Deals of the Year 2009 - Riders on the storm

By bne IntelliNews January 26, 2010

Guy Norton in London -

Given the global economic downturn of the past 12 months, 2009 won't be fondly remembered by too many people across emerging Europe and beyond. But in a year when the going got tough, the tough got going. As a result, 2009 boasted a series notable of financial transactions that demonstrated Central and Eastern Europe can still attract precious capital from across the globe.

bne's inaugural "Deals of the Year" poll canvassed opinion from issuers, investors and investment banks across the region, and the results clearly show that in the face of challenging market conditions, a wide range of countries, companies and banks were able to triumph over adversity.

On a general level, therefore, most countries in the region were able to re-access the international financial markets, if only on a modest scale in many cases. While 2010 won't be an easy year by any stretch of the imagination, the successes of 2009 point to the fact that in capital market terms this year won't be a write-off either.

Poles apart

Prime among the winners is Poland, which on both a sovereign and a corporate level showed that it was made of the right stuff in 2009 and spawned a gamut of noteworthy transactions as a result. Russia also put in a strong showing last year, with a string of landmark deals, which demonstrated that while the Russian economy may have been bloodied, it remains largely unbowed and a number of its corporates remain go-to names for both debt and equity investors.

Poland proved to be the standout sovereign in CEE in 2009, enjoying great success in both the debt and equity markets. Thanks to a proactive approach - Poland reopened a number of currency markets for CEE sovereigns last year - the country was able to leverage its reputation as the most successful of the major regional economies to sell more than $8bn of bonds denominated in euros, dollars, Swiss francs and Japanese yen - more than double the $3.5bn it raised in the international bond markets in 2008. "Poland knew beforehand that a successful programme of issuance in 2009 would require flexibility on issue timing, choice of currency and market and maturities. Its strategy of diversified issuance in previous years meant that Poland could weigh up the relative merits of issuance in all four of the core currencies - Japanese yen, Swiss francs, US dollars and euros ¬- and could prioritize those sectors where demand was strongest," says Vince Purton, managing director, debt capital markets at Japanese investment bank Daiwa SMBC. "And of course, by spreading the funding programme over four currencies, Poland avoided overreliance on any one area and achieved optimum funding terms, and has entered 2010 with all four investor bases keen to buy more paper this year too. Poland's 2009 issuance record is a text book case of highly effective debt management."

Given the positive investor sentiment towards Poland at home and abroad as a result of it being the only member of the EU not to enter into recession in 2009, the government was also able to sell sizeable stakes in a number of companies on the Warsaw Stock Exchange, including the near PLN6bn ($2.1bn) initial public offering (IPO) of power company PGE - the largest IPO in Europe in 2009.

In a year when the global economic downturn provided more than enough grounds for investment bankers to hit the bottle, a Polish corporate, booze distributor and vodka producer Central European Distribution Corporation (CEDC), supplied some much-needed cheer with a troika of transactions totaling almost $1.5bn, earning it bne's "Best Corporate Issuer" title. First, it kicked off a highly successful year with two secondary offerings in July and November that raised more than $500m. Commenting on the success of its equity deals, Christian Steffens, head of equity capital markets at UniCredit Group, says: "CEDC is a great name, the largest spirits company in Central and Eastern Europe, and a well-known story with investors given its listings in both the US and Europe. The two equity deals it launched represented a great opportunity to clean up its balance sheet and to build up the liquidity of its stock in Europe."

CEDC then notched up a noteworthy hattrick with the launch of a $950m high-yield bond - the largest such transaction from the region in 2009 and one which was heavily oversubscribed. More on that later.

On the fixed-income front, Poland's $3.5bn, 6.375%, July 2019 Eurobond in July proved to be the cream of the crop in the sovereign bond category, with lead managers Barclays, Citigroup and HSBC drumming up more than $8bn worth of demand for the original transaction. Consequently, the issue was upped to $2bn from an initial target size of $1bn-1.5bn and pricing was pared from 300 basis points (bps) over US Treasuries to 290 bps over. Demand for the deal was so strong that it was later increased by $1.5bn at a tighter spread of 272 bps over. The transaction was Poland's first dollar benchmark in four years and provided clear proof of the scale of demand for well-regarded emerging market issuers such as Poland. As a rare, high-yielding issue from an investment-grade EU sovereign, the deal benefited from positive supply and demand dynamics as well as scarcity value, thus attracting a diverse profile of investors. Over 400 accounts participated in the geographically diverse orderbook for the combined $3.5bn offering. The US bought 59%, UK 21%, continental Europe 19% and Asia 1%. Real money accounts dominated the book with investment advisers/asset managers buying 76%, banks and investment trusts 12%, hedge funds 6% and pension funds and insurance companies 6%. "This deal really reestablished the Poland name in dollars," says the head of emerging market debt syndicate at Barclays Capital.

