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Comment by Andrey Solovyev, Global Head of DCM at VTB Capital, for IFR

31 March 2017
IFR
Gazprom returns to sterling with a bang - IFR News

Gazprom demonstrated its resilience to political risk when it priced the biggest sterling corporate bond of the year on the day the UK government formally began the process of leaving the European Union.

The deal - Gazprom's first in sterling since 2013 - cemented its return to its main international funding markets, which also include euros, US dollars and Swiss francs.

"Gazprom is absolutely resolute about having access to different markets," said David Greenbaum, head of corporate and financial origination, CEEMEA, at Deutsche Bank.

The timing, however, caught the eye, with the deal pricing as the UK triggered Article 50 last Wednesday.

Gazprom is well versed in issuing bonds at delicate times. Earlier this month, it made its comeback in the US dollar market after a two-and-a-half-year absence the day after the Federal Reserve hiked rates by 25bp.

And last November Gazprom was out in the euro market a little more than 24 hours after Donald Trump had been confirmed as the next US president, and as rates markets were convulsing.
"They bulldoze their way through in true Russian style," said a banker away from the sterling deal.
In the event, UK asset moves were relatively muted as the EU exit clause was activated. "It was priced in and was not going to be a game-changer," said Andrey Solovyev, global head of debt capital markets at VTB Capital.

Gazprom had undertaken a two-day roadshow in London and Edinburgh at the beginning of the week so it was logical for the Russian state-owned company to issue when it did.

The company began marketing a seven-year at 4.375%-4.50% before announcing guidance of 4.375% area (plus or minus 12.5bp).

Gazprom (Ba1/BB+/BBB-) then priced £850m at par to yield 4.25%, the tight end of guidance. It was the biggest single-tranche deal in the sterling corporate market for three years.

The absolute cost of funding was attractive for Gazprom, with the 4.25% coupon well inside the 5.338% on its only outstanding sterling bond, the £500m March 2020. Those bonds were quoted at 279bp over Gilts, according to Thomson Reuters data, while the new notes priced at plus 342.3bp.
The bonds then traded up half a point, which leads said showed it was a well-executed deal, although they added that determining fair value was a moot point in view of the lack of reference points. "It was a price discovery process," said Solovyev.

The bonds were certainly cheap compared with Gazprom's euro and US dollar curves. At the tight end of IPTs, a second banker away from the deal reckoned it was coming 40-50bp behind Gazprom's euro curve and more than 100bp wide of its dollar curve in spread terms.

Leads, however, said Gazprom was less interested in comparing pricing across different currencies - even though the proceeds will be swapped into euros - than in what it can achieve in a specific market.

"Of course they are cost-conscious but they look at benchmarks in individual markets and seek to extract value that they deem to be fair," said Greenbaum.

Buyers were predominantly core UK money managers but also included dedicated EM accounts, high-yield funds and Russian investors, who helped swell the book to more than £1.6bn.
Deutsche Bank, Gazprombank, JP Morgan and VTB Capital were the leads.

VTB Capital

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