Principles of Syndication

Vremya Novostey,  February 27, 2007

“We have shown that we are in a position to raise considerable funds at record-low rates”

The potential of such financial instruments as syndicated credits is becoming increasingly attractive both to banks and to borrowers. The volumes of the Russian syndicated credit market for financial institutions are on the steady rise: from 2004 to 2006 they more than doubled. The pluses of these financial instruments from the point of view of creditors are easy to understand: they help to reduce risks, diversify loan portfolio and achieve high profitability. But best practices in syndicated banking are just beginning to evolve.

Vnesheconombank is an active market maker in the syndicated market and it acts both as a creditor and a borrower. The fact that the Bank managed to attract syndicated credits twice became highly symbolic for the market: in July 2005, the Bank received a 500-million dollar credit and a year later – an 800-million dollar credit for a three-year period at LIBOR+0.35% per annum. Meanwhile, in 2006, the Bank participated in 8 syndicated credits and the total volume of its participation in these transactions exceeded 30 million US dollars.

Crucial issues relating to the development of syndicated credit market were dealt with at the corporate workshop “Syndicated Lending. Theory and Practice” organized by Vnesheconombank. Together with Vnesheconombank employees the workshop was attended by representatives of 20 Russian and foreign banks and law firms.

Representatives of Dresdner Kleinwort, Bank Austria Creditanstalt, Deutsche Bank, Raiffeisen Zentralbank Osterreich, Vneshtorgbank, as well as such law firms as Bаker&McKenzie and Salans gave master classes. Those who participated in the workshop said that while greater use of syndicated credit transactions is a highly promising and rapidly expanding line of business in Russia it is still hindered by the lack of practical experience in conducting transactions, the absence of special regulation and the limited number of syndicated market makers. Director of Vnesheconombank’s Financial Institutions Department Alexandr Zelenov told Vremya Novostey about the way the Russian syndicated lending sector is developing.

-- What are the special features of conducting syndicated lending transactions in Russia, is there an adequate legal and regulatory framework in this banking sector?

- In fact, there are some special features. There are no separate legislative acts to regulate the syndicated credit market. And in such legislative acts as, for example, the Civil Code these transactions are regulated indirectly as these acts set out only general requirements.

Normative regulation is rather contradictory. Here I mean discrepancies between Bank of Russia regulatory documents and the Loan Market Association’s standard credit documentation applied by foreign credit arrangers. As a consequence, the established standard practice in the Russian syndicated credit market is that agreements made are not fully in line with bank of Russia regulatory standards. And in their reports, foreign lawyers state that regulatory standards themselves are not binding.

In addition to the inadequate regulatory network as a special feature of the Russian syndicated credit market, I would also like to mention the absence of judicial practice, standard credit documentation and generally accepted business principles.

- Judging by the transactions made, Russia banks and companies prefer to attract syndicated credits from foreign syndicates and have foreign credit arrangers. What’s the reason for it? Is it because Russian financial institutions are not experienced enough?

- Nothing of the kind. Although Russian financial institutions haven’t been working in this banking sector for along time, they have acquired appropriate expertise in attracting syndicated credits both for Russian and CIS borrowers. As an example I’d like to mention transactions arranged by VTB, International Moscow Bank and the Bank of Moscow. Lately Vnesheconombank has become an active participant in syndicated credits.

Nevertheless, foreign banks are still in the lead of arranging syndicated credit transactions. The fact is that credit arrangers have the largest share of participation in syndicated credits. Foreign arrangers’ yields are relatively high and this allows them to participate in credits at a rate in excess of traditional ten percent of the credit amount.

Most Russian banks’ yields from participating in syndicated credits are rather low. And syndicated credits’ rates for such banks as Vnesheconombank, VTB (the Russian Bank of Foreign Trade) and Sberbank (the Russian Savings Bank) are so low as to make them unattractive to Russian banks even with commissions for arranging transactions. 

- What are the benefits of syndicated lending now that Russian banks do not have problem attracting credit resources from a single source?

- Application of maximum risk rates for one borrower or a group of tied borrowers as well as limits established by banks do not allow them to extend considerable funds to a single borrower and that was one of the reasons for the syndicated credit market to develop.

What’s more, in principle, it’s easier to attract one credit from 27 banks as Vnesheconombank did it in 2006 despite all the problems associated with this business than 27 separate credits for the same amount and expenses on attracting credits in the second case would be higher. It should be remembered that such a deal is made public. Bilateral credits tend to go unnoticed for a wide range of investors whereas syndicated credits are made public. In the course of syndication, credit arrangers and the borrower involve many creditors who in the end might not participate in the credit but they get to know the borrower better. That is why for many banks a syndicated credit is the first step towards issuing eurobonds and conducting IPO.

- How does Vnesheconombank see its role in promoting syndicated lending in the Russian market?

- In view of the fact that Vnesheconombank is soon to be transformed into a National Development Bank and, in fact, is already acting in this capacity, it sees its role as a chance to attract substantial financial recourses from foreign and maybe Russian banks and at the same time as a chance to make available credit resources to individual economic entities through extending credits to Russian financial institutions in the case that objectives of credits attracted by these banks are in line with Vnesheconombank’s objectives as a development bank.

I would like to emphasize that Vnesheconombank has shown that it is in a position to attract considerable funds at record-low rates. It was the first of Russian financial institutions to attract a syndicated credit with a margin of less than 100 basis points. Making special mention of the debut-syndicated credit, the well-known magazine Global Trade Review said it was the best transaction of the year 2006.

In 2006, Vnesheconombank continued to be successful in borrowing financial funds in the international market: in the agreement on a 800-million dollar syndicated credit signed in July 2006, the LIBOR rate was +0.35% per annum, at that time the rate was the lowest for Russian financial institutions especially taking into account increased risk insurance costs under Russian banks’ debt obligations. I hope that this transaction won’t go unnoticed in leading financial publications.