Deal pipelines for trade finance and structured commodity finance look strong in Eastern Europe, but whether or not this is a long-term trend rests on the appeal of the bond markets. Rebecca Spong reports.

The growing cloud of uncertainty hanging over Western Europe has not yet seriously unsettled CEE and CIS countries. In contrast to the Eurozone countries, most CEE states have relatively modest levels of debt. Rather than seeing sovereign debt downgrades, Ukraine was upgraded by ratings agencies in March, and there have been upward revisions in GDP growth predictions for many countries.

The larger commodity-rich countries such as Russia are on the rebound, buoyed by improved oil prices. Troubled countries such as Ukraine and Kazakhstan are again attracting investors and lenders.

“There is definitely an uptick in business in CEE and CIS regions, especially in the commodity producing areas such as Russia. We see an increase in investors coming back to Russia, and lots of deals in the pipeline,” remarks an upbeat Thomas Schirmer, head of commodity and structured trade finance, at RZB.

His business covers both structured commodity finance business and the more vanilla commodity finance business, both of which have enjoyed strong flows of business.

“On the commodity finance side I am optimistic; the turmoil of 2008 has been digested by most of the players. Oil prices have stabilised at high levels, steel at slightly lower levels, and the rebound of non-ferrous metals has also helped,” he observes.

Yet it is the large structured pre-export finance (PXF) deals that have been spearheading his business, with highly structured deals being the more popular, and often the only available source of funding for customers over the last year.

But, there are signs that the PXF party in the CEE and CIS might be over before the year is out. Deals backed by export credit agencies (ECAs), which were the life support machine for many ailing transactions last year, are also less likely to be used towards the end of 2010.

As larger and cheaper financing options, such as bonds and corporate loans appear, trade and commodity finance teams might have to review their tactics.

RZB’s Schirmer reflects: “The hope is that the pace of the shift back towards straightforward lending activities and capital market lending will not be too fast, though I fear it will be faster than in 1998 [in reference to the previous Russian crisis].”

Oil and gas

A clear indication where the market is heading is illustrated by the elusive Gazpromneft US$1bn pre-export financing. In February the story was that the oil arm of Russian gas export monopoly Gazprom had selected banks to arrange its five-year PXF at a rumoured margin of 5%.

The deal then disappeared from the radar and it has been suggested that there is some backpedalling going on with both the borrower and the provisionally mandated banks regarding the deal structure and margin.

At the height of the crisis top Russian oil names such as Lukoil paid 4% on its PXF deal, and now in improved economic times, Gazpromneft is no doubt inclined to shop around for the best priced deal.

TNK-BP seems to be in a similar mindset, with sources telling GTR that the firm will prepay its US$600mn PXF facility signed last year and priced at 4%, at the next interest payment date in May. The firm has reported record profits for 2009, has successfully tapped the bond market and has a host of willing bankers ready to lend unsecured money.

Another big Russian oil name looking for PXF financing is Tatneft. Again it was in the market last year securing a US$1.5bn PXF priced at 5.85% on a three-year tranche, and 6.85% on a five-year tranche. Earlier this year the borrower was in discussions on how best to refinance its previous US$2bn loan signed in April 2008, weighing up the PXF model against other options. As GTR goes to press, one market source reports that the borrower is very close to signing a mandate with MLAs for a PXF facility. BNP Paribas, WestLB and UniCredit are said to be co-ordinating the deal.

Bashneft is another contender in the Russian market that could either go down the PXF or the bond route. However, the decision rests with Sistema, the owner of the company who acquired the mid-sized oil producer last year.

At the end of April, Sistema announced that fourth quarter revenue grew 64.7% year-on-year, fuelled mainly by the Bashneft acquisition. Sistema has also revealed it has agreed to acquire a 49% stake in another oil firm, Russneft.

Yet this pool of top-tier borrowers will ultimately dry up, as Schirmer at RZB points out: “The majority of banks coming to Russia are still appreciating the structured elements of the deal, but I think the pace of returning to capital instruments will be quite fast.
“From a commodity finance point of view, we will have to start looking at lower tier names eventually.”

Robert Fleischmann, managing director, head of structured trade and commodity finance, at UniCredit, also notes a change in what type of products clients are asking for: “We see a continuously increasing demand for structured receivables transactions tailor-made to the needs of the customers for 2010.”

