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4 | ifr special report | April 2008 RUSSIA AND CIS LOANS ROUNDTABLE “

Heavy use of the loan market means pricing will just keep going up and up. Every time you have a new request, you are not looking at whether the last deal was 250 all-in or 300 all-in, you are wondering how much can we charge for this incremental hundred million dollars.

bond markets meaning these bridges will be taken out through the capital market. But we have not yet seen that recovery yet so banks are saying we will do this bridge loan or this short-term club deal, but we want to have a go at the refinancing, whether it is through the loan or bond markets, but we want the first go at doing that because we have supported you. Arrangers now are becoming much more savvy and are seeing the opportunities here that the loan can be used very much as a leader for the revival of the bond markets.

Benjamin Binetter: There is also a general push among banks that are active in Russia, to push the tenors out and push the model away from bridge loans to take the pain out of the refinancing. Last year there were a number of prominent examples of deals that had very ambitious take-out strategies that were mandated but did not materialise in the end. This only pushed the funding requirement to the syndicated loan market in 2008, which has also in part created a backlog of deals in a very difficult market, and the borrowers are having to pay the price for that. So a lot of the discussions that are

being had today, when these deals are put together, is also to see whether there is a way deals can be done long term from day one, with a view possibly to taking it out in capital markets at a later stage and refinancing it at a later stage.

IFR: A lot of the ability for borrowers to raise huge amounts in the loan market has been predicated on the bond market or different take-outs. Now with this avenue closed, is this going to start impeding borrowers ability to raise the type of big ticket financing that has been common this year? Are limits being stretched?

Hasan Mustafa: Heavy use of the loan market means pricing will just keep going up and up. Every time you have a

new request, you are not looking at whether the last deal was 250 all-in or 300 all-in, you are wondering how much can we charge for this incremental hundred million dollars. If that is 500 all-in, then that is what it should be.

James Nisbet: You can almost see a convergence now of bond pricing because, at the end of the day, banks, if they are not lending or providing debt through the bond markets, they still have the capacity through the loan market. So they say we will do the loan, but we want the same or near bond economics through the loan. There is always a rela- tionship element of loan pricing which you will not have in the bond markets, but they definitely will up the pressure, and the longer the bond markets remain closed or limited in capacity, perhaps the higher that convergence between bond and loan pricing will become. This is what we saw before in the European leveraged market, with the development of derivatives and other instruments, and there needs to be a convergence and a proper assessment of the cost of capital. That is what clearly everybody is looking at the moment. Everybody has their own cost of funding increasing and capital is very limited, so whether it is a bond or a loan, I don’t think it makes a lot of difference at the moment. People are saying, what is the cost of our capital here? And that will dictate ultimately where pricing goes, and the only way at the moment is going to be upwards.

William Sharpe, Natixis: In terms of the appetite of the loan market, there are a number of natural constraints that you can point to. Certainly one of them is the size of a bank’s balance sheet, because obviously there is only so much of your balance sheet that you can lend to a specific borrower or group of borrowers, and there is also a finite country limit. So I think these things will limit how much borrowers can tap the loan market for. There is also the question of normal credit metrics that banks look at when

deciding whether or not to lend to a borrower, in terms of gearing and leverage, and a lot of these public Russian borrowers that have launched jumbo transactions this year are not that leveraged in terms of debt, but the leverage levels are going up. So I think some of these typical credit metrics will begin to come into play in terms of creating a limit, a ceiling, as to the appetite of loan markets.

Benjamin Binetter: Borrowers have been relying on the debt markets, be it bank or bonds, to raise their financing needs, and as their financing needs increase. They have substantial capital expenditure require- ments, or in some cases they are making very aggressive acquisitions – and M&A activity certainly has increased substan- tially in Russia – their leverage overall in Russia is increasing to the highest level you would normally see for the corporate borrower. There is certainly still a reluctance amongst many borrowers in Russia to look at the equity markets as a means to reduce the pressure on that front.

IFR: Why is that?

Benjamin Binetter: A lot of these companies are privately held companies with a few controlling shareholders that generally do not like to see their portion of the company, being diluted.

Hasan Mustafa: So far the cost of debt has been so cheap so why raise equity? Dilution in control is one key driver in that respect.

William Sharpe: There is also the issue of valuation. I have heard several discussions about, well, if this such-and- such company were to be introduced, what would be the appropriate valuation? Typically the owners who do not want to see themselves diluted are pretty bullish when it comes to putting a value on their assets.

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