10 | ifr special report | April 2008 RUSSIA AND CIS LOANS ROUNDTABLE “
People forgot the fact that cycles always happen. There will always be a credit cycle. You can elongate them, but unfortunately when you elongate them as we have seen now, the fall tends to be much sharper and the recovery slower.
largest aluminium company and you have the world’s largest nickel - everything is the world’s largest in terms of these core sectors. Despite all of that and the credit strengths of some of these businesses, people are still looking back and saying where Russia was seven or eight years ago and do not want to get burnt. I think the memory of 1998 still lingers on. So whatever we were seeing in the first half of 2007 where everybody was saying pre- export financing is out of fashion and we are going to move on to the unsecured side, I think there was, even before the correction, a realisation that yes, you could do unsecured, but a lot of banks, especially the European banks, do not want to do unsecured. They only have commodity financed businesses, and that is the only way for them to get into Russia.
Benjamin Binetter: In 2007, I think you are right in saying that. It was a very borrower-friendly market and we were gradually moving away from secured trans- actions. But that was only really reserved for a select few and for small amounts. We never actually really got to a market like in Western Europe of a pure plain vanilla market, because there is a still perceived risk tied to the country. The fact that we are seeing banks manage their country limits and take a portfolio approach rather than a deal-based approach a lot more today is also linked to the fact that they have become more sophisticated in the application of the risk return models. The application of Basel II requirements also means that it is easier to find a balance on a secured transaction than it is on a cheaply priced most often not unsecured deal, and it is easier to allocate a new portfolio.
IFR: Is there any possibility of the secured structure being put on other non-commodity companies?
James Nisbet: Totally. We are looking at real estate and infrastructure deals in Russia. All these deals can be secured. We are seeing diversification into retail with
X5 and others, into telecoms, into lots of other areas because obviously there is a lot of need there. So I think these deals probably will be structured with security attached to them, by and large. Thankfully we do not have short memories, we do remember the Russian crisis, we do remember the Asian crisis, and it is important that we do remember that because that is in a way why the leveraged market became so over heated. People forgot the fact that cycles always happen. There will always be a credit cycle. You can elongate them, but unfortunately when you elongate them as we have seen now, the fall tends to be much sharper and the recovery slower. So should we be saying to ourselves,
well, actually, maybe we are better off having shorter cycles like we used to in countries like Turkey? There you would have a natural five-year cycle where pricing and structures would slightly erode, but then you would have a bit of a problem, and then pricing would go back up again, structures would tighten in again and then you are back on the train again in the typical cyclical fashion.
IFR: Is that fair on the borrower? The position in Russia now compared with 1997 or 1998, is miles away.
James Nisbet: There are still risks there. You still have a legal system that needs a lot of work doing to it. The LMA are going out to Moscow in June to talk about issues such as standardisation of documentation in Russia. The reason the rouble market in Russia has not really taken off yet is because there is a lack of faith in the legal system. There is a lot of work to be done there.
Everybody focuses on the macro economic situation and says fine, yes, the economy is booming, GDP is at 8 per cent, but there are a lot of risks there still. What is going to happen with the US recession? How is that going to impact Russia? Is it going to be dislocated? We are still reliant on the dollar in Russia and in the CIS countries.
So there has to be an impact there, and as yet people do not know what this re- cessionary pressure is going to have. Our own economist gave us a presentation the other day and said Russia should fare fairly well. If you look back to when the dot-com boom hit and the bubble burst there in the States, the economies in emerging markets did not actually fare too badly. But we just don’t know. This is a global crisis here, so my view is that Russia will be inevitably be impacted and that is going to cause inherent credit risk. So while we are in a fairly benign credit environment at the moment in terms of default rates, everybody has to accept the fact that that could change in the next six months to a year, and we have to protect ourselves. We didn’t protect ourselves with the leveraged market, and look what has happened. So people are using that, which is a very fresh experience, and saying, let us not replicate this here. We have a chance here to grow a market in a sensible fashion, with sensible pricing, sensible structures, but also making sure that we are protecting ourselves as much as possible from the inherent credit risk.
Benjamin Binetter: The borrowers have simply no choice, frankly, because the contagion effect from other markets is clearly there, and frankly their financing needs are substantial, whether it is in the form of refinancing of bridge loans, like we discussed, or M&A activity, or even just purely capex, I think there are limitations as well on the domestic banking market. Borrowers are simply not in a position to say no. The banks that have been leading the transactions in Russia are very consistent in their approaches, in their pricings, in their structures, without necessarily billing together. Everyone knows today that there
might be one or two outliers, but the broad consensus is generally there is a need to strengthen structures. And borrowers simply have to accept it, because there is not liquidity that you can rely on at a later stage.
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