In good company

On the supranational front, the Eurasian Development Bank's (EDB) $500m, five-year Eurobond in late September really grabbed investors' attention, with the EDB's debut dollar issue attracting more than $5bn worth of orders. As a result, the bank, established by Russia and Kazakhstan in 2006, was able to tighten the coupon pricing on the deal from an initial target of 7.75% to 7.375% - the tightest yield yet for a borrower from the Commonwealth of Independent States (CIS) in 2009. The deal, lead managed by Deutsche Bank, JP Morgan and Royal Bank of Scotland, also achieved the borrower's aim of achieving diversified distribution, both by geography and investor type. Geographical distribution was 42% US, 25% UK, 18% continental Europe and 15% Asia. Demand by investor type was 60% asset managers, 29% banks, 7% hedge funds and 4% insurance companies. "The transaction confirmed the renewed interest in the CIS from emerging markets investors and as the highest rated borrower from the region, EDB offered an ideal investment proposition," says Stefan Weiler, executive director, debt capital markets at JP Morgan.

Commenting on the blowout reception for the issue, Dmitry Krasilnikov, head of corporate finance and financial institutions at the EDB, says: "Everybody appreciated the fact we were a strong quasi-sovereign story of Russia and Kazakhstan, both of which have not issued internationally for a long time, and that we had a very high level of capital adequacy and liquidity. These two sets of factors, as well as the fact that despite the substantial oversubscription we decided not to increase our deal size, ignited broad investor interest in the issue and allowed us to tighten our pricing below the initially indicated levels."

On the corporate bond side, Lukoil's $1.5bn Eurobond perfectly illustrated the extent of the recovery in investor sentiment towards Russia in general and Russian oil companies in particular, after oil prices had tanked in 2008. As a result, bookrunners Barclays, ING and RBS were able to attract an orderbook of almost $7bn for the transaction, which was split between a $900m, five-year and a $600m, 10-year tranche. Altogether 410 accounts bought into the two elements, producing a well-diversified orderbook in terms of both geographic distribution and investor type. Overall, demand was split 30% US, 66% Europe and 4% Asia. Some 44% went to asset managers, 43% to banks and 13% to insurance companies, pension funds and other types of investors. Commenting on the reception for the issue, Jan Mutsaers, managing director, debt capital markets at ING, says: "Investors were impressed by the way that Lukoil has managed its business during the economic downturn in Russia, its high level of corporate transparency and its relative scarcity as a borrower." He adds that the combination of these factors not only enabled to raise far more that the $1bn it was initially targeting, but also helped it price both tranches inside where comparable deals from state-owned Gazprom were trading - a notable achievement for a privately-owned oil company from Russia. The combination of five- and 10-year elements also proved a draw, allowing Lukoil to tap a wide spread of investors.

"This was the standout corporate trade of the year," says Mike Elliff, head of emerging market debt origination at RBS. "This was a true market-placed issue from a borrower with scarcity value." Brown at Barclays adds: "Investors wanted renewed exposure to corporate Russia in a good size and at a good price, and this Lukoil deal provided that."

On the high-yield bond front, new issue activity revived in the last few months of the year, with a bevy of deals from the likes of Polish broadcaster TVN, regional broadcaster Central European Media Enterprises and Croatian retailer Agrokor. The pick of the bunch though proved to be the $950m equivalent deal from Poland's CEDC. Bookrunners Goldman Sachs, Citigroup and Deutsche Bank were able to quickly build a strong orderbook for bond, enabling them to increase it by $79m from the original target size. Overall, the book was more than three times oversubscribed, with just under 300 accounts across the two tranches. Roughly 80% of the euro book went to high-yield long-only funds, with most of the rest going to emerging markets funds, alongside a small bid from retail investors. The dollar book was almost entirely institutionally focused, with around 70% going to high-yield funds and 30% to emerging-market accounts.

