Taking Russia down

Pricing for Russian bank debt hit a low last year when Vnesheconombank (VEB) managed to raise a three-year US$800mn facility from international lenders at a margin of 35 basis points.

At the time it was the lowest margin for an unsecured deal of this tenor. By way of comparison, a US$500mn loan signed in July 2005 for the bank had a margin of 90bp (see GTR, Mar/Apr 2006, p69).

“Certainly our deal for VEB set a new pricing benchmark for state-related Russian deals,” comments Ben Dobson, director of trade finance at one of the mandated lead arrangers, Deutsche Bank, in London. “Since then for example VTB 24 raised a US$330mn syndicated loan in late August at the same margin of 35bp. ZAO Raiffeisenbank Austria (RZB’s Russian subsidiary) also raised three-year funds (US$625mn) at a margin of 35bp.”

The low margin reflects both the strong reputation of VEB as well as the improved credit ratings for Russia, claims Dobson. However, margins are also falling in almost all other emerging market loans which, in part, reflects the general liquidity in the syndicated loan market, he adds.

Despite the low pricing, the facility was oversubscribed in syndication and increased from US$500mn. Commitments exceeded US$800mn and had to be scaled back. A total of 28 international banks participated as lenders.

One of the key reasons why banks participated in this deal was to strengthen their relationship/earnings with this key Russian client, says Dobson. “For example, bond markets were trading at higher pricing at the time of our syndication, which shows the importance of the relationship (ie, if lenders were purely looking at yield they would buy the bond not syndicated loan). Despite the fact that the new VEB loan is larger (US$800mn as against US$500mn) and was considerably cheaper (35bp as against 90bp) than VEB’s July 2005 loan (also co-arranged by Deutsche), this 2005 loan actually had a larger number of lenders, ie, now there are a smaller number of banks but the average participation of each lender is higher.”

“I think that pricing will go a little lower in Russia but the decline in pricing will now be more gradual,” says Dobson. “I expect pricing will also continue to fall in most other emerging markets such as Kazakhstan and Ukraine – but here, even for top tier names like Kazkommertsbank (eg, the three-year tranche of the December 2006 US$1bn loan had a margin of 60bp), pricing is higher.  There are select cases where cheaply priced Russian syndicated deals have struggled in syndication. This is where either they are a regular borrower and/or where they do not have many close relationships with international banks.

“I believe that the syndicated loan market in Russia will continue to grow. It continues to be an attractive source of funds for borrowers especially due to (i) relatively low pricing (ii) relatively stable pricing (iii) relatively quick and cheap to set up. Most borrowers active in the syndicated loan market continue to raise funds in the bond market – here the main advantage is that borrowers can access longer tenors.

“As syndicated loan pricing continues to fall and the risk improves, more and more lenders are looking to second tier borrowers in Russia and new emerging markets such as Belarus.  For example, the December 2006 syndicated loan for AK Bars Bank, arranged by us and ABN AMRO, raised US$140mn from 21 lenders.  The US$202.5mn loan for Russian Standard Bank, also arranged by us and ABN, had 19 lenders.”

VEB was founded in 1924 and is designated as a specialist state bank with a mission to facilitate foreign economic affairs and the management of foreign debt and foreign assets of the former Soviet Union and now the Russian Federation.


Deal information:

Borrower: Vnesheconombank (VEB)

Amount: US$800mn

Mandated lead arrangers: Bank of Tokyo-Mitsubishi UFJ; Bayern LB; Deutsche Bank; Dresdner Bank; Erste Bank; HSBC; Mizuho; RZB

Arrangers: Barclays; JPMorgan; Mediobanca; Wachovia

Tenor: 3yr

Margin: 35bp

Law firms: Linklaters (lenders); Cleary, Gottleib, Steen & Hamilton (borrower)

Date signed: July 2006