UC Rusal’s new pre-export financing request features the predictable low margin, yet enthusiasm for this type of facility has not faltered. Although lenders are finding higher yields on deals with second-tier Russian corporates, the top tier is maintaining an enduring appeal, writes Rebecca Spong.



Reflecting on the appeal of pre-export financing, Enna Pariset, managing director, head of investment banking, Russia/CIS, at BNP Paribas, remarks: “Banks are likely to prefer secured deals in the current market. The pricing decline is over.”

This statement may seem contradictory when considering the new pre-export seven-year US$2bn financing for Rusal that has just hit the market, and said to pay a sub 100 basis point margin. Mandated lead arrangers BNP Paribas, ABN AMRO, Barclays Capital, Calyon, Citi, ING, Natixis and Société Générale have just launched syndication on the deal. Rusal’s previous US$2bn financing dual tranche financing signed last September, featured margins of 110bp and 140bp.


Margins on the up

In light of this deal, it may be too early to herald the end of the downward spiral on margins in the Russian market. Yet, optimism that pricing might creep up again could be one of the reasons behind the long-standing popularity of large-scale Russian pre-export deals. Banks need to cement their relationships with corporates such as Rusal in order to reap the benefits on future deals, if or when the pricing rises in their favour.

There are few in the market who would even admit to not being interested in the new US$2bn facility, with many referring to themselves as key ‘relationship banks’s in terms of supporting Rusal’s financing needs.

Evidently there are also other appealing factors to Rusal’s new offering, as Pariset explains: “UC Rusal remains one of the few high credit quality large corporate borrowers in the Russian market still offering pre-export finance (PXF) facilities. Lenders tend to prefer PXF ones over unsecured ones.”

She adds: “The current facility is a refinancing of the bridge facilities related to a merger. The pricing still remains attractive compared to unsecured facilities in the market for large Russian corporates. We believe the facility will be well oversubscribed.”

While Rusal’s popularity is undeniable, lenders’s attention is also being caught by the varied financing needs of newcomers to the market as well as second-tier corporates. Such deals offer a means for banks to diversify their portfolios while they wait for the wider Russian market to swing back in their favour.


Larger players hold on to popularity
Rusal’s fellow large-scale borrowers are, to a certain extent, maintaining their popularity, despite some dissenting voices over margins.

Thomas Schirmer, head of commodity and structured trade finance at RZB in Vienna, remarks on the Russian market: “Historically, the bank has been involved with the main players in the oil sector. But the market is getting tighter. On a five or seven-year transaction you are looking at margins of +/- 50 basis points. We opted not to participate in recent transactions as the margin was too low.”

Regular visitors to the pre-export market include Siberian Coal and Energy Company (Suek) who closed a US$500mn five-year pre-export financing via mandated lead arrangers (MLAs) Calyon, ING and Société Générale in July. It was closed at the original request of US$500mn, but the borrower has the option to increase this.

Oil company Rosneft was another borrower stirring up a lot of interest during the summer with its US$2bn pre-export facility which closed in June. This facility also proved particularly popular, with the transaction being oversubscribed, despite the margin falling from last year’s relatively low 65bp to 50bp for the first three years, rising to 57.5bp for the final two years.

Although some players were put off by these returns, Rosneft is attracting US banks such as JPMorgan, Morgan Stanley and Goldman Sachs, lenders not necessarily always associated with the Russian market.

Another large-scale Russian deal in the market is the US$3.5bn loan for Norilsk Nickel, which forms part of a US$6bn financing package funding the acquisition of LionOre Mining International. Earlier this year, Norilsk Nickel beat Swiss mining company Xstrata to win control of Canadian firm Lionore in what has been deemed the largest international acquisition made by a Russian company to date.

In total the acquisition package features a US$2bn five-year pre-export finance facility, a U$1.5bn three-year dual tranche unsecured term loan, as well as a US$2.5bn one-year unsecured facility.