Commenting on the reception for the issue, William Carey, CEDC's founder and chief executive officer, tells bne: "We are the largest vodka producer in the world, so we have an unquestionable leading position in our industry. For years we've been delivering strong and stable results and we've met the guidance we set up. With the work we have done in Poland and Russia to restructure our business, develop our brands and cut costs, we have prepared CEDC Group to come out from the crisis a stronger company, ready to benefit from the improving demand, as soon as positive changes appear." He adds that the fact an important part of CEDC's business is located in Poland, which has come through the global financial crisis exceptionally well, was a definite plus from an investor perspective.

The local bond markets across CEE proved to be risky places to be in the early part of the year, nowhere more so than in Russia, where a combination of currency weakness and increasing default risk proved to be an unpalatable mix for investors. But by the time Russia's leading conglomerate Sistema came to market in late August with a RUB20bn bond via Renaissance Capital (RenCap) and Sberbank, there were clear signs of a recovery in the Russian market. Consequently, Sistema was able to launch what proved to be the biggest corporate issue of the year in Russia, thanks to strong demand from a mix of Russian and overseas investors, split 70% commercial banks and 30% asset managers. As a result, the five-year deal, which features a put option after three years, was priced at 14.75%, 20 basis points lower than the initial price guidance of 14.95% - particularly impressive given that the spreads on most first-tier and second-tier issues in the Russian bond markets had widened by 25 bps to 70 bps when the deal was marketed to investors. The deal also signaled how a growing number of Russian corporates sought to manage the foreign exchange risk elements of their debt portfolios following the managed devaluation of the rouble at the start of 2009. "Russian issuers are becoming more and more sophisticated about risk management in terms of looking to mitigate factors such as foreign exchange," says Dimitri Sredin, head of debt financing at RenCap in Moscow. "All the top Russian names want to issue in roubles and we expect the market to improve further... in terms of the level of investor demand and the pricing for issuers."

In a year when a number of debtors - most notably Kazakh lenders BTA and Alliance Bank - dismayed creditors with the miserly terms of their restructurings, the Credit Suisse-led restructuring of Ukrainian energy company Naftogaz's debts won nothing but praise for the way that it successfully met the expectations of a variety of creditors. Naftogaz effectively exchanged its entire foreign bond and loan liabilities into a new $1.65bn Eurobond, guaranteed by the Ukrainian government, which ultimately created a sovereign risk instrument deliverable into a corporate CDS auction - a world first. When Credit Suisse was mandated to restructure the firm's debt in structure, it knew it would have to design a process that would address the requirements of both hedged and unhedged investors with exposure to Naftogaz through a variety of different assets. "With the completion of this transaction and the subsequent CDS auction, substantially all foreign currency bond, loan and CDS exposure to Naftogaz has been removed from the market," says Andrew Burton, director, liability management, at Credit Suisse.

Driving convertibles

2009 also saw a renaissance in the convertible bond market, with Russian steelmaker Evraz stealing the limelight with its $650m, 7.25%, 2014 issue via Goldman Sachs and Morgan Stanley in July. The transaction highlighted the fact that heavily indebted companies such as Evraz, which saw their access to the international bond and loan markets effectively barred for most of 2009, were able to turn to equity investors in the search for much-needed capital for debt repayment purposes. The convertible was launched in conjunction with a $315m placement of global depositary receipts (GDRs), which made the deal the largest equity transaction from Russia in more than 18 months and revived hopes that Russian issuers will return to being the major players in the international equity markets they were before the onset of the credit crunch. Although Evraz is far from out of the woods in terms of servicing its $8.5bn debt burden - in November the bank had to pay investors to agree to covenant changes on $750m of bonds maturing in 2015 - bankers at Goldman Sachs and Morgan Stanley deserve praise for convincing investors to part with the best part of $1bn to at least ease Evraz's leverage problems.

On the equity capital markets stage, Polish power company PGE (full name: Polska Grupa Energetyczna) proved a star performer, with its PLN6bn ($2.1bn) IPO via Goldman Sachs and UniCredit on the Warsaw exchange more than seven times oversubscribed. PGE's transaction was the largest IPO from Europe in 2009 and one of the highlight deals in a very successful year for the WSE, which witnessed over 20 new issues in 2009. The deal was priced at the top end of the pricing range of PLN17.5-23 per share and enjoyed a successful debut on the market when its stock rose 16% at the open, lifting the market capitalization of Poland's largest electricity provider to PLN44.96bn, making it the biggest company listed on the exchange. "We offered investors a chance to invest in a company that is a key to Poland's energy sector," says PGE chief executive Tomasz Zadroga.

