Let’s Put “R” back in its Place

Expert,
Expert №8 (742)
February28, 2011 06:06
Author: ALEXANDER IVANTER

When talking about BRIC foreigners often omit letter “R” leaving Russia behind the closed doors of investment-attractive countries. Our task is to put it back there, believes Vnesheconombank Deputy Chairman Petr Fradkov.

Russian banks are coming back to borrowings markets. Last year their joint debt increased by 14% to 144.8 billion dollars. So far the first echelon financial institutions are tapping foreign capital markets. Sberbank, VTB, Gazprombank and VEB are among heavyweights. Last year VEB raised about 9 billion dollars on foreign and domestic markets. We discussed specifics of the post-crisis activity on public debt markets with VEB Deputy Chairman Petr Fradkov.

-What’s the reason for Vnesheconombank’s increased activity on public debt markets? Are you in a hurry because the period of low interest rates might end?

-Our strategy on debt markets is not determined by opportunistic considerations. It took us a long way to get to the current period of active borrowings. As you know, till the year 2007, VEB didn’t have a banking license and operated as specialized credit institution subject to the 1993 presidential decree. Our opportunities for tapping public debt markets were significantly limited because potential investors didn’t quite understand our legal status. At that time we focused on tied loan transactions covered by foreign insurance export agencies and intended to finance concrete projects inside the country. We raised the first syndicated loan for general purposes worth 500 million dollars in 2005. After VEB’s status of a bank for development in the form of State Corporation was formalized in legislation in May of 2007, we set ourselves a goal to radically diversify our funding base and almost immediately got down to preparing the first bond issue. The work took us about a year and we completed it in the autumn of 2008 when international capital markets factually collapsed. And it was not until the early 2010 that the markets started to gradually come to life. We somewhat coordinated our efforts with the Finance Ministry, which placed Russian eurobonds on the market after a ten-year interval, it would have been wrong for us to enter the market before the sovereign bond issue.

In July of 2010, VEB placed a debut ten-year eurobond issue worth 1.6 billion dollars. The eurobond issue was a success although the market situation at that time was complicated. For  example the Finance Ministry’s eurobond issues traded at a price a lot lower than their par value. This proved to be unpleasant news for all Russian issuers who started to carefully tap the market last year. In the course of our pilot bond issue we gave a premium to investors and not only for our debut issue, so they felt pretty comfortable, the bonds traded in the positive zone for several months and by the time of the second issue in November when we issued 7and 15-year bonds one after another the situation was fundamentally different. As far as 15-year bonds are concerned the demand outstripped the supply by four times.

As a result, for a period of half a year we made a good showing as a borrower. The yield curve of our bonds is closest to the yield curve of sovereign eurobonds among issuers of the financial sector. Among non-financial sector bonds only Transneft bond issues are trading better than ours.

-The proportion of public borrowings in VEB’s funding structure accounts today for about seven percent. What’s your target?

-30 percent by 2014.

30 percent?! Isn’t that too much? As a matter of fact public bond issues are relatively expensive.

No, it’s not much. Now VEB has a certain imbalance in favor of funding using financial resources of the Central Bank and the Government. As part of crisis management measures we used government funds to extend subordinated loans to banks and refinance foreign debts of a number Russia’s largest corporations. So far, Central Bank and government funds form about a half of our resource base. In terms of our long-term activity as a Bank for Development it’s not the right thing. We believe that we should diversify sources of funding in the following proportion 30-30-30. That is, 30 percent will account for government sources. Another 30 percent – for the so called backtobacks (back-to-back loans), that is, tied bilateral loans. And at last the final 30 percent – public markets and not only foreign ones. At present, three our bond issues are circulating on the Russian bond market, with one of them being denominated in US dollars.

If we have a look at development banks’ business experience abroad we can see that in a number of cases their borrowed capital is a main source of their funding. For example, the Korea Development Bank funds about 60 percent of assets through borrowing on debt markets, the China Development Bank – 70 percent, and German KfW – more than 75 percent of assets. In 2010, our colleagues from KfW raised more than 70 billion euros in 2010. KfW is the world’s third or fourth largest bank. To tell you the truth, they make borrowings against the guarantees of the federal government. Brazil’s development bank BINDES borrows a lot and often both against its government guarantees and without them.

Alpine benchmark

-VEB has just placed eurobonds worth 500 million Swiss francs. What’s the reason for choosing the Swiss market?

-Before us none of issuers from developing countries placed five-year bonds of such a volume in Switzerland. We paved the way and made a benchmark. Poland, the Indian State Bank and other borrowers followed our suit right away.

As a whole our borrowing program includes such currencies as the US dollar, the Russian ruble, the euroruble, the Japanese yen and the Swiss franc. Maybe, a list of currencies intended for borrowing will be expanded. In particular, the yuan loan market has considerable potential.

