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14 | ifr special report | April 2008 RUSSIA AND CIS LOANS ROUNDTABLE


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aware that there is a finite amount of liquidity that is going to be put to play on these deals going forward. We have much more corporate deals


to look at now, the markets are opening up, lenders want to diversify their risk away from FIs, away from oil and gas, into new sectors, so there will be much more liquidity coming into the new areas like telecoms and retail and other areas, where people see opportunities to diversify away from their concentration of risk. I think the Kazakh issue highlighted that. Put all your eggs in one basket with FIs, then the whole market tends to go the same way. You do not tend to see one or two FIs going down, as with the Russian crisis, you see the whole lot. So I think there is a period when I think liquidity is going to move away from the FI market, certainly in Russia, and more into the corporate market.


William Sharpe: There is definitely more reluctance on the part of Russian banks to increase pricing in response to the crisis. It is interesting to note that last year Russian banks went massively to the bond markets, to the euro bond markets, compared to previous years. By my count, about US$20bn in euro bonds were placed in favour of Russian banks last year, which illustrates the fact that typically Russian banks have gone to the international capital markets more than their corporate counterparts, and a greater portion of their debt is in foreign currency. If you combine this with the sort of general perceived weakness of the financial sector today they are a victim rather than being guilty. It is very rare are the Russian FIs to have invested in subprime in the United States. It is a combination of factors that makes the perception of Russian FIs less attractive compared to previously. Unless the perceived risk is correctly remunerated, then liquidity will still be drawn towards other asset classes.


Hasan Mustafa: It is not an issue that nobody wants to lend to the FIs, it is an issue that they do not want to pay for the liquidity that they need. So to the extent, if there is a large Russian bank or some of the Russian banks want to borrow, I think the market is still there, and that is the widest possible investor universe that one could think of in terms of the


sector. Because even Asians will play it, Egyptians will play it, Middle Eastern will play it. So from a distribution risk point of view, it is probably the best sector to play in, but because the pricing had come down so low, I think some of the borderline retail investors had disappeared. But if they want to come back to and raise money, I think FI is probably the first sector that could rein- vigorate the retail investor base, without the need to pay for that. I find that astonishing, that banks are still out there pitching new deals at FIs at returns which are lower than their own cost of funding.





There is definitely more reluctance on the part of Russian


banks to increase pricing in response to the crisis. It is interesting to note that last year Russian banks went massively to the bond markets, to the euro bond markets, compared to previous years.


Christian Eberl: There is a certain view among the arrangers where the pricing should be, but I think intensive discussions are ongoing, and I think what I hear for the time being is that everyone tries to find the lowest common denominator, which is obviously reducing the facility amount in the first instance and then trying to raise each available cent in the market. I think on the face of it, this might be a model to play, but not sure whether this is the appropriate model to play.





William Sharpe: There have been a couple of transactions that have been blow-out successes for this year for FIs, at the lower end of the tier. Now, blow-out success just in terms of percentage over- subscription, not in terms of total amount raised, but it shows that if the


transactions are priced correctly, then they will generate appetite in the market.


Benjamin Binetter: I do find it astonishing that cheap deals are getting done, even if just barely; Sberbank really scraped through, and yet they can still find one or two banks that will completely undercut the market in the FI sector, in such a way that you are not seeing in other markets such in the energy and commodity sectors where the banks are pricing deals very closely to one another. And they are undercut- ting their own funds so there is no business logic in that.


Hasan Mustafa: There are some leading banks who do nothing but FIs. For them, that is their bread and butter business.


Benjamin Binetter: Yet those same banks, when they commit, or prior to committing to a deal which is priced a lot higher, with a security package on an energy deal, will not send in a commitment before they have actually confirmed with the treasury department whether they can actually raise whatever liquidity they need to commit to a deal. So there is a complete gap.


James Nisbet: I think there is still obviously a huge number of banks over the years that have become arrangers of FI deals. There is a lot of competition out there, and competition leads to one thing: price reduction and competition for pricing. The borrowers are not stupid. The FI borrowers are some of the most sophisticated borrowers in the market. They know how to play the banks because it is tested over time, the Turkish banks used to be the classic example. So we need to be careful in that market, because we could very quickly find ourselves back at square one again where we have rock bottom pricing. This is where again the secondary market will be very key in terms of determining where pricing has gone. If you look at names like Sberbank and even VTB over the years, the pricing has just gone down and down and down, and the fall has got steeper and steeper and steeper, and as that has happened, the secondary price discount has got wider and wider. You look at the discounts now, if you want to sell a Kazakh


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