In terms of export credit agency-backed financing, the return of Nordstream is likely to be the biggest deal in the second half of this year, following on from the successful signing earlier this year of its €3.9bn financing for phase one of the natural gas pipeline project between Russia and the EU, via the Baltic Sea.

This deal consisted of large chunks of ECA-backed money, with Sace and Euler Hermes playing key roles in the financing. Talks about the second phase of this pipeline have begun, and some form of financing package is likely to be launched into the market in the second half of this year.

To what extent ECAs will support this transaction is yet unknown, and a banker working for one of the advisory banks remarked to GTR that it is not clear how much equity the project sponsors will be prepared to inject now that the markets are more settled.

Furthermore, as appetite in the other market improves there might be less need for ECAs to cover large chunks of the transaction.
This trend is applicable to many CIS and CEE corporates, not just Nordstream, all of which are reassessing their funding options.

“Speaking with Russian blue chips such as Norilsk Nickel, SUEK, MTS, they are saying they will probably look at returning to the bond market or going for syndicated loans. But one lesson learned from this crisis is that they will probably work to have a diversified funding structure, including some form of ECA borrowing,” comments Ralph Lerch at Commerzbank.

But export finance bankers will also have to start looking and correctly analysing mid-cap risk, Lerch adds.

Commerzbank’s export finance team is tentatively moving into new sectors and regions, citing deal opportunities in Azerbaijan within the telecom and paper industries as well as in Moldova and Armenia.

“There are also opportunities in Turkmenistan, where there have not been ECA deals over the last 10 years. There are lots of projects on the way, not all of them will be fully realised, but it shows there is a change in mindset of the government. Public companies want access to capital markets and long-term funding sources, and at the moment there is no alternative but ECA-covered financing,” he observes.

Florence Werdisheim, managing director, global head of export finance, at Unicredit says: “We have seen several inquiries in Azerbaijan for export finance. There is more business to be done there. We have a connection with this market via Yapi Kredi which belongs to UniCredit Group.”

Structured trade and commodity finance teams will also have to start looking beyond the more appealing and safer oil transactions, and move into sectors such as metals and mining, areas that are still in the very early stages of recovery.

The metals sector was probably the hardest hit industry in the CIS and CEE, with the Ukraine in particular seeing multiple restructurings in its steel industry.

Steel traders bore the brunt of the crisis compared to other trading companies. “Last year most steel traders suffered from inventory problems, due to not achieving the price for steel as predicted. Off-takers could not take the agreed quantities,” observes UniCredit’s Fleischmann.

Back in 2008, Ukrainian metals companies lost 90% of their market capitalisation and the likes of Interpipe and Industrial Union of Donbass (IUD), began the process of restructuring with their foreign creditors.

However, the success of Ukraine’s Ferrexpo’s oversubscribed US$230mn pre-export finance facility signed in December suggests that given the right borrower, the right lenders and right structure, structured trade finance deals in Ukraine can be done.

Over in Russia, investors and lenders are beginning to swarm around the metals giant Mechel again as the company starts to publish some healthy results. This is despite the fact the company went through a large, successfully completed, debt restructuring in 2009.
Other corporates looking strong include ENRC, the Kazakh mining company, which has seen hikes in its share price after announcing plans to secure a stake in the South African platinum producer Northam in April.

Banking sector

Despite the CEE and CIS banking sector still finalising some restructurings, international banks are slowly returning to doing trade finance business with local institutions.

The banking market has been shaped by the problems with Kazakhstan’s BTA Bank; its state takeover last year, near default and the prospect the bank would not pay out its trade finance claims. BTA has now signed a restructuring termsheet with creditors, and is completing an adjudication process defining what debt should be defined as trade finance debt.

Fellow Kazakh bank Alliance Bank completed a restructuring of its US$4.5bn-worth of debt on March 30 this year. It was the first bank in Kazakhstan to complete such a process, and reassuringly for the trade finance community, this restructuring did allow for the separate treatment for trade finance creditors (those who satisfied certain criteria).

