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Comment of Andrey Solovyev, Global Head of DCM at VTB Capital, for International Financing Review (UK)

2 April 2012
Russia returns with USD7bn triumph

02.04.2012

International Financing Review (UK)

Russia roared back into the US dollar market last Wednesday after a two-year hiatus with a blow-out US$7bn triple-tranche bond that drew praise for its size, pricing, timing and structure.
Taking advantage of limited supply from the CEEMEA region in recent weeks, the transaction garnered a remarkable US$24.1bn order book from over 600 accounts as Russia (Baa1/BBB/BBB) proved that it had learnt from its previous mistake of bulldozing deals onto the market.
“It was a perfect deal, built around investor feedback. We very much listened to the market,” said William Weaver, head of CEEMEA debt capital markets at Citigroup, which led the 144a/Reg S transaction with BNP Paribas, Deutsche Bank, Sberbank and VTB Capital.
The deal was divided into five-year, 10-year and 30-year tranches, but it was the sovereign’s decision to include the long piece that paid off as it became the biggest bond issued by an emerging  markets sovereign at that tenor “Enthusiasm for the 30-year tranche was incredible,” said Weaver.
The 5.625% US$3bn note saw US$11.6bn of orders from 430 accounts, with US real-money managers desperate for long-duration bonds acting as the driving force.
“Russia is the one major country without a 30-year bond and they finally accepted the need to change,” said Helene Williamson, head of emerging markets debt at First State Investment.
While the 2017s and the 2022s were successful notes in their own right, it was clear from the outset that it was the 30-year tranche that had investors salivating. In the grey market it was quoted up by 1.75 points, compared with one point for the 10-year issue and 5/8 of a point for the five-year bonds.
That performance was reflected in the secondary market, with the 2042s trading at 99.375 on Thursday morning, compared with a reoffer price of 97.533. The US$2bn 3.25% 2017s were trading at 100.25, up from 99.657, while the US$2bn 4.5% 2022s were quoted at 100.125, up from 99.277. They fell back slightly later in the day, but all three tranches remained tighter than their reoffer spread.
Better than expected
Pricing was fairer than many investors had expected. “Last time they put out their bonds according to their own rules and regulations, irrespective of investor concerns. This time guidance was manageable, though not cheap,” said one fund manager. 
One banker away from the deal reckoned that, based on initial guidance, the new-issue premium for the five-year bond was about 35bp and for the 10-year issue it was 20bp-25bp on a mid-swaps basis. Both notes were subsequently tightened by 5bp, while the 30-yer tranche was tightened by 15bp from its initial level.
Russia’s relative value compared with other similarly-rated emerging markets sovereigns also made it an attractive buy. For example, Mexico, which has the same ratings as Russia, is trading about 90bp tighter on a spread basis for 10-year debt. Brazil, which is lower rated, is trading even tighter.
Herculean effort
The roadshow for the transaction began on March 19 in the US, with a series of meetings on both coasts, before finishing in London last Tuesday. 
A sign of the Russians’ changed approach came when tenors were announced on Monday, with guidance terms released the following day before pricing was completed on Wednesday.
“Putting a trade of this size into the market requires a Herculean effort. It’s a very rare event and it requires a lot of investor work,” said Nick Darrant, head of CEEMEA syndicate at BNP Paribas.
The extensive marketing effort helped to change investors’ perception of Russia, whose previous dollar deal in 2010 had left a sour taste.
“The 2010 deal, on which the price was extremely tight, left a lot of investors disappointed. The Russian government decided to make it right, to improve its relationship with investors,” said Andrey Solovyev, global head of debt capital markets at VTB Capital.
US investors were especially keen, making up on average 57% of the book across all three tranches. “Russia has come on leaps and bounds in broadening its US investor base with this deal,” added Durrant.
With this transaction out of the way, bankers hope that other borrowers in the region will now take advantage of the still huge amounts of cash sitting on the sidelines.
“The message is clear,” said Maryam Khosrowshahi, head of CEEMEA sovereign origination at Deutsche Bank. “There is demand and liquidity for the right names across the board.” (For full allocation details please see Emerging Markets section.)

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