PGE is Poland's largest producer, generating 42% of its energy. The IPO also marked the latest in a number of asset sales by the Polish authorities, which have enjoyed an enthusiastic reception from both retail and institutional investors at home and abroad. Commenting on the success of the deal, Christian Steffens, head of equity capital markets at UniCredit Corporate & Investment Banking, says: "PGE is considered by many to be the best utility in Poland. It was important for the PGE deal to be a success as it would create a positive slipstream for the other power utilities Enea and Tauron that will follow it to market in 2010." He adds that in addition to the strong demand from Poland, which accounted for 70% of the book, there was also keen interest from abroad. "For insurance companies and pension funds that are seeking exposure to Central and Eastern Europe, this is the stock to hold."

International IPOs from emerging Europe were thin on the ground in 2009, but the £62m offering by oil producer Exillon Energy gave investment bankers some pre-Christmas cheer in December when it listed on the London Stock Exchange, selling 40.5m shares at 153 pence each. The share sale, which represented around a 30% stake in the company and valued it at £192m, was lead managed by Bank of America Merrill Lynch and ING. Although registered in the Isle of Man and headquartered in Dubai, Exillon's core operations are in Western Siberia and Komi regions of northern Russia, and so as such it represented the first foreign listing from Russia since 2008. Exillon will use the cash to fund the full acquisition of production licences and develop drilling projects up to 2011. "Although at an early stage of development, Exillon attracted a high-quality book of investors that bought into the fact the company is cashflow generative and largely debt free," says Chris Goodman, director, equity capital markets at ING. The investor base was largely composed of sector-specific oil and gas funds, supplemented by specialist emerging market buyers, principally from the UK alongside some US interest.

On the secondary offering front, Russian supermarket chain Magnit's $527m transaction via Morgan Stanley and VTB Capital in October proved to be the star attraction of the year, fighting off competition from a bevy of smaller deals from independent oil and gas companies in Russia and Kazakhstan. Magnit's budget supermarket format has proved a hit with cash-strapped consumers in Russia and Magnit is using the proceeds from the share sale to further expand its network, which with more than 3,200 stores is already the biggest in Russia. With less money in their pockets, Russians have traded down from expensive imported food products to the cheaper Russian made goods that Magnit sells en masse, making Magnit one of the few companies in Russia to maintain not only its headlong growth but to keep its expansion plans in tact. "We are an ugly duckling story," says Magnit director Oleg Goncharov. "We went from a wholesale operation in a small regional town 15 years ago, to one of the fastest growing retail operations, not only in Russia, but the whole world." Magnit posted net retail sales of RUB169.6bn for 2009, up 28.1% from the year before.

The offering, which took the form of Global Depositary Receipts combined with a pre-emptive rights issue, was the largest secondary share sale from Russia since the onset of the global credit crunch and attracted strong demand from both domestic and international investors. As a result, it raised far more than the $300m initially targeted by the company's management earlier in the year.

While blockbuster IPOs by the likes of Russian aluminum giant Rusal may have failed to reach the markets in 2009, the Human Stem Cell Institute (HSCI) managed to steal some limelight for itself when it became the first Russian company to launch an IPO since the second quarter of 2008. Lead managed by local broker Alor Invest, the pioneering RUB142m deal, the first ever by a Russian biotechnology company. The IPO saw the sale of 15m shares, representing a 20% stake, sold at RUB9.5 apiece - the lower end of the RUB9-11 indicated pricing range. The shares were listed on the Innovative & Growing Companies (IGC) sub-sector of the newly created Innovation and Investments Market small cap segment of the Moscow Interbank Currency Exchange (Micex). According to Alor Invest, more than 300, predominantly retail, investors bought the stock. Commenting on the deal, Vladimir Savov, head of research at Otkiritie brokerage in Moscow, says: "It's encouraging that a small hi-tech company like HSCI has the guts to go to the market."

The HSCI placement comes at a time when the Kremlin is pouring billions of petrorubles into creating hi-tech industries to reduce Russia's perceived over-reliance on natural resources. HSCI general director, Artur Isaev, the firm's largest shareholder, claims the IPO marks an important step in creating a dynamic new biotechnology sector in Russia. "In addition, the capital we raise will allow us to implement research and development projects to develop our own innovative and unique stem cell-based medications, which are aimed at treating blood cancer, heart attacks, and skin defects."