Looking broadly at the Kazakh banking sector, Halyk Bank is probably considered one of the better Kazakh risks.
Last year, Halyk Bank increased its share of the trade finance market, reporting to GTR a 16.9% share of the Kazakh LC business as of January 1, 2010; an increase from 5.7% share recorded on January 1, 2009.

Halyk still had to deal with the problem of the price of Kazakh risk for all banks shooting up during the crisis.

“The price for the risk did rise over the past two years, mostly due to the overall economic situation. For the moment, the prices for risk remain relatively stable, and in the future we look forward to their decrease, especially as the economic environment becomes sounder,” the bank said in a statement.

In April, Halyk announced that it intended to increase net profits by almost 60% this year, and boost the overall loan book by 10%.
Further evidence of Halyk’s strength is demonstrated by rumours of a possible Eurobond being raised, however the bank confirmed to GTR that it is quite comfortable with its liquidity level.

“For the moment, we do not have any definite plans in terms of new borrowings on the international capital markets.
“Some time ago we were considering the opportunity of a Eurobond issue, having come to the conclusion that appetite for Halyk’s risk does exist among investors. Our decision in this respect will depend of the overall market situation, the bank’s liquidity position as well as other important internal and external factors.”


With the Ukrainian election over, bankers and investors are becoming more comfortable with Ukrainian political and credit risk.

“Since the world economy started recovering and a general stabilising trend in Ukrainian economy can be noticed due to successfully finished elections and a formed coalition, we can see that trade in Ukraine is increasing in volume again and that trade finance is recovering accordingly,” comments Igor Tykhonov, member of the management board and head of treasury and financial institutions, at Ukraine’s CreditWest Bank.

“Therefore we believe the foreign trade market in Ukraine is recovering and we hope to see more activity soon,” he adds.
In March, Standard & Poor’s raised Ukraine’s foreign currency sovereign credit rating to B-/C from CCC+, and its local currency sovereign to BB from BC, with a positive outlook.

There are signs of renewed vigour among the banks too. Ukreximbank issued five-year Eurobonds for US$500mn in mid-April, and the book was oversubscribed by more than nine times. The bonds were the first debt offering by a Ukrainian company since July 2008.

Ukraine’s ministry of finance is now planning to issue bonds on the external debt markets for the amount of US$1.3bn, after budget approval. It is thought that corporates such as Ferrexpo and Metinvest are also likely to tap the bond market too.

Despite these success stories, the problems facing the failing Nadra Bank continue. Last year the bank had provisionally restructured US$900bn-worth of debt, including trade finance.

But the restructuring of such debt is now being called into question, as the bank has not been recapitalised by the government as was expected post-election.

The recapitalisation did not originally happen due in part to a conflict between the ex-prime minister Yulia Tymoshenko and a potential buyer for the bank, Dmitry Firtash, owner of DF Group. Even with a new government in power, a resolution over the bank’s ownership has not been found, although a final decision is expected soon.

However other Ukrainian banks have fared better than Nadra, with VAB Bank, Finance and Credit Bank, FUIB and Alfa Bank (Ukraine) all successfully restructuring US$1.5bn-worth of debt.

Russian banks

In Russia, recent results published by the Central Bank of Russia show a decrease of non-performing loans (NPLs) in the Russian banking system, suggesting banks are successfully managing their problem loans.

Olga Strekalova, director, trade finance and forfaiting at VTB Bank, notes that foreign banks are regaining their appetite for Russian trade finance risk. She adds: “Both trade finance for corporates and banks is growing. Not only is the number of transactions increasing but also the tenors of the deals. At VTB, the Q1 2010 results showed a 15% growth for the trade finance portfolio in comparison to the first quarter 2009.”

Pricing is also decreasing for Russian banks, with VTB getting 60bps for one-year unfunded deals at the moment, on average, compared to 100bps six months ago.

Ralph Lerch at Commerzbank is seeing more Russian banks looking to tap for ECA-backed deals as well. Last year, most of the ECA-supported deals he worked on were directly with corporates.
“In 2008 ECA business with Russian banks took up 80% of Euler Hermes’ business. This dropped to 25% in 2009, but now this business is coming back in 2010 with Russian banks keen to explore ECA-backed deals,” Lerch notes.
Market direction

CEE and CIS markets are beginning to look healthier, but with other financing options coming into play for borrowers, those working in structured commodity finance, export or trade finance will start to move to second-tier borrowers, lower pricing on the bigger ticket deals, and shift into new markets.