-Your borrowing program was initially documented in accordance with the American securities circulation rule known as Rule 144A. What are its specific features?

-This program is more comprehensive compared with Reg S and it includes more serious requirements to the issuer in terms of information disclosure. But Rule 144A makes it possible to use the American investor base to a greater extent. So far, Russian issuers have not made debut bond issues in accordance with Rule 144A.

-Judging by your experience, there is a certain degree of coordination between Russian issuers’ activity on the foreign market with the Finance Ministry?

-This sort of coordination is being put in place, certain regulations have been worked out, under which Russian issuers and not only companies and banks with state participation are to agree upon their borrowing programs including date, volumes and currencies of instruments with the Finance Ministry. An interesting thing is that my colleagues from the Finance Ministry told me that on the eve of placing sovereign bonds that one of requirements made by investors was the establishment of such a system of coordinating bond issues.

-This is an absolutely logic requirement. The market suffers from lack of coordination. Is there a horizontal coordination of borrowings between our issuers?

No, there isn’t. we don’t have access to other large issuers’ plans. We can get some information only due to our communication and partner relations with various banks and companies. Moreover, there are investment banks – arrangers of bond issues. Without disclosing any details they can hint that it would be better to postpone a bond issue.

-Two weeks ago VTB completed an offering of the government stake. Its results are pretty ambiguous. At least we can’t say that the offering price was high. What’s the reason for it? Did the issuer fail to prepare properly or are the market conditions unfavorable for us?

-The current market situation for issuers from emerging markets and specifically, from Russia is not bad. It was even better in the second part of last year. I learned it for sure from communicating with investors. And the figures speak for themselves. In 2009, issuers from emerging markets made eurobond issues for a total amount of 260 billion dollars and in 2010 – for a total amount of 315 billion dollars.

-By the way Russia is not a leader among emerging markets, although such countries as Ukraine and Baltic States were hit harder by the crisis. We are somewhere in the middle…

-I noticed an unpleasant nuance on the sidelines of the Davos Economic Forum. When talking about BRIC foreigners often omit letter “R” leaving Russia behind the closed doors of the club of investment-attractive countries. Our task is to put letter “R” back in its place. As far as the bond market is concerned, at first, it opened for financial institutions and then in 2010 and now it is ripe for real economy companies to make bond issues, but so far only for the first echelon. Beyond this first echelon unreal premiums emerge, which are disproportionate to Russian companies’ positioning on the Russian market.

As to various market segments, during the crisis the foreign bond market was hit harder than the syndicated loans segment and even now it didn’t come back to the pre-crisis bond-yield level but the ruble-bond market has in general come back to the pre-crisis bond-yield level.

-What are VEB’s plans for operating on the public debt market this year?

-We plan to borrow as much as we did in 2010 and three thirds of funds are to be raised abroad.

-Do you plan any new dollar borrowings on the domestic market?

We do not rule out such possibility. It depends on the demand for such bonds. In the time of the crisis many banks had excessive amounts of foreign currency against the backdrop of the ruble shortage. They bought our dollar bonds and received ruble liquidity against them at the Central Bank. And in terms of our operations the dollars we received were not excessive

-Are commissions fees lower for bond issues in Russia than on the foreign markets?

-Yes, they are. Foreign markets are more expensive in terms of overhead expenses. The more local a foreign market is the more expensive it is. And bond offering periods are a lot longer there. For example, a road show in America or England takes three days and a transaction closes. But in Switzerland where there are hundreds of thousands of account holders a subscription procedure is a lot longer.

-Is it more important for you to offer bonds at the highest price or to offer them at a lower price in order to have a good secondary market?

-The most important and principal thing for us is to have a liquid, active secondary market. This is your image to investors, a foundation for future bond offerings. And next time you won’t need to tell them anything, your bond quotation schedule will be enough. And several bpps (base percentage points) which you can economize on at a bond offering will play against you – investors won’t let you offer bonds even at a market price.

-What are the ways of supporting your own bonds on the secondary market? Besides the art of determining the right offering price.

-If you mean the practice of trading transactions with your own bonds, it takes place of course. Usually banks that arrange bond offerings are responsible for it.

-And finally one microeconomic question, since mid October of last year the net outflow of capital from Russia has dramatically increased. A monthly net capital outflow is 9-13 billion dollars. What’s your opinion about the reasons for it?

-I can give my opinion about one of the reasons for the capital outflow you mentioned. Why does Russia suffer the shortage of direct foreign investments? From my point of view the reason for it is the lack of clearly defined, quality projects in the real economy. Foreigners find it extremely difficult to implement large-scale long-term projects without adequate local partners.

State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’ was founded subject to Federal Law № 82-FZ dated May 17, 2007. As of 30.06.2010 VEB’s assets were 63.3 billion dollars, VEB’s own capital – 14.1 billion dollars, its loan portfolio – 27.96 billion dollars, its net profit – 457 million dollars.