n the three months from May to July 2009, Russian capital markets gradually came back to life. State-backed companies Gazprom and Rosselkhozbank led the way with Eurobond issues and by the start of the third quarter, private sector firms such as Alliance Oil and Evraz were following up with convertible deals.
Michael Pugh, a capital markets lawyer for Lovells in Moscow, says one of his clients - a mid-tier Russian bank - issued a bond in August 2008 with a put option after one year. Only about half of its investors exercised the option, which gives an indication of the recovery in sentiment.
The prospect for new financing brings welcome relief to a market that had frozen over after the near-collapse of local investment bank KIT Finance in September 2008. The fresh rise in oil prices, which also pushed the Russian stock market higher, has assuaged fears of any further rouble devaluation. And although the debt refinancing scheme for Russian companies, run by state development bank Vnesheconombank, remains open, the bank has not received any fresh requests recently, after a $14.3bn wave of lending in the last quarter of 2008 and first quarter of 2009.
Even so, the Russian government is not taking any chances. Vnesheconombank has apparently agreed in principle that the one-year loans made from October 2008 should be rolled over for at least another year, to give the new financial market landscape more time to settle.
Strategic partnerships
The settled landscape is certain to map out some changed contours, especially among the local investment banks. KIT Finance, the harbinger of crisis, is close to completing a major restructuring under the ownership of Russian Railways. The two largest locally owned players, Renaissance Capital and Troika Dialog, have laid off about 40% and 25% of their staff, respectively, and both have changed ownership structures. Mikhail Prokhorov's Onexim Group bought a stake of 50% minus one share in Renaissance Group, while Troika Dialog's owners sold a 33% stake to South Africa's Standard Bank, in return for cash and Standard's Russian investment banking subsidiary.
For both banks, the tie-ups will provide a stronger balance sheet that should help raise their credit ratings and status as trading or swap counterparties, and support the fixed-income business. Debt markets have traditionally been Troika's stronghold - it was the sole lead for a sizable Rbs25bn ($823.4m) three-year commercial paper facility for Lukoil in August.
But in a sign that the high-velocity market for Russian investment bankers is starting to return, Renaissance hired Dmitri Sredin from Troika in July 2009 specifically to acquire new rouble debt market business.
"We had all the components in fixed income: a good team, strong research, very strong sales and trading and good client relationships. But what we were missing was someone who could be the engine to drive the deal flow, and that is what Dmitri can do," says Ruben Aganbegyan, who was promoted to president of Renaissance Capital in September 2009. The bank had previously adopted a selective approach to fixed-income deals, but had consequently lost out to Troika's high-volume strategy, which Mr Aganbegyan now hopes to put right.
In his new role, Mr Sredin will focus on seeking deal flow and maintaining key client relationships. Of course, Onexim itself is a client as well as a co-owner - RenCap had advised Onexim on its sale of a 25% plus one share stake in Norilsk Nickel to UC Rusal in April 2008.
"We had wanted a Russian partner for a long time, because there are a lot of business connections that are more available to companies with a strong Russian shareholding," says Mr Aganbegyan. He adds that Onexim, whose CEO Dmitry Razumov had earlier worked at RenCap, does not intend to be heavily involved in the day-to-day running of the bank. The deals done in the months since the Onexim transaction have therefore reassured other clients over any potential conflicts of interest.
"It is clear that there is no information flow between us and Mr Prokhorov on the kind of deals we are working on, or trading flows. He has no interest in equity trading; he is a strategic investor," says Mr Aganbegyan.
In addition to the strengthened fixed-income franchise, RenCap also created an equity-linked team under John Porter in June, with the instruments growing in appeal as issuers seek to lower their financing costs in the wake of the crisis.
"When we became the number one initial public offering bank in Russia, we proved to our international competition that there is no area where you need to be a big global player to do the business - you can be a big local bank and be successful. I am sure will prove this again on convertibles," says Mr Aganbegyan, emphatically.
Jacques Der Megreditchian, Troika Dialog's deputy chairman
Taking a global view
At Troika Dialog, deputy chairman Jacques Der Megreditchian also plans a wider product offering, not least thanks to the capabilities that Standard Bank's Russian business brings to the combined firm.
"These two institutions have a lot in common - emerging markets, commodity economies - and they are complementary at the same time. Standard Bank is coming from a commercial banking background with strong businesses in commodities, interest rates and foreign exchange; we are coming from an investment banking approach focused on equities, fixed income and derivatives. And as markets are more volatile, the hedging needs of Russian companies will be greater, so we can meet that demand," says Mr Megreditchian.
Despite the loss of Mr Sredin, fixed income remains core to Troika's business, supported by a strong research team from which there were no redundancies among the senior staff. Mr Megreditchian also believes the bank's rouble bond brokerage picked up market share during the heavy sell-off by international investors in the final quarter of 2008, thanks to it being one of a handful to have a comprehensive network straddling both international and Russian clients.
And with pools of capital from traditional investment bases in western Europe and the US diminished by the financial crisis, Mr Megreditchian is excited by the international presence that the Standard Bank deal provides. Standard is itself 20%-owned by China's ICBC, which could provide Troika with a relatively straightforward way to open sales channels in Asia without needing a representative platform or local licences.
"In the next five years, we will see a trend of more M&A deals between emerging markets, because that is where you will have both growth and the creation of wealth. That is also true for our brokerage business - you may see, for example, Chinese investors buying Russian equities," he says.
