April 2008 | ifr special report | 3 RUSSIA AND CIS LOANS ROUNDTABLE Russia and CIS loans roundtable
IFR: Russian lending has been in the tens of billions this year and so far the market appears to hold up well. But can this continue?
Hasan Mustafa, RBS/ABN AMRO: When you talk about the volume and the supply side increasing dramatically over the last three or four months, one needs to keep in mind the fact that the bulk of that is on the short term. So these are bridges to acquisitions, they are bridges to bond issues or IPOs, which essentially means that if you divide the market between term and bridge financing then the bridges will outweigh the term side of the business. This has two implications. Firstly because these bridges are event driven, it is the borrower who is at a disadvantage in the sense they need the money and they need it at a certain point so their flexibility is limited. Lenders on the other hand, because of the volumes that are being raised often in similar sectors with similar credit stories, have been feeling the pinch because bridges generally do sell very well among retail investors. Retail lenders do not like to take refinancing risk as they are unlikely to share any of the refinancing economics. Because of the increased supply, pricing had to increase to accommodate these requests, and timing of these financings played a big part in pushing the pricing up. I think the top tier banks present here
have, to some extent, done their part in moving the pricing up. They need to make sure that if they are taking incremental exposure in Russia or CIS on a similar sector, or even if not a similar sector but large amounts, then they know that they will not be able to distribute in the retail, then the pricing needs to stack up to accommodate that incremental appetite. In terms of the trends, my sense is
that the trend will continue. There are strategic assets west of Russia and south of Russia that are becoming cheaper as economies around the world get into difficulties. If you have the balance sheet and can raise financing, then from a buying opportunity point of view, the timing could not be better. So the trend in terms of increasing volumes is likely to stay, and the banks
who are looking to do these short-term, short-end financings are being not only guided by higher pricing, but also by available ancillary business. Where previously, if you look six months ago, borrowers would take a slightly more aggressive stance and say, you commercial banks, you give us the money, investment banks will take the front role in the take- out story. But no longer. That “we cannot lend” card, which was being played by the IBs is no longer valid unless there is a serious issue where the bank cannot lend for reasons that we all know.
Banks are being a lot more choosy
and can afford to be choosy as to which deals they wish to allocate their finite balance sheet.
Benjamin Binetter, BNP Paribas: Banks are being a lot more choosy and can afford to be choosy as to which deals they wish to allocate their finite balance sheet. Indeed, of the things that we are seeing at the moment is a tendency for deals to proceed on a quasi-club basis, in a bid to minimise the amount of liquidity that has to be built up in the retail phase, knowing that those retail investors have a choice of deals, not just between deals in Russia and the CIS, but deals across the globe. That is certainly something that we have seen in the Asian market, which a lot of people have been talking up, and we have seen actually very little liquidity coming out of that markets, bar one or two exceptions that were deemed to be strategic by a few of those investors. The banks that were once very active in
the retail phase have now seen the market as providing an opportunity to move up a
level, which is a gap that has been left by some banks that no longer have the ability to underwrite large amounts. Banks will step up on the premise that as a core relationship lender they will get equal treatment on the ancillary business take-outs. A year ago we could have more easily
sold a deal to the market on a normal sub-underwriting process, with no MLA title, no ancillary business to be shared, but that is no longer the case. The banks that join at the top want to be treated in the same way.
IFR: Is a sub-underwriting phase still possible?
Hasan Mustafa: I think it still is possible, but generally a sub-underwrite is considered a stuffee position. Banks who generally would come in as a sub- underwriter now suddenly realise that with everybody else gone, they can step up and be a joint underwriter. Going back on the retail appetite, I think
that part of the issue with the retail investor appetite disappearing is the fact that the secondary pricing has widened considerably. For them, there is no rela- tionship angle to any transaction. Another result of what was happening in 2007 – in terms of volumes – was that banks had to create room on their balance sheet and assets were trading at 96, 97 or 98 that were completed in primary at 99. As a retail investor the choice is, should I do a primary deal at 30 basis points upfront or shall I pick it up at 97 or 98?
James Nisbet, VTB Europe: Relative value is a key issue here. The retail market is now looking across all areas to see where they can pick up the best yields. Obviously with the state of the bond and derivatives market at the moment, quite often they can get better returns through other areas than going into a loan. At the moment the primary market is being driven by relationship issues. As a result of this we are going to see top arranging banks actually locking into the potential refinancings of these bridging loans and short-term facilities, as people anticipate reopening of the
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