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

22 October 2016
Lukoil revives deal as demand grows for Russia

Lukoil looks set to become the latest issuer to tap into growing demand for Russian paper, with the oil giant close to pulling the trigger on a deal that has been delayed for the past two years.

The oil company mandated Citigroup and JP Morgan to issue an international bond offering in 2014, but has held off on the sale against the backdrop of escalating US and European sanctions against Russia, low oil prices and a deep recession in the country.

However, after a series of successful issues from the country in recent months, bosses at the notoriously conservative issuer now feel that conditions have improved sufficiently to consider launching. A transaction is now expected before the end of the year – and possibly within weeks, according to people close to the oil producer.

Lukoil would be the latest Russian corporate to tap into growing investor demand for paper from country – only last week, Tatfondbank and Polyus Gold were in the market with deals, while Gazprom, Credit Bank of Moscow and Alfa Bank are planning trades soon. This year looks to be the best for issuance from Russia since 2013, just before sanctions were imposed.

Solid demand

Lukoil declined to comment on its plans for a deal but bankers said a bond sale from the company – the first from a Russian privately owned blue chip this year – would probably meet solid demand, and could spur further issuance from others from the country.

“This is going to be a big deal and should give a big kick to Russian issuance,” said one senior investment banker in Moscow, who estimates that up to US$6bn of deals could print before the end of the year. “It has been two years in the making.”

Russian corporates’ use of international capital markets had been growing rapidly in the years running up to the imposition of sanctions and the collapse in oil prices. In both 2012 and 2013, dozens of deals printed, raising over US$30bn a year in financing.

Issuance has since collapsed. Proceeds were just US$8bn in each of the last two years, with only a handful of deals coming to market. Sanctions and worries about how low oil prices would impact Russian companies have left most issuers unwilling to test markets.

“This is going to be a big deal and should give a big kick to Russian issuance”
But bankers say that investor demand for Russian paper has picked up in recent months – in part due to rising oil prices and improvements in the economy, but also because many non-sanctioned companies have proven resilient through the past few tough years.

“Russian corporates have really prioritised repaying their foreign debts over the past few years, and as a result we have seen only one or two difficult situations during challenging economic times,” said Andrey Solovyev, global head of DCM at VTB Capital.

“That dedication to paying bondholders is now being recognised,” he added. “There is a large and growing pool of investor money ready to be invested in the Russian market. We’ve seen issuance pick up recently, and next year should be even better.”

Strict covenants

Corporates are particularly keen to wean themselves off bank loans taken out during the past couple of years when bond finance dried up. Although many foreign banks cut back their exposure to the country – some by as much as 75%, say bankers – Russian banks have dramatically increased lending to fill the funding gap.

Many of those loans come with strict covenants and tie up collateral, restricting management in a way that bond financing doesn’t. Bankers say corporate clients hope to shift borrowing back to bond markets as soon as they are able to.

But with the Central Bank of Russia estimating that around US$100bn of foreign debt will mature next year, even the recent pick-up in demand for bonds may be insufficient. Many Russian companies may be reliant on domestic bank financing for some time.

“Refinancing needs are very high, it’s a huge volume that needs to get done and these are not easy times,” said the banker in Moscow.

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