2002 and 2001 combined.

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Read more about:  Central & Eastern Europe , Russia