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

18 July 2017
Nostrum 'generous' with 8% five year Kazakhstan’s independent oil and gas company Nostrum navigated a tricky price discovery process to print five year bonds at 8% on Monday after what has been a difficult few months for the company. The deal has been a long time coming for Nostrum, having first been mooted in March, but patience appears to have been rewarded for both the issuer and the lead managers, after Nostrum completed a successful exchange, while raising a larger than expected $725m five year deal.

What with volatility in oil prices, and a UK court order brought against Nostrum’s ex-executive chairman Frank Monstrey, who resigned in April, bringing the deal to market has not been plain sailing, as Andrey Solovyev, global head of DCM at VTB Capital pointed out. “There was some risk associated with noise in the press that needed to be mitigated and we wanted to be able to disclose it in the prospectus so investors could make their own decisions,” he said. “Overall volatility has impacted investor sentiment and appetite is diminishing going into August, so it was wise to print the trade now.”

To compensate for such risks, the leads started pricing “a bit wider” at low-8% area though rival bankers and the buy-side slated fair value anywhere between low to high-7% area.“The price discovery was difficult,” said Solovyev. “We held an extensive roadshow but the participation for the exchange was very good. Books were around $1.1bn and we had enough consent to tweak the covenant package.” Pricing was revised down to 8.125% area before the deal was priced at 8%. Citi and VTB were joint global co-ordinators with Banca IMI and Deutsche Bank as bookrunners.

A buy-side analyst who saw fair value at 7.75% said that he thought the final pricing was quite generous, but said that he didn’t think the negative headlines earlier this year had impacted the trade.

“It is a single-B name, so maybe it was just market conditions,” he said. “Investors are reluctant to buy into single-B names when oil is volatile. Also investors want to be paid more for short call options. You don’t want to do all the [credit] work only to be taken out in a couple of years.” As well as issuing new five year debt, Nostrum is in the middle of a buy-back and consent solicitation. By the early tender deadline, which passed on July 14, investors had tendered an aggregate of $584.8m of its $560m 7.125% senior notes expiring in November 2019, and the $400m 6.375% note due February 2019 issued by its subsidiary Zhaikmaunai. The offer expires at 11:59pm New York time on July 27.

Several sources referred to the $4 fee per $1,000 of bonds tendered as higher than that usually paid. Kazmunaygas, which recently cancelled a tender offer after failing to attract enough demand, offered between $2.5 and $3 per $1000 of notes tendered.

One said that the fee was a “very large carrot.” Solovyev acknowledged the higher fee but said that the company had wanted to ensure the success of the trade.

US investors took 40%, UK 39%, continental Europe 16%, Asia and the Middle East 4% and CIS 1%. In March, a London high court injunction blocked against ex-executive chairman Monstrey from dealing with his shares in the company. The charges business dealings with the former chairman of BTA Bank Mukhtar Ablyazov. BTA Bank brought a case against Ablyazov after a $10bn hole was discovered in its balance sheets. A settlement was reached on June 13.

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