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

refinancing right now, because if the pricing trends goes up, then where will I be if I start refinancing something in three months’ time? This is adding additional pressure. And

let’s say, some borrowers are getting concerned about overall liquidity. We have heard that transactions are jumbo deals, which require big MLA clubs. All the MLAs have to take big chunks. So how long will this be sustainable if the retail market remains blocked as it is right now, which means just a small amount can be sold down. So many transactions are capped on MLA’s books.

IFR: Retail bid disappeared last year partly on the back of the pricing being too low, but if pricing has increased, why haven’t they stepped back in?

Hasan Mustafa: There were a couple of pre-export finance deals that were done at the end of 2007, which saw retail investors come back, but I think what Christian is saying is that retail is blocked up essentially for these bridge facilities. Even though they have higher pricing and higher yield, they just do not see why they need to take a six-month, nine-month, 12-month view. There are opportunistic buyers who will take it, but you cannot go on and invite 40 or 50 retail investors and hope that 20 will come. They would rather do a term financing or pick up something in the secondary market, where term paper floating around at 97 or 98.

IFR: How important is the secondary market now?

Hasan Mustafa: I can talk about, from my experience, 2007 being the biggest year as far as secondary trading is concerned for us, and I think our volumes quadrupled. It was not only what we were selling from our portfolio, but it was a lot of trades were done buying and then selling on to somebody else. That still continues to be the case, but there are still a lot of investors looking for opportunities to buy assets in Russia, in CIS and Middle East and Turkey.

James Nisbet: If you look at what banks are offering in the secondary markets, you know, probably a year and a half ago 90 per cent was leveraged loans, whereas now probably as much as 50 per cent is emerging market loans. I think the key for the secondary side is obviously getting a

balance between demand and supply. Obviously there is a lot of supply in the market now and I think the secondary market is still finding its price parameters because emerging market loans are not linked into derivatives such as loan CDS like the leveraged market. Secondary pricing on the emerging market side is very much based on what price people are prepared to sell at, and that is very much diversified at the moment, depending on how pressurised people are to sell, whether it is obviously on a trading book

As balance sheets become more

clogged up and country limits need to be released, people will be more forced to sell assets in secondary and therefore they will have to price them at realistic levels where they will trade.

or whether it is just sitting on your balance sheet. If it is on a trading book and you have three months to sell it at any price, then you are going to have to discount it. So we are seeing at the moment some banks, particularly investment banks, having to offer out paper at quite discounted levels. Other banks who are not so pressurised are maybe offering things out in the 99s but they are not getting any traction so there is still price discovery going on. Over time, as balance sheets become more clogged up and country limits need to be released, people will be more forced to sell assets in secondary and therefore they will have to price them at realistic levels where they will trade. There is demand there and there is the

retail demand but there is relative value pressure. Because if you are a retail investor, you might say, well, I can buy the bond at this price, or maybe sell protection at this price, the loan is priced here, therefore actually I need to buy the loan at 97 rather than 99 to match the economics I

would get on buying the bond. If you can do that, then you will find retail appetite in secondary, and probably even in primary as well. But I think there is a lot of scope to develop the secondary market now and it just needs people to be more realistic. We are not talking about huge discounts like we see on a leveraged market, but if banks need to relieve their balance sheets and lighten up assets because of the lack of derivatives at the moment, they need to be realistic.

Hasan Mustafa: I think if the bond markets do not come back within the next three months, starting from April, May and June, then secondary prices will widen further. So far the pressure always appears to be from the investment banks to sell as much as they can, as quickly as they can, at whatever price they get it. The universal or commercial banks tend to take a slightly more relaxed view. But there is bound to be pressure that needs to come, because at the end of the day, as we just discussed, the volumes will not drop. These companies in Russia and CIS will continue doing business, acquiring assets in the region, outside the region, and who will they go to? They will come to us. If there are no other markets available to offload the risk, then there will come a tipping point where something has to give.

William Sharpe: There is definitely a disconnect between primary pricing and secondary pricing. I mean, a year ago, a year and a half ago, we would look at secondary loan market pricing for corporate and bank paper. We would also look at spreads in the eurobond market, but clearly there is a disconnected aim. Maybe they will align themselves. If markets function perfectly then they should, but for the moment I think it is back to basics. A year to 18 months ago, we were basically pricing liquidity in the market, from the point of view of participants. Today I think there are two factors. We

are back to pricing risk, so you can see where certain structures, like pre-export financings, they are a less perceived risk so they do better in the market in terms of liquidity compared to unsecured transac- tions. The other point is that banks’ own funding costs have gone up. So to a degree we are still pricing liquidity, but banks’ own liquidity. I think this is one factor which has constrained transactions five years and longer because we all know

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