Guy Norton in Moscow -

Though funding conditions for all types of borrowers from Central and Eastern Europe may have eased considerably since the first quarter of 2009 when investor and lender sentiment towards the region was at its nadir, the experience of corporates in first three months of this year has proved to be much like the proverbial curate's egg - good in parts, bad in others.

One corporate that typified that experience was Russian aluminium titan Rusal. Its $2.2bn IPO of a 11% stake on the Hong Kong Stock Exchange in late January was arguably a hit for majority owner Oleg Deripaska, but a flop for investors.

BNP Paribas and Credit Suisse were global coordinators on the groundbreaking transaction - the first by a Russian company on the Asian bourse – alongside Bank of China International, Bank of America Merrill Lynch, Nomura and three Russian firms Renaissance Capital, Sberbank and VTB Capital. But the rumour on the street, be it in Hong Kong or Moscow, is that the lead managers were effectively bystanders on the trade, with cash-strapped Deripaska effectively running the show himself in search of the billions of dollars he requires to keep his lengthy list of creditors at bay.

Judged by how much was raised, the IPO can be adjudged a triumph for Deripaska, but in the short term at least something of a disaster for the 300 or so investors who bought into the trade, including New York hedge fund bigwig John Paulson, Hong Kong's richest man Li Ka-Shing and English financier-socialite Nathaniel Rothschild alongside Russian development agency VEB and Russia's leading lender Sberbank.

Priced in the middle of its HK$9.10-12.50 target range at HK$10.80 a share, the Rusal transaction has to date never even remotely looked like being a money spinner for stockholders. Rusal traded down 11% on its first day of trading and at one point was down by a third. By the end of April, the stock was quoted at HK$8.50. The deal has underperformed both the underlying Hong Kong market and peer group stocks such as China's Chinalco and Alcoa of the US.

With Deripaska having drummed up over $2bn of cash with which to help trim Rusal's weighty debt burden to $12.9bn, company executives were arguably justified in claiming the deal had succeeded in its primary goal, placating Rusal's creditors. "The successful IPO helped the company to raise funds that allowed us to significantly reduce our debt," says Oleg Mukhamedshin, Rusal's capital markets director. "We are confident that the right choice of strategy to overcome the consequences of the global economic downturn and the strengthening of our competitive advantages will enable us to pay off the remaining debt in the shortest possible term to provide for the active development of Rusal and increase of the company's value in the interests of all our shareholders."

Minority shareholders surely feel less sanguine. Commenting on the deal, Florian Fenner, managing partner at Deutsche UFG Asset Management in Moscow, says: "For the record we did not participate and could not short it, as liquidity was insufficient. We acknowledge that the participating banks investment banks produced the most leveraged warrant on aluminium prices ever, but wonder why a bank would want to be associated with an IPO where under almost all scenarios the equity would be wiped out or at least severely diluted."

"While we have nothing to say about the prestige of the participating banks and the quite detailed risk factors in the prospectus, we just hope that investors who will undoubtedly lose a lot of money will not blame it on Russia. The company could not sustain the debt load during extremely prosperous times and we wonder what will happen during less prosperous times," he says.

The underwhelming response to the issue is widely regarded as having put a kibosh on other Russian corporates' plans to list on Hong Kong, with the likes of Russian miner Petropavlovsk (formerly Peter Hambro Mining) likely to hold off on a possible listing of its iron ore business separately or the business as a whole in Hong Kong. According to Barry Ehrlich, mining analyst at Alfa Bank, a listing of the iron ore business could see it valued at over $2bn.

Mongolian coal

One company that did impress on the Hong Kong Stock Exchange is Mongolian coal miner SouthGobi Energy Resources, which raised C$459m at the end of January with the sale of 27m shares at C$17 apiece via Citigroup and Macquarie Capital and secured a Hong Kong listing alongside its existing quotation on the Toronto Stock Exchange. The company will use the proceeds from the offering to raise production at its Ovoot Tolgoi mine, which lies around 40 kilometres north of the Mongolia/China border. The shares in the Hong Kong listing were significantly oversubscribed on the back of strong investor demand, with the Chinese and Singaporean sovereign wealth fund China Investment Corporation and Temasek both subscribing for shares as cornerstone investors. "By listing in Hong Kong, SouthGobi has dramatically increased its investor base and enhanced its valuation premium," says Alisher Ali Djumanov, chief executive of Eurasia Capital Management (ECM), which launched the first Mongolia-dedicated hedge fund in 2008. Eurasia has a 'Buy' recommendation on the stock with a target price of C$24, implying a 35% upside from trading levels at the end of March.

