Press about us

Comment of Andrey Solovyev, Global Head of DCM at VTB Capital, for EMEA Finance (UK)

4 April 2012
Investors rush to Russian debt deals


EMEA Finance (UK)

Russia’s economic outlook has risks, but international investors want a piece of its promise nonetheless.
Thanks in no small part to the high price of oil, Russia has much to be happy about in economic terms. The government’s fiscal balance is back in the black. Public debt is low as a percentage of GDP. Last year its economy was the ninth biggest in the world, up from 11th in 2007. This year output could pass US$2trn, which would make it the sixth largest.
Certainly, there are risks ahead. Analysts at the World Bank point to slow growth in the manufacturing sector and a record high in the non-oil current account deficit as potential problems. But good economic policies will help to shore up Russia’s resilience, diversify its economy and strengthen its growth potential, they add.
For dealmakers, a sense of optimism is opening new opportunities. After a string of successful initial public offerings from Russian companies in 2011, for example, lender PromSvyazbank is expected to make a stock market debut in the coming months and is also ready to tap the syndicated loan market, rumours suggest.
But the deal to make investors truly excited came in March, when the government returned to the eurobond market in a transaction that should open the doors for other borrowers in the coming months.
One deal, all done
At US$7bn, Russia’s latest eurobond is the largest debt issuance to come from the emerging markets since Qatar raised US$7bn in late 2009, and takes care of the government’s foreign borrowing requirements for 2012 in one deal. Five bookrunners – VTB Capital, Deutsche Bank, BNP Paribas, Citi and Troika Dialog – helped the Russian Ministry of Finance to issue in tranches of five-, 10- and 30-year maturities worth US$2bn, US$2bn and US$3bn respectively. 
Investor appetite was huge – almost US$24bn-worth of orders were made across the three tranches, dominated by demand from the US. “Understandably investors like Russian sovereign risk,” wrote Commerzbank analyst Barbara Nestor in a research note. “[It’s] a BBB-rated country with public debt to GDP ratio of 12% and FX reserves of nearly US$500bn with limited refinancing needs.”
Give the scarcity value of 30-year issuances from Russia, the longest-dated tranche proved the sweet spot for investors, attracting US$11bn in orders compared with US$6.5bn for the five-year tranche and US$6bn for the 10-year tranche.
Crucially, the ministry’s goal here was more than monetary – the Russian authorities believe that they can use the transaction to encourage other domestic issuers to come to market. “It was a strategic exercise,” says Andrey Solovyev, global head of debt capital markets at VTB Capital. “Given the price of oil, Russia doesn’t need to raise a lot of money. But to set up three liquid benchmarks [for other issuers] made a lot of sense.”
As if to prove the point, within days of Russia raising its US$7bn, state-owned Russian Railways tapped the market for US$1bn of its own in 10-year bonds, managed again by VTB Capital. 
“There was a lot of unsatisfied demand from investors in the five and 10-year tranches of the sovereign eurobond,” Solovyev tells EMEA Finance. “Russian Railways was able to piggyback on that, and its own transaction was more than three times oversubscribed.” 
That’s some skilful mopping up of money on Russian Railway’s part, and demand isn’t likely to dry up yet.

VTB Capital

Federation Tower West, 12, Presnenskaya emb., Moscow, 123100