VTB Capital has successfully built a debt capital markets business model that targets primary market mandates from Russian and CIS companies in G3 currencies and roubles — and it now has its eyes set on building a network among borrowers in Eastern Europe and Asia.
As recently as 2009, VTB sourced all of its primary market mandates in Russia, according to Andrey Solovyev, global head of debt capital markets. Since then, the firm’s expansion has paid off, he said during an interview at the second Russia Capital Raising and Investment Summit, hosted by FinanceAsia and AsianInvestor in Hong Kong last week.
According to data provider Dealogic, VTB was the top eurobond bookrunner in Russia and the CIS region for the first six months of this year, which was a period of record issuance. Offerings from Russian companies rose 25% compared to the previous six months to $17 billion, while new bond launches by Russian and CIS companies combined jumped 40% to a total of $26 billion.
Much of the demand for Russian bond issues has come from fresh allocations. There were just $6 billion of redemptions during the first half of the year, which suggests $11 billion of new money was raised.
However, the next six months are unlikely to be as strong because many companies have already met their refinancing requirements. But the pipeline is looking healthy, especially in the natural resources and energy sectors, said Solovyev.
There is a healthy demand in Asia, he said, for high-yielding, low-rated corporate names (for example, a $350 million transaction in June by Koks, Russia’s biggest pig iron exporter), but not financials. Often, regional Asian investors take up to 20% to 25% of Russian deals.
“Russian borrowers are generally pleased if a large proportion of their new bond issues are allocated to Asian accounts because they are often retail or private banks who tend to be buy-hold investors, so the secondary market performance is well supported,” said Solovyev.
“But many Asian investors lost money owning high-yield, single-B rated Russian financial paper in the wake of the global crisis in 2008; now they seem prepared to give up some yield for better quality.”
VTB distributes product through a global salesforce, supported by a research capability of over 40 analysts. There are more than 750 professional staff in Moscow, 300 in London, nearly 30 in Singapore, an office in Dubai and last week the firm was granted a licence to conduct securities dealing and advisory services in Hong Kong.
It has already started to build a track record in Asia’s local currency bond markets. The firm lead managed two successful Singapore dollar-denominated deals for its parent, VTB Bank, and another in the burgeoning offshore renminbi, or dim sum, market. It is also examining the potential of issues denominated in Korean won and Malaysian ringgit.
Solovyev is especially proud of the dim sum transaction. The Rmb1 billion ($155 million) issue was the first by a non-Asian emerging market borrower, and achieved a coupon of only 2.95%. He is confident that the expertise his team has already gained should help it attract mandates from other Russian firms looking to diversify their funding and investor base in Asia.
The problem is that the market is “one-sided” and it is hard to execute currency swaps in sizes larger than Rmb1 billion. VTB and other