Meanwhile, Petropavlovsk, whose primary listing is in London, enjoyed success on the equity-linked front with the launch of $380m of convertible bonds due 2015. They paid a 4% coupon and offered a conversion price of £12.93 - a 32.5% premium to its outstanding stock. The deal, which post-greenshoe represented roughly 7.5% of the total share capital share, was joint lead managed by JPMorgan Cazenove and Citigroup. Sentiment towards the deal was boosted by the company's forecast of a rise in gold production and promise to reinstate dividends. The proceeds have been earmarked for exploration and development purposes as well as to fund future investments. In December, the company called an existing $140m convertible in December to give it a net debt position of just $24m at end-2009.

Meanwhile, VTB Capital lead managed a $412.5m convertible bond for pipemaker TMK in early February. The five-year bonds paid a 5.25% coupon and are convertible into four of TMK's London-listed global depositary receipts (GDRs) at a strike price of $23.075%, representing a 30% premium to outstandings. Proceeds from the deal will be used to pay down existing debt. Given cautious optimism in the market about Russia, VTB Capital's head of debt capital markets Andrey Soloviev says the TMK issue offered investors an attractive combination of downside protection from the fixed-income element and upside potential from the equity element. In February, the TMK board had already agreed to increase the company's share capital by almost 10% through a placement of 86m or so additional shares at RUB10 apiece. It later sanctioned a further issue at RUB133 a share to boost the firm's share capital to RUR873m ($296.5m).

The equity offerings were launched in the wake of an agreement with VTB, whereby the state-owned bank agreed to an extension on a $450m loan. The original one-year facility was provided by VTB back in August 2009 to fund the buyback of TMK's 2011 loan participation notes. The revision to the facility allows for an initial three-year extension with an option to extend up to five years. As a no doubt grateful TMK chief executive Alexander Shyryaev observed: "TMK continues to optimize its loan portfolio while emphasising the use of long-term instruments. As a next logical step in the development of our mutually beneficial partnership with VTB, this prolongation significantly improves the maturity structure of the company's loan portfolio."

Meanwhile, in March TMK listed American Depositary Receipts (ADRs) on an over-the-counter (OTC) trading platform in the US. The ADRs will trade on the OTCQX International Premier trading platform, the OTC market's highest tier. Each ADR represents four ordinary shares. TMK officials say the decision to issue ADRs was a natural one for the company following its entry into the US in 2008 when it bought Ipsco Tubulars and NS Group. "TMK awareness has been steadily increasing ever since the company began operating in the US. We appreciate the interest of North American investors and plan to expand our presence in the world's largest financial market. The next logical step in our commitment to improve the company's transparency and stock liquidity was the listing of TMK ADRs on the OTCQX, which, in particular, provides access to a wider range of retail and institutional investors," says Vladimir Shmatovich, senior vice president for strategy and business Development at TMK. TMK's GDRs are currently traded on the London Stock Exchange while its common shares trade on Russia's RTS exchange.

Different fare

Away from the flurry of industrial plays that came to market, Russian eaterie chain Rosinter Restaurants Holding served up some different fare, literally and metaphorically offering investors a chance to play on the recovery in the Russia/CIS consumption theme. In a secondary offering, Rosinter sold 2.6m shares at $10.5 apiece to raise around $27.5m before fees and expenses. Sole lead managed by Renaissance Capital the sale represented around a 26.2% stake in the firm,

Rosinter intends to use the proceeds of the capital increase primarily for debt reduction, business development and other general corporate purposes.

Commenting on the deal. Rosinter chief executive Sergey Beshev says: "We are very enthusiastic about the outcome of the offering in which more than 50 institutional investors demonstrated strong interest in our business. A wider shareholder base and an increase of our free float will generate enhanced liquidity of our shares. This capital increase will allow us to strengthen our leadership in the rapidly developing casual dining market in Russia and the CIS by taking advantage of macro recovery and further growth opportunities."

Rosniter IPO'd in June 2007 when it raised $60m. Its shares hit a peak of $61 in December 2007 before slumping to $5 in November 2008. By the end of March, the shares were at $12.25, up 55% year to date and whopping 310% in the previous 12 months. Natasha Zagvozdina, retail analyst at Renaissance Capital, which has a 'Buy' recommendation on the stock with a target price of $14, believes that the company is well placed to benefit from any uptick in consumer spending in the Russia/CIS region. "We forecast 2010 Ebitda growth at 52% [in ruble terms], thanks to the company's continuing, cautious approach to operating costs and slow expansion."

Rosinter reported a 0.7% sales increase last year despite opening new restaurants, while suffering a 16.1% like-for-like fall as consumers reined in spending. Over the same period, it trimmed its debt by 12.5% to $72.5m, and is looking to reduce the burden further.

