12 | ifr special report | April 2008 RUSSIA AND CIS LOANS ROUNDTABLE
Christian Eberl: So really not a western-style model where you had your traditional institutional investor base and, as we heard from James, the banks were just passing through, making loans without really caring about credit quality itself, because you were sure you would find someone taking on the risk and you can get rid of it. Emerging markets have always been bank-driven markets and will remain so. The bank market was always the most flexible, one really to be tailored exactly to the need of your investor base. For example, if we have something in Russia or if we have something in Turkey, we will listen what for example the local market will require in order to get things done because in such an area a local market might be a very important source of liquidity, which might not be a traditional western-style pattern. But I think that is our big advantage; that we can be flexible and will be flexible to get things done. This should avoid the problems that have impacted the leveraged market.
Hasan Mustafa: The intensity of credit and risk analysis is far stronger than what you see in Western Europe. In Western Europe everything is weighted, things are easily available and disclosure is good. So it is all about originate and distribute. In our case, you need to dig and dig and dig until you get your info memo ready. I think the whole ethos of focus on credit and risk has held us in good steam in the sense that we never originated deals that we thought we would never hold ourselves. So that already brings in a certain amount of discipline. By virtue of that, we never had an institutional appetite for the assets that we were originating. So the troubles never arrived, partially because of the fact that our deals were always lender friendly, to the extent that we were doing a lot more due diligence and risk analysis than what is being done in the Western European context.
James Nisbet: I have been out to see a lot of the investment banks recently, and what I am sensing on the institutional side is that you will get institutional money coming into the Russian market, and it is already coming in, but it will be very much driven by specific sectors. You will get funds being set up that want to invest in things like infrastructure. Our economists have worked out there is a trillion dollars’ worth of funding in Russian infrastructure over the next ten years. So the demand is huge if you think about it; airports, roads, hospitals, all of this infrastructure in Russia and in the other CIS countries needs over time to be developed.
You need to dig and dig and dig
until you get your info memo ready. I think the whole ethos of focus on credit and risk has held us in good steam in the sense that we never originated deals that we thought we would never hold ourselves.
There is no way that the loan market is
going to have the capacity to take that. But what we will start to see now is funds being set up, and they are already being set up, that will invest in certain strategic areas like infrastructure, you would be getting real estate funds as well being set up. And they will not be necessarily an integral part of the loan structure as we saw with the leveraged
market where institutional funds take a tranche or a couple of tranches of a leveraged loan; it will be a separate part of the package. So you might get a syndicated loan, a structured loan put in place to provide part of the financing, and the fund money maybe through a mezzanine tranche or something will come into that, but it will be a separate part from the senior debt structure. So the traditional LBO structure model will have to be revised. We will not see it replicated. I do not think we can say that the institutional fund market is dead and it is not going to be investing. I think there is a lot of interest, there is a lot of private equity interest already in Russia and CIS and I think this market will develop, but along different lines. Hopefully they will learn from what has happened in the US market and in Europe, but it will be more specialised.
William Sharpe: You can point to the level of maturity of Russian equity markets as well as the legal system, which has been mentioned, from the point of view of transparency and also sophistication. These are two major constraints in terms of allowing Russian potential LBO market to evolve along the lines as it did in Europe and in the United States. At the end of the day there is only so much you can do with a domestic Russian entity that does not export products, and therefore does not have income in foreign currency outside of roubles. Now, especially the constraints just mentioned, the legal system in particular, that is just a different play, both for a lender and for an equity investor today, in my view.
IFR: But there are several popular borrowers that don’t have foreign currency revenues.
William Sharpe: Absolutely, but it is just a different type of marketing
I do not think we can say that the institutional fund market is dead and it is not going to be investing. I think there is a lot of interest, there is a lot of private equity interest already in Russia
and CIS and I think this market will develop, but along different lines. Hopefully they will learn from what has happened in the US market and in Europe, but it will be more specialised.
| Page 2
| Page 3
| Page 4
| Page 5
| Page 6
| Page 7
| Page 8
| Page 9
| Page 10
| Page 11
| Page 12
| Page 13
| Page 14
| Page 15
| Page 16
| Page 17
| Page 18
| Page 19
| Page 20