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

23 September 2016
GlobalCapital
Russia proves Western banks redundant with '100% international' tap

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With a $7.5bn book and a deal sold wholly to international investors, Russia returned to the capital markets in style on Thursday, shrugging off the ghosts of failure that blighted its return in May.

Once again soleled by VTB, Russia raised $1.25bn with a reopening of its 2026 bonds at a cash price of 106.75. The book was over six times subscribed, a record for the sovereign. 

“We can see that it’s not necessary to have foreign banks placing the sovereign issue,” said Andrey Solovyev, global head of DCM at VTB Capital.

The deal was sold 100% to international investors, a departure from May’s deal which was not deemed by international banks a success on account of the fact that many investment funds did not participate.

“In the first trade state banks’ participation was restricted,” said Solovyev. “This time the deal was placed without Russian investors at all. It was a really high quality book, we haven’t seen quality US accounts play for a while so it was refreshing.”

Despite escalating geopolitical tensions between the US and Russia, and the fact that US banks were warned off working with the unsanctioned sovereign earlier this year, US investors made up over 50% of the allocations.

“There were a lot of US accounts,” said Solovyev. “We gave them two hours to put orders in and we waited patiently for them. We were very satisfied that they were making their own decisions to buy the bond.

US investors 53% allocations, followed by UK (30%), Europe (13%) and Asia (4%). Asset managers bought 51% of the issue, hedge funds 27%, fund managers 8%, and banks 6%.

However, one EM banker was sceptical of this and said he doubted the book had been completely free of Russian money. “It disingenuous to say its 100% international, there’s a lot of Russian money offshore,” he said. “Our trader said a lot of US investors still had mixed views.

On paper it looks a great success but I take it with a pinch of salt.”

Solovyev said Russia had been ready to issue since last week but wanted to wait until the Fed had made a call on rate rises for any volatility to subside.

Hobbled

Russia’s return to the markets in May was hobbled by Euroclear declining to confirm it would settle the bond, and by compliance teams halting some fund managers from participating. In July, Euroclear announced it would start servicing the bonds, prompting a 30bp rally in yields and talk of a tap.

That Russia’s debt was Euroclearable from the outset of this deal was a huge boost, according to Solovyev. “Euroclear is very important for us and was one of the major reasons we saw so much demand,” he said. “The second part is that we increased the bond up to $3bn which is very liquid.”

There is still a question mark over whether the major indices will include Russian sovereign debt, but Solovyev is hopeful.

“Index inclusion is still a little bit of an unknown,” he said. “JP Morgan is still undecided but we think the $3bn size as well as the clearance of the bond by Euroclear should encourage the providers to include us.”

One EM portfolio manager who did not buy the original bond said he was definitely putting in an order this time round.

“We are much more comfortable with this one,” he said. “We don’t have any reservations about subscribing. It looks slightly on the cheap side to me. Demand is going to be very strong. There was concern about the first issue but it’s been a few months and all the dust has settled.”

Cautious banks

While the buyside was clearly comfortable with Russia’s stated use of proceeds — “general government purposes” that would not be used to “violate US/EU sanctions” — Western investment banks are still cautious.
Euroclearability does not necessarily alter the moral dilemma of participating in a deal that the US and European authorities warned Western banks not to work on, said one EM syndicate banker.

“It’s now clearable, but that’s a technicality,” he said. “Fundamentally there is still a moral issue. US and Russian relations are becoming increasingly difficult. US investors may see value but not every real money account will be able to play.”

A second banker at a large investment bank was concerned about the use of proceeds.

“Clearly investors are engaged on this,” he said, “but at the same time, it is a topic that doesn’t make a lot people comfortable. Clearly Russia is performing and this trade will go well, but I don’t want to be associated with it because of the sanctions. The first deal was a disaster, and there was that clearing issue. I note that Clearstream isn’t on it this time.”

The sovereign’s $1.75bn 2026s bonds were quoted at 3.89% on Wednesday afternoon. Initial price thoughts for the tap were at 3.99% yield or a cash price of 106. Books were reported to be over $3bn by 10am on Thursday morning and the most recent update said $6bn. Final guidance was revised to 106.75 and the bond was printed to yield 3.9%.

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