However, any predicted shift way from trade should not be overplayed, Sebastian Beurle, senior manager, structured trade and commodity finance, at UniCredit, comments: “I think for a long time, the market will be very much transaction orientated. Everyone, even the big companies are more transaction orientated, as it provides more security for banks which therefore gives more liquidity to the client. There is also the question of pricing. There is still a big distinction in price between a well-structured risk and an unstructured corporate risk, the unstructured risk is much more expensive.I think it is far more price efficient for a client to go for a more structured deal.”

Beurle also predicts that more banks will return to the commodity finance market, increasing competition and pressure on margins, and to an extent structures will become looser again.

However, he adds: “With the changes brought in by Basel III, it will make structured trade business inherently cheaper than unsecured business.”

Peter Hazou, head of business development at UniCredit, also notes the impact of Basel III: “It is clear that transaction banking is going to become even more important, not just in UniCredit, but throughout the market, given the requirements of Basel II and Basel III.”

The other potential bump in the market will be how the debt problems mounting in Greece, Spain and Portugal develop. For now such dramas have potentially, as one banker remarked, distracted the capital markets from returning to the CIS and CEE regions, leaving the trade finance and structured commodity finance teams to lap up the potential flow of deals.

However, if the sovereign debt downgrades start to significantly impact on the cost of funding for some European banks, potential trade and commodity finance deals in newly recovered yet fragile CEE and CIS markets may come under increased scrutiny. GTR

EBRD continues to provide lifeline 

As the European Bank for Reconstruction and Development (EBRD) hosts its annual meeting in May in Zagreb, GTR catches up with Rudolf Putz, head of the bank’s trade facilitation programme.

GTR: In terms of trade finance volumes, are you seeing any signs of recovery in the CEE/CIS regions?

Putz: In almost all countries, foreign trade volumes were significantly lower in 2009 than in 2008, and in Russia, Kazakhstan and Ukraine even down by 50%.. Most local banks are still very cautious in lending to importers and exporters, resulting in a reduction of their trade finance volumes by up to 50-75%. Trade volumes and trade finance volumes have now stabilised on a low level; the only exception was trade in commodities like oil and gas which continued to flow during the crisis and still benefit from large and long-term pre-export finance facilities of foreign commercial banks.

GTR: Over the course of 2009, how regularly was the EBRD’s trade facilitation programme used and did demand for this scheme increase?

Putz: In 2009 the TFP programme supported 886 foreign trade transactions, compared to 1,115 in 2008, for a total amount of €576mn, compared to €890mn in 2008. The lower number of transactions and business volume was mainly due to a dramatic fall in the amount of foreign trade but also TFP client banks’ reluctance to take on more client risk.

GTR: What are the main problems facing trade finance banks in the EBRD’s countries of operations?

Putz: Most larger banks, particularly state-owned banks and foreign subsidiary banks, now have access to sufficient trade finance facilities of foreign commercial banks and export credit agencies. However, smaller and medium-sized banks with private local owners in Russia and banks in other CIS countries are still suffering from a lack of risk appetite on the part of foreign global banks.

GTR: Are the regional CIS banks getting themselves successfully back into shape?

Putz: Many local banks are still suffering from a high percentage of non-performing loans; as a result, they had to stop lending or strengthen their capital base before they can restart lending to importers and exporters. Many local banks are now also very busy with restructuring non-performing loans and very cautious in taking on new risk. I expect that over the next months we will see a steady, but slow, growth of trade and trade finance volumes; it may take three to five years until we will reach those volumes which we saw before the crisis.

GTR: Is liquidity returning to CIS banks?

Putz: Since most local banks have strongly reduced their lending to importers and exporters they are now so liquid that they can easily finance short-term trade with tenors of up to six months from their own resources. As a result, demand for syndicated trade-related loans and bilateral cash facilities of foreign banks has fallen significantly.

GTR: For your team, what would you say are some of your top priorities for the coming 12 months?

Putz: Our major priority will be to keep our trade finance facilities open also for smaller banks in Russia and banks in other high-risk CIS countries which still have no or only very limited access to trade finance facilities from foreign commercial banks, insurance underwriters and export credit agencies.