Cleaning up balance sheets
In the short term at least, most Russian companies are more focused on refinancing maturing debt than on any expansion plans. And while top-tier issuers are beginning to regain access, smaller borrowers or those in the most cyclical sectors have yet to find funds in significant quantities.
This brings debt restructuring activity to the forefront. "The trend generally is that there is more meeting of minds between borrowers and creditors," claims Elena Titova, CEO of Morgan Stanley Bank Russia. "This process has been going on for a few months, and pretty much everyone who needs to engage in these negotiations is engaged by now, but effectively in the absence of access to new financing from the markets."
But according to Yury Tuktarov, managing partner of law firm Avakian, Tuktarov & Partners, borrowers in the rouble bond markets in particular lack experience for coping with the demands of difficult restructuring negotiations. As a result, examples of successful rouble bond restructurings that have avoided insolvency are somewhat sparse. Raiffeisen was the advisor to Siberian Airlines, which in April 2009 had secured 85% bondholder approval to restructure a bond for Rbs2.3bn on which it defaulted two months earlier.
"There are often very long discussions with bankers and creditors, but at the end they either fail to reach agreement, or the deal proves to be economically not viable," says Mr Tuktarov. After three rounds of restructuring negotiations, agro-industrial White Frigate Holdings filed for bankruptcy in August 2009, while carmaker Izh-Avto followed suit in the same month after failed merger talks with larger peer Avtovaz.
The government's efforts to strengthen creditors' rights may help to restore confidence in the market by providing banks with better collateral security and recovery prospects. A new law on foreclosures passed in December 2008 allows the use of property not yet constructed as collateral, which could revitalise real estate development lending and also permit borrowers and creditors to enter into advance agreements that would facilitate extra-judicial foreclosure.
"The new bankruptcy law says that the secured creditor, if a bank, gains at least 80% of the available collateral in the event of liquidation, regardless of priorities. Prior to this amendment, creditors were only third in line to access collateral," says Dmitry Sobolev, a senior associate at Avakian, Tuktarov.
Yevgeny Perkunov, a senior associate at Lovells who specialises in dispute resolution, says Russian courts have tended to favour creditors, and there are even signs of a nascent market for distressed debt. Alfa Bank caused a stir in August 2009 when it won a court order freezing property assets of real estate developer Mirax, after purchasing at a heavy discount a $242m loan originally made to Mirax by Credit Suisse. Alternative asset manager Black River is apparently looking at distressed opportunities in Russia, but foreign banks tend not to have the appetite or the resources for court battles - Alfa Bank has about 150 in-house lawyers.
Ruben Aganbegyan, promoted to president of Renaissance Capital
Competitive market
The foreign banks will not be shy, however, when it comes to competing for new issuance. Ms Titova says Morgan Stanley is already beginning to make new hires selectively, following a round of redundancies in late 2008. While Russian borrowers have found it easier to reopen the rouble market, she expects foreign loans and Eurobonds will retain their appeal in Russia as long as inflation remains obstinately above 10%, keeping local interest rates high.
Ms Titova says local private equity or strategic capital could be more attractive, especially in the consumer and retail-related sectors. "But most owners are still looking to refinance rather than sell a stake at such low valuations," she adds.
Rair Simonyan, chairman of Morgan Stanley Bank Russia, says the refusal of foreign banks to exit the market altogether marks a significant contrast with what happened after the 1998 crisis. "And they are not just staying - they are active and positioning themselves for market share," he says.
But nobody is expecting a return to the heavy volumes of capital available before the crisis. Ms Titova says this will discipline companies to manage funds wisely, but it means a tough market for investment banks, where a little-changed pool of players is competing for a smaller deal volume.
Mr Aganbegyan for one appears to be relishing the new environment, and is urging his bankers to launch an "autumn offensive", presenting new ideas to clients to help them take advantage of the market reopening.
"In the boom years there was a growing tender mentality where many banks were invited to compete on fees for every deal. It was never our business model to be the cheapest - our focus is on having the best execution. And now we are in a tougher market, our clients are realising the value of having a partner you can trust to get the deal away," he says.
Even so, this is a difficult context in which to maintain the motivation of staff used to sky-high bonuses, especially for those foreign banks, such as UBS, whose future global strategy is uncertain because of subprime write-downs. Some staff have migrated to the real economy, while others are setting up their own boutiques or joining smaller outfits to gain seniority and a larger share of the earnings pot.
Evgeny Yuriev, who sold the investment banking business of Aton Capital to UniCredit in 2006 but retained its asset manager and retail brokerage, has now relaunched investment banking activity under the name Aton Line. UniCredit Securities - as its new owners rebranded it - has been the main casualty, losing at least four of its staff, including its head of equity trading, to the relaunched Aton.
Bankers are also closely watching the progress of Otkritie, which is predominantly a brokerage business but has been winning growing numbers of advisory mandates. The bank is planning to increase its capital by 33% over the course of 2009, and has already sold a 19.9% stake to VTB Capital as part of this process.
And of course VTB Capital itself has expanded rapidly over the past 18 months, as one of Russia's largest corporate lenders seeks to build out an investment banking platform. The bank has made a number of senior hires from Deutsche Bank's operations in Russia, and the scale of its corporate lending and its state-backed balance sheet will naturally help generate business. But its deal-making track record is still short.
"It's good to have a relationship bank on a deal," says an investment banker at another institution, "but VTB Capital will need to prove it can perform if there are several investment banks on a ticket, because no one likes to share fees while making more of the effort."