MLAs BNP Paribas and Société Générale closed senior syndication on the pre-export deal in June after six banks joined the facility, and general syndication closed in the final week of August.


New players 

As Norilsk Nickel closes, another large Russian borrower, Gazmetall, is preparing to make its market debut, looking to raise a US$1bn five-year pre-export financing. The assets of Gazmetall are controlled by the holding company Metalloinvest, in which Russian billionaire Alisher Usmanov has a 50% share.

Although a newcomer to the market, it is expected that Gazmetall will be looking for margins comparable to the other large-scale Russian borrowers. The facility is being arranged via MLAs ABN Amro and BNP Paribas and general syndication is expected to be launched in the next couple of months.


Declining attraction
However, there have been some deals this year that have failed to whip up enough enthusiasm, potentially reflecting market fatigue for the ever-decreasing margins.

In November 2006 Anglo-Russian oil company TNK-BP launched a US$1bn five-year loan, but it didn’t close until the following March. It was eventually signed fully subscribed. Enthusiasm for the deal was said to be dampened as the borrower had already tapped the market for two transactions in 2006, totalling approximately US$2.8bn, of which at least US$1.8mn was unsecured.

In recent months TNK-BP’s , BP’s Russian joint venture, presence in Russia has come under pressure from Gazprom. In June, BP decided to sell its stake in the Siberian Kovykta gasfield to Gazprom for between US$700 to US$900mn.

Untapped tiers
In light of the diminishing appeal of some top tier borrowers, banks have arranged some innovative deals with second and third tier corporates.

Suggesting that new lending patterns in the Russian market are beginning to emerge, RZB’s Schirmer remarks: “The types of deals being done with the second tier corporates and the related risks are similar to those being done with the top tier corporates in the mid to late 1990s in Russia. We are seeing almost a repetition of that era.”

He adds: “We are involved in the metals sector, and there are many steel mid-caps looking for funds to either expand their plants or finance the construction of new plants. We are also looking to finance a few independent refineries.”

Such deals draw on a range of funding sources, from export credit financing, pre-export structures as well as bringing in elements of project financing. The rewards on such deals are promising, with bankers citing margins ranging from 150bp right up to 300-350bp.

One second-tier newcomer to the market is the oil company Severneft. General syndication is just about to be launched on a US$240mn structured finance facility, arranged via sole MLA Commerzbank.

The borrower is approaching the market, with the main intention of raising money to support the company’s expansion plans, as it intends to shift the focus of its operations towards the commercial production of gas.

Previously, the company concentrated on the production and sale of condensate, which is a gas by-product. However, it also holds an E&P licence to explore hydrocarbon reserves within the Western Yaroyakhinsky field in the northern part of the Western Siberian plateau.

Now actively exploring this region, it is planning to build the necessary infrastructure to embark upon the commercial production of gas, including the building of a gas preparation facility, a 43km pipeline with required gas pumps and connections to the now finished Russian gas pipeline network controlled by Gazprom. Other investment in additional infrastructure to switch the field fully into its commercial production phase will also be required.

Unlike a top-tier corporate with great track record, high production levels or collateral, Severneft is not yet producing gas, and therefore MLA Commerzbank is faced with the challenge of financing a trade-related transaction which relies on the company completing its expansion plans. Usually completion risk is something a project financing would deal with rather than a structured trade finance team.

Mario Messerschmidt, senior vice-president of commodity finance and structured trade finance at Commerzbank in Vienna, spoke to GTR about the deal, explaining how in some ways the deal did mirror project finance deals, in that the correct due diligence procedures had to be adhered to.

However, the deal structure managed to completely bypass the need to manage completion risk. Payments were assured by securing the financing against the pledges of cash flows from already existing contracts. Re-payments were therefore guaranteed, even if the related infrastructure such as the gas pipeline is not completed.