HSCI was founded in 2003 to advance projects in stem cell technologies. "According to our pessimistic scenario, we expect 40% annual growth in capitalization and revenues. But the main growth in capitalization will be driven by the launch of three innovative medications, the licenses for which may be worth hundreds of millions of dollars," Maxim Dremin, head of corporate finance at Alor Invest, says.

On the lending front, bne's "Best Syndicated Loan" deal of the year goes to the $250m syndicated IFC B-loan facility for MDM Bank, which at the end of October was the first privately-owned Russian bank to sign an international syndication since the onset of the global credit crunch. Given the fears about growing non-performing loans in the Russian banking sector, for much of the year it looked as if the country's banks, and especially those without government backing, would be frozen out of the international loan markets. In the end though, MDM managed to break the logjam with its well-supported loan. Mandated lead arrangers on the transaction were Calyon, ING, RZB, Standard Chartered Bank, and VTB Deutschland. Altogether a total of 16 banks from 10 countries joined the facility, which was upped from an initial amount of $175m due to an oversubscription. The World Bank's IFC arm acted as the lender of record for the loan, which will be used for trade-related financing and other trade-related projects undertaken by MDM Bank's customers. "We are very pleased to announce the first international transaction for a privately-owned Russian financial institution since the beginning of the financial crisis. The success of the transaction demonstrates the trust and confidence in MDM Bank shown by the banks participating in this syndication," MDM Bank's chief financial officer, Vadim Sorokin, says.

The groundbreaking loan is a feather in the cap of the funding team at the "new" MDM Bank, which was created in August through the merger of retail banking-focused Ursa Bank and corporate banking-focused MDM Bank. The merged bank is the largest privately-owned bank in Russia by retail deposits and retail loans, and second by total assets and total capital. "Other Russian banks followed the deal very closely and we expect more to follow MDM's example," says Thomas Hädicke, head of primary loan distribution at RZB Group, adding that support from international financial institutions such as the IFC will play an important role in opening up the syndicated loan markets for borrowers from CEE.


bne's "Best Private Equity and M&A" deal of 2009 goes to CVC Capital Partners' acquisition of Anheuser-Busch InBev's (ABI) emerging European operations, which exemplified that the global giants of the alternative asset management industry are still taking the region seriously. In its first deal in emerging Europe, CVC stumped up an initial $2.2bn to acquire breweries in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia. CVC will also brew and/or distribute Stella Artois, Beck's, Lowenbrau, Hoegaarden, Spaten and Leffe in CEE under license from ABI. "Among the key attractions of the AB Inbev's [Central and Eastern European] business are its fantastic portfolio of brands, leading positions in fundamentally attractive markets, and strong local management," says Istvan Szoke, senior managing director at CVC. "We are acquiring a business that already has a very good structure and model. We plan to build on the good foundations already in place." As part of the transaction, CVC raised around $1bn of senior debt from a group of international and regional banks, demonstrating there is still strong lender support for the acquisition of well-run businesses in New Europe.

bne's "Best Infrastructure Deal" of 2009 is the financing for the R1 motorway project - the first ever public-private partnership (PPP) road project in Slovakia. The deal paired the European Bank for Reconstruction with a consortium of commercial bank lenders. The EBRD committed €200m, while commercial banks stumped up €780m, which will help cover the majority of forecast €1.3bn cost of the R1 motorway. The project will involve the construction of a 47-kilometre stretch of dual carriageway between Nitra and Tekovske Nemce and a 5.7-km northern bypass for the city of Banska Bystrica in the south west of the country, which has been awarded to the Granvia Consortium under a 30-year availability fee-based concession.

Granvia is a joint venture between France's Vinci Concessions (70%) and its Dutch Partner ABN Amro Highway (30%), which won a public tender hosted by the Slovak transport ministry in February 2009. Construction of the east-west road link has already started and is set to be completed by mid-2012. Commenting on the deal, Thomas Maier, business development director for infrastructure at the EBRD, says: "This is a landmark transaction in a time of crisis as it signals a return to the more normal functioning of the banking markets." He adds that while the EBRD had to step in to plug a funding gap for the project, the fact that €780m of the €1bn loan was still provided by commercial banks was testament to the financial viability of the project and the professional and transparent management of the Slovak authorities. As result the financing package did not require any sovereign guarantee. The R1 project is set to be the first in a trio of road PPPs in Slovakia, with construction of the D1 motorway link, which is likely to cost around €5bn, set to spawn two separate PPS and will likely require further support from the EBRD. "Although the banking markets are returning to more normal parameters, we would still expect to be involved in financing part of the D1 project," says Maier.

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