Chris Weafer of Uralsib -

Conditions for new equity issuance in all global markets remains tough, with issuers reluctant to sell at valuations demanded by investors. Russian issuers are also very reluctant to sell at current valuations, but are expected to do so in size when market conditions improve.

The success of future IPOs will depend on how willing the owners are to accept valuations that, in many instances, will be a lot less than they expected pre-crisis. In 2007, it was a seller's market; today it is a buyer's market.

On the docket

19 companies have either confirmed that they are preparing to issue equity in 2010 or have been the subject of media speculation that they are close to doing so. The value of possible issuance from these companies over the next six months is just under $10bn. The table on the side column lists the main contenders. Our analysis of balance-sheet structures shows that a much larger number of companies would like to raise equity capital to repair overly leveraged balance sheets. Other companies have previously indicated their intention to list news shares, ie. for expansion or to compensate founder shareholders, but are waiting for market conditions to improve. The total for that list is closer to $50bn over the next 24 months. The amount that is actually raised in 2010 will clearly depend on how market conditions evolve.

State may also extend its privatization programme. The government previously set a target to raise RUB70bn ($2.3bn) via privatizations in 2010. However, that list is now being reviewed, and a revised programme may be announced later in March. The companies already mentioned for sale are all expected to be sold to strategic investors rather than via an IPO. This may happen in 2011. In addition to new privatizations, the state is expected to cut its equity positions in several state companies that already have stock-market listings. In total, approximately $38bn could be raised by selling down stakes in such companies as Rosneft and the banks to minimum 50%+1 share controlling stakes. Some of these stakes may be sold to strategic investors and/or via SPOs in Hong Kong as the state seeks to boost its Asian credentials ahead of the 2010 ASEAN Forum in Vladivostok.

The Russian securities watchdog, the FCSM, has made changes to the rules concerning listing for shares by Russian companies on international exchanges. These changes came into affect in January this year, and cut the amount of equity that a company may sell via international IPO. Since then, however, in an effort to avoid the restrictions, several companies are reported to be planning to register special putpose vehicles (SPVs) in foreign jurisdictions and to list the shares via these vehicles. This would, of course, present problems for companies looking to have their shares included in the important MSCI Russia and EM indices. Companies such as Evraz, X5 and RusAl have used these vehicles and are excluded from the MSCI Indices.

History

The total amount raised by Russian companies via 79 IPOs and SPOs to date is $62.7bn. That does not include private placements or equity injected by the state into state companies (for example the extra equity put into VTB last year). The busiest year was 2007, when a total of $32.9bn was raised via 29 issues. Coming into 2008, the list of planned IPO and SPOs was calculated at $40bn, with a similar amount thought to be targeted for 2009. Due to the crisis, the total actually raised in these years was $2bn and $1.7bn, respectively. Year-to-date, there has only been one IPO, when RusAl raised $2.2bn in a Hong Kong listing in January.

Russian international IPO and SPOs have not been very profitable for investors in their first year of stock-market listing. The table below shows the main issues traded in the 12 months after listing against the performance of the RTS Index in the same period. The table below shows that, of the 34 major listings reviewed, only 12 performed better than the RTS Index in their first 12 months. Uralkali, listed in October 2007, was the best-performing issue relative to the Index, while Amtel Vredestein was the worst. However, over a longer period, the ratio of outperformers to underperformers improves. The table below shows how the 34 reviewed international IPOs and SPOs have performed compared to the RTS Index from their issue date to the present time. 20 of these have beaten the Index's performance to date.

The 42 most-indebted Russian companies - ie. those with stock-market listings - have an aggregate short-term debt burden of $38.5bn. Short-term debt is defined as debt due to be repaid or refinanced within 12 months, less any cash or cash equivalents. A list of companies ranked by size of net short-term debt as of the end of the third quarter 2009, appears below.

Many companies delayed listing. Listed in the section below, in industry sector and alphabetical order, are companies which are known to have either planned an equity issuance in 2008 or 2009 but had to shelve it due to market conditions, as well as companies that have recently confirmed plans for 2010 or 2011.

Some are preparing for 2010. The table below lists companies that have either confirmed or are widely speculated to be ready or preparing to come to the market in the first half or early autumn of this year, waiting for market conditions to improve. Few have indicated the amount that they plan to raise, but the total (for the companies on this list) is thought to be some $6bn-7bn. It has been widely reported that EurosibEnergo may seek to raise $1.5bn, SUEK has indicated a target of $1bn, while UralChem, LSR Group, and Prof Media are likely to target between $500m and $800m each.

Chris Weafer is head of strategy at Uralsib