RTS and Micex-listed Rosinter is the leading casual dining restaurant company in Russia and the CIS, operating operates 350 outlets, including 95 franchised restaurants in 39 cities in Russia, the CIS and the Baltic countries. The company previously said it saw positive trends in guest traffic in the fourth quarter of last year after full-year 2009 like-for-like sales fell 16% as consumers cut back on spending.

Outside of Russia, the main source of corporate equity issuance was Poland where the government sold stakes in a number of firms as part of a concerted privatization drive.

There was a notable transaction from Turkey however, with the TRY662.4m ($436m) flotation in early February of a 34.5% stake in Koza Gold – the IPO in Turkey since the $1.9bn Turk Telekom sale in May 2008.

Koza Gold's 1.8bn share offering was marketed at TRY36.80-46.00 per 100 ordinary Class B shares and was eventually priced by bookrunners Goldman Sachs and JPMorgan at the bottom end of the range, to give Koza Gold a market capitalization of TRY2.2bn ($1.5bn).

Although the company's shares ended the first day of trading down 9.5%, market participants are hopeful that the Koza Gold offering has set the stage for a revival in IPO activity. Deals in the pipeline from Turkey include an IPO of the country's largest lender, Ziraat Bank, while the government is also looking to sell further shares in Halkbank and Vakifbank, where the government sold 25% stakes in 2007 and 2005 respectively.

Debt issues

On the international bond market front, Russian oil company TNK-BP started the ball rolling at the end of January with a $1bn dual tranche offering via Barclays Capital, Credit Agricole and RBS. The deal, TNK-BP's first overseas bond since a $1.7bn five- and 10-year deal in October 2007, comprised a $500m, five-year tranche with a 6.25% coupon and a $500m, 10-year tranche with a 7.25% coupon. Given the relative dearth of Russian oil and gas deals since the onset of the credit crunch, the bonds attracted over $10bn worth of orders and so TNK-BP was able to price both tranches at relatively aggressive levels, with the five year element pitched at 406 basis points (bps) over US Treasuries and the 10-year piece at 385 bps over. Sentiment going into launch was boosted by the decision by Standard & Poor's to upgrade the company to 'BBB-' from 'BB+' in December. "The upgrade reflects our perception of material improvements in governance and shareholder alignment," said S&P credit analyst Karl Nietvelt.

In 2008, TNK-BP was the subject of a long-running dispute over the company's strategic development plans between UK oil company BP and Russian investor group Alfa Access-Renova (AAR), which are joint owners. S&P's decision made TNK-BP a fully investment grade rated credit and placed its ratings on a par with those assigned by Moody's and Fitch, which rate it 'Baa2' and 'BBB-' respectively. Consequently, January's Eurobond offering provided a litmus test of investor sentiment towards and appetite for TNK-BP debt, with the company boasting a combination of emerging market growth upside potential alongside the downside protection of investment grade risk. As such the deal attracted both existing emerging market accounts as well as new investment grade credit buyers. Jonathan Brown, head of European debt syndicate at Barclays Capital in London, says that by issuing early in the year, TNK-BP was able to capitalize on the positive ratings momentum following the S&P upgrade and the high level of liquidity at the start of the year, and thus ensure certainty of execution alongside tight pricing.

Meanwhile, after scrapping its plans for a $750m bond in late February when issuance terms failed to meet its expectations, in mid-March Stockholm-listed Alliance Oil issued a $350m, 9.875% 2015 Eurobond via BNP Paribas, Credit Suisse and JP Morgan. "The improved market conditions allowed us to successfully extend the maturity profile of our debt portfolio at attractive terms. In addition, this further increases our flexibility and at the same time strengthens our financial position," says Arsen Idrisov, managing director of Alliance Oil, a junior oil company with operations in Russia and Kazakhstan.

Stefan Weiler, executive director debt capital markets at JP Morgan in London says the fact that a relatively small, sub-investment grade operator such as 'B+'/'B' (S&P/Fitch) rated Alliance can tap the international bond markets "shows that weaker credits can issue as investors are looking for high-yield opportunities". Alliance will use the proceeds of the issue to expand production and upgrade a refinery in Khabarovsk in Russia's Far East.

Finally, debut issuer Russian Railways (RZD) made quite a splash at the end of the first quarter with the launch of a $1.5bn, seven-year bond via Barclays Capital, JPMorgan and VTB Capital that attracted $10bn of demand. The strong market reception enabled RZD to achieve the tightest launch spread for a Russian name in the last 18 months. At 245 bps over mid-swaps, the deal was priced well inside the initially indicated 275 bps over level marketing level, and tightened by 10 bps after launch.