April 2008 | ifr special report | 7 RUSSIA AND CIS LOANS ROUNDTABLE
where European and American banks’ five- year CDSs are trading well over 100 basis points, so it is very difficult to lend at the rates that Russian borrowers have come to expect even with a healthy premium, given that situation.
James Nisbet: It is a very key issue again with the retail market. You have to look at the scale of the cost of funding. The retail smaller banks in the market who, two years ago were your natural lenders in the pyramid of the primary market, they are all sitting there with a much higher cost of funding than the big banks. So this is again why you are seeing the bigger banks stepping up to take more exposure, because on the jumbo deals where the pricing is quite cheap still, the big banks are pretty much the only ones that can even do it, irrespective of relationship or relative value, simply because the cost of funding is prohibiting the smaller retail investors. They are saying “my cost of funding is 100 basis points, therefore I need a return of maybe 200”. So they will look to the secondary market, they will look to the smaller higher-priced deals in the market. When looking at the retail investor base, you have to ask, on an almost individual case-by-case basis, what is the cost of funding for this bank? Speak to them, asking “what is your return criteria now?” It could change week on week. That is the problem. This is not something we are used to in the market - not since the Asian crisis when the Japanese premium was prevalent. Now there are a new set of issues that arranging banks are having to consider when actually structuring a deal and looking at retail appetite.
IFR: It sounds like retail investors have become a lot more sophisticat- ed in how they approach the market rather than just taking pure primary. Why has there been this sea change?
Christian Eberl: They have learnt from mistakes in the past. Now they recognise that they could be important for the MLAs in order to slim down their exposures, and they can afford to sit on the fence, given just the big supply. Therefore they really can cherry pick. It looks like they could take over an upper hand to a certain extent. This is what is driving the appetite from the retail investor. So they are watching the development very closely and carefully and, as we have heard, rela- tionship for them is not a big issue, so they
James Nisbet, VTB Europe “
On the jumbo deals where the
pricing is quite cheap still, the big banks are pretty much the only ones that can even do it, irrespective of relationship or relative value, simply because the cost of funding is prohibiting the smaller retail investors.
can play around and it does not make a difference whether they, let us say, ship in five million, ten million in this transaction or in this transaction. As long as the overall credit matrix or sector remains intact for them, they are happy to go wherever the highest yield is.
Benjamin Binetter: I think at the end of the day, the bookrunners over the past two years have made quite an effort in expanding the universe of banks that could look at Russia as a country, and on every deal you tend to see a finite group of
same investors being approached. The mere fact that you have so much paper coming out to the market at the same time means that those same investors have opportunities to choose between five deals, not including the secondary opportunities. At the end of the day, that same group of people are looking at five deals on the table and just cherry picking deals.
IFR: Are there any banks that are in a better position than others to win at the retail or secondary level? Are there any banks that are more liquid than others?
James Nisbet: The banks that have not had the issues that a lot of the larger banks have had with subprime and all the other things. The issue at the moment is that subprime is being blamed for everything. We all know, we all work for large banks or have worked for large banks and clearly the issue is not just subprime, it is a number of other factors. It is the banks, the small retail banks that maybe have clean balance sheets that have maybe a reasonable cost of funding at the moment, that are sitting in quite a good position. So we know that the institutional
investor market has pretty much evaporated for the time being. It has never really been part of the emerging market scene anyway, so thankfully we are not reliant on that. It has always been a very traditional bank market in terms of the investor base. Luckily it is a global investor base and we have we
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