Guy Norton in London -
In the world of investment banking it seems there are winners and... maybe future winners.
After a hotly contested process involving more than 20 investment banks, the authorities in Moscow have mandated Barclays Capital, Citigroup, Credit Suisse and VTB Capital to lead manage Russia's return to the international bond markets after an absence of more than a decade. While there's some disappointment at the banks that failed to make the grade this time around, there's also the expectation that the Kremlin will shuffle its lead manager pack when it comes to mandating future issues. Meanwhile, the winning quartet can bask in their glory before the hard work of actually bringing a deal to market begins.
While Barclays, Citigroup and Credit Suisse are all acknowledged emerging market veterans with top-notch sovereign bond franchises, the appointment of VTB Capital marks a noteworthy coup for the Russian investment bank, which was only set up in 2007. The bank fought off competition from local rivals Troika Dialog, Renaissance Capital and Sberbank to secure the sole berth reserved for a Russian bank. Commenting on the bank's mandate win, VTB's president, Yuri Soloviev, says: "We are extremely pleased that VTB Capital has been selected as the only Russian bank to act as a bookrunner in this deal. I am certain that this placement will prove strategically important for our international debt capital markets business."
Though VTB lacks a pedigree in the sovereign bond business, it does boast a strong corporate bond franchise. According to Russian fixed-income portal Cbonds.ru, in 2009 VTBC was the leading arranger of Eurobond and local bond issues in Russia and the rest of the Commonwealth of Independent States. "Despite international finance market turmoil, VTB Capital has succeeded in attracting investments into the Russian economy and helping companies get resources for further development," says Soloviev.
According to Deputy Finance Minister Dmitry Pankin, the winning banks were chosen because they proposed a more aggressive funding strategy, with Pankin claiming that any new issuance would slash borrowing levels for the sovereign. "We are not talking about [lowering the yield from current market levels] by 2-3 basis points [bps], but by several tens of basis points," he said at a press conference to announce the mandate in February.
Russia's current benchmark Eurobond is the $19.9bn, 7.5% March 2030 Eurobond, which in February was trading at a mid-market yield of around 5.5% or a spread of roughly 215 bps over US Treasuries. While keen to debunk speculation that Russia would need to raise the $18bn figure mentioned in the 2010 budget, Pankin said it will certainly seek to highlight its competitive advantages over other economies by issuing at least one benchmark-sized bond in the international markets this year and would not be put off issuing by the bond market jitters over highly indebted Western European sovereigns such as Portugal and Greece. Whilst acknowledging that concerns over the debt repayment problems faced by Portugal and Greece would no doubt have an influence on the pricing of Russia's first overseas bond issue since 1998, he said the marketing roadshow for the issue would give the Russian government the opportunity to highlight the country's economic strengths. "Our aim is to competently position Russia... to explain our advantages, that we are different from Greece and Portugal, that our budget situation is different, that our macroeconomics is much better than of that of many countries with a comparable rating level."
Given the need to correctly position the Russian sovereign story, the finance ministry is unlikely to rush to market, with any international issue unlikely to be launched before the end of March at the earliest. At this point there is little concrete detail about the likely terms or conditions of the issue, with Pankin merely saying it would be denominated in either dollars or euros. Market speculation, however, suggests that any deal will be at least $3bn equivalent in size, possibly have split five- and 10-year tranches, and will most likely be in dollars rather than euros. "Despite lacking details on the issue, we foresee substantial demand for Russia's Eurobond from institutional investors. The issue will create a new benchmark on Russia's sovereign curve and... create a more fluid market for Russia's Eurobonds in the future," says one fixed-income analyst.
According to a report by Alexander Kudrin, head of fixed-income research at Troika Dialog in Moscow, in order for Russia to optimize the funding costs of any new issue, the finance ministry should look to utilize a global bond form and also re-register some of its existing debt in the same format. Previous foreign bond issuance by Russia has been in either Rule 144A or Reg S Eurobond formats, which though involving less arduous financial disclosure requirements, places restrictions on distribution to US institutional investors in particular.
Kudrin argues that the global bond format would enable Russia to tap the widest possible spread of investors, thus enabling it to achieve tighter pricing levels. Furthermore, he says that given their almost universal appeal, global bonds feature in all the key bond indices such as Barclay's Capital Global Aggregate Bond Index, which are widely followed by all major fixed-income funds and not just emerging market specialists. In order to fully leverage the benefits of the global bond format, Kudrin argues that the benchmark 2030 Eurobond should be re-registered as a global bond ahead of any new issue so as to help tighten the sovereign yield curve. "In the event that sovereign Eurobonds are issued, we believe that the format of global bonds would reduce their yield by 40-60 bps relative to the current level on the secondary market."
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