Clare Nuttall in Almaty -
The Eurasian Development Bank was quick to raise money on international financial markets in its first few months of operation. Four years on, it has no urgent need for funds, but all the tools are in place, allowing it to spring into action when required. Dmitry Krasilnikov, managing director, corporate finance, is confident the bank will be able to raise money whenever needed.
The EDB has been an active fundraiser since its launch in June 2006, raising its first syndicated loan just five months later in November 2006. "We really hit the ground running," says Krasilnikov, outlining the bank's successful raising of this and two subsequent syndicated loans, with a total value of $850m. At that time, he says, the syndicated loan market was very vibrant, allowing the bank to carry out three successful, high-profile deals. With its track record established, the bank started preparing its Eurobond programme.
Plans to issue the EDB's debut Eurobond in 2008 fell through due to the turmoil in international financial markets following the collapse of Lehman Brothers. However, by 2009 the situation had improved, and the EDB carried out its inaugural bond issue, raising KZT20bn (€104m) on the Kazakh market. "That was a clear ice-breaker for Kazakhstan, because virtually no deals were coming to the market from any non-sovereign borrower in this country. It was a well-timed and useful issue both for us as a borrower and for the Kazakh market," says Krasilnikov.
Later that year, the EDB followed up with its first global Eurobond issue, raising $500m in September 2009 after an extensive road show involving both the EDB's top management and the finance ministers of its major shareholders, Russia and Kazakhstan. "The issue was extremely successful. One month later, we did a RUB5bn (€123m) issue, which was also very well received," says Krasilnikov.
In the wings
So far in 2010, the EDB has not carried out any issues, though the bank still has "very substantial plans for coming to the markets," according to Krasilnikov. The main reason for its lack of activity in the first nine months of the year is that new funds are simply not needed. As of the end of 2009, total assets were $2.495bn, and by mid-2010 they were slightly higher at $2.521bn.
However, when the time comes to raise funds, all the necessary machinery is in place. The EDB registered its $3.5bn euro medium term note (EMTN) programme in December 2007, and Krasilnikov and his team remain in constant dialogue with its investment banks JP Morgan, Citi and VTB Capital. In July, the EDB also registered a $3.5bn euro-commercial paper (ECP) programme. "Coupled with longer-dated Eurobonds, the ECP registration gives us a lot of flexibility in terms of providing instant financing for projects of pretty much any size and any tenure, at very moderate cost," explains Krasilnikov.
Despite the continuing volatility in international financial markets, Krasilnikov believes the fundraising climate for an EDB issue would be "quite supportive" and he's confident in the bank's ability to raise funds. "The overall picture is unclear because the past few months proved to be very volatile and at times even hectic in terms of market behaviour. Investors are quite nervous. However, looking specifically at our situation, there is still a shortage of bond issues from relatively high-quality borrowers from the CIS," he says.
While Russia carried out a Eurobond issue earlier this year, it's not planning any more dollar issues in 2010. Meanwhile, the Kazakh government remains divided over whether to use the country's National Welfare Fund or to raise finance on international markets. The appetite for Kazakh risk has also been reduced by the country's banking sector crisis and restructuring. A positive side effect of the lack of good quality names from Russia and especially Kazakhstan is that appetite for an issuer such as the EDB is likely to be high. "The market appetite is highly segmented in terms of the quality of issuers, so the lower-rated issuers, especially from the financial industry, have to pay sizeable premiums to come to the market," says Krasilnokov. "It's obvious there is a market need for our issues, and for us the question depends on whether we need money this year, rather than whether we will be able to raise funds. When and if we need money, we will get as much as we need."
As the EDB grows and develops, the bank is also working to launch new financial products for its core clients. Although some of these clients are already being served by investment banks, in general the areas where the bank operates - which include hard-to-access sectors such as the nuclear industry - are heavily under-banked. "We have excellent access to clients and industries, and a good understanding of their business," points out Krasilnikov. "Our clients are comfortable working with us because we are a supra-national, inter-governmental organization, with the Russian and Kazakh governments as our biggest shareholders."
For example, the bank plans to become more inventive in terms of working with its assets. "Many of our loans will soon be maturing to the stage where they will become bankable by ordinary commercial banks or by investors," says Krasilnikov. "As soon as this happens, we will be looking to sell off that risk from our balance sheet to some private investors or other development banks."
The EDB can also use its preferred creditor status to help its member countries raise funds on international markets. As an international development bank, it can work in jurisdictions that are not broadly bankable because of the problems in evaluating sovereign risk. Although Russia and Kazakhstan have historically been active on international financial markets, Tajikistan is unrated and has never made a sovereign issue. Armenia, while rated, has not been very active internationally. "It's a common approach for international development banks that has been used in Africa, Latin America and even Western Europe after World War II. There is no history of defaults to international development banks, which is probably why the banks are as a rule much higher rated than their shareholders," says Krasilnikov. "This gives us another potential area to expand into in terms of inviting banks and private investors into those less established jurisdictions."
At present, the EDB is in the process of launching its investment banking operations. "We have a big appetite for this part of the world in terms of taking some long-dated and large-scale risks in the real sector. We also have sufficient capital, credit ratings and attractiveness to investors, allowing us to offer financing in areas that practically no one else can. Very often that financing can be complemented by some commission-based business," says Krasilnikov.
This could, for example, involve acting as arranger for a corporate bond issue, which would also be covered by the bank's guarantee. The EDB might also provide bridge financing or financing for various types of M&A transactions. Investment banking operations are still at an early stage, but the bank already has a modest pipeline of deals. To control costs, it plans to outsource as much as possible from the beginning. "Our aim is to grow our origination effort in terms of some special situations where we can fit into client needs. Normally, this would involve partnering with other banks - either Russian or western. Our aim is not to compete head to head with the behemoths in the market, but to spot and get into situations whereby we will have some competitive advantage," says Krasilnikov.
"We view the high added-value, commission-based business as a means to create profits we can then use to subsidise lending rates to low [internal rate of return] projects in the real sector which cannot pay high interest rates. The investment banking effort will therefore help our mainstream business," he adds.
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