The deal also features a 12-month grace period on repayments, and the margin is expected to be higher than those seen on top tier deals reflecting the company’s mid-cap status.

However when dealing with Russian mid-caps, lenders are also having to consider the future stability of the company, and the likelihood of it being potentially swallowed up a larger Russian conglomerate.

Commerzbank’s Messerschmidt raises some of these concerns: “One of the dominant issues to operating at the second tier level is to work out how embedded the corporate is both regionally and within the overall picture to assess whether to arrange a financing. Are they being threatened by takeover

Moving down 

Even smaller deals than the Severneft transaction have been proving popular among the international players. BNP Paribas is arranging two debut PXF facilities for smaller borrowers new to the pre-export market. One is a three-year US$100mn pre-export club deal being raised for Soyuzmetallresource, a subsidiary of Russian conglomerate Basic Element. The other is a US$70mn pre-export club deal for Sibanthracite, a subsidiary of Renova Group.

Similarly-sized pre-export deals have proved popular in the market in the past. In June, Polymetal, a Russian producer of silver closed a US$80mn two-year pre-export facility via MLA ABN AMRO.

Syndication proved so popular the facility was oversubscribed. Raised to refinance a previous facility, the new facility pays a lower margin of 2% over Libor, when compared to the 3.5% over Libor featured on the original deal signed in 2004.



Local market growth 

Commenting on common banker grievances that the pre-export market is potentially drying up, Rudolf Putz, head of the trade facilitation programme at the EBRD, remarks: “Pre-export facilities are still being done; it is just that the local banks are financing them rather than the international players. The larger borrowers can access funds via other means such as bonds, but there are thousands of small pre-export deals being done with smaller firms via the local Russian bank market.”

He adds: “To get a foothold in this new area of Russian pre-export financing, international banks need to have or develop their Moscow base to ensure they can build the much needed relationships with the lesser known corporates.”

Russian banks are not just active in pre-export facilities, but are heavily involved in LC transactions as well as import finance solutions. With increased liquidity and competition even among the Russian banks, margins in this field are also following the downward trend seen among the top tier corporates. SMEs found in the Russian provinces can now secure both import and pre-export finance facilities in foreign currency at 6-8% plus Libor.

Trade and ECA-backed finance has become one of the priority business lines at Promsvyazbank (PSB). Between 2004 and 2006, the bank’s trade finance turnover increased from US$543mn to US$1.2bn. Approximately 90% of this business is related to import financing, with some pre-export business with second or third tier clients.

The bank signed a particularly significant import financing earlier this year, involving the purchase of Boeing aircrafts from a leading airline company for US$43mn. It consisted of five tranches supporting the import of five aircraft. Out of the five, three tranches were structured through the use of letters of credit confirmed by international banks with post-financing. The other two portions were trade-related loans.

PSB was the only arranger on the deal, and there was no risk sharing entailed. The risk of the Russian buyer was mitigated by collateral and payment was made in dollars. It carried a five-year tenor, a maturity typically found on these kinds of transactions.

A turning market
With competition for deals heightening between local and international players, falling margins may continue to dominate the conversations in the offices of credit committees.

Or, in light of the recent market turmoil and credit slumps, the Russian market for pre-export and trade-related transactions maybe on the verge of a significant turning point. The market could be ready to shift in favour of the lenders.

“As credit is already becoming more expensive and borrowers that do not have a large solid base of relationship banks will need to consider PXF to provide a security kicker to banks,” suggests Pariset at BNPP.

The recent credit slump has directly affected the bond market, and it is not expected to recover until early next year, although some prime names are attempting issues at the end of September. In addition, bonds are typically more expensive than pre-export.

“The borrower’s market is largely over and the banks will be back in command,” Pariset predicts.

From the international players’s perspective, pressure on margins is also coming from the local bank market, which is experiencing heightened liquidity partially fuelled through bank-to-bank loans provided by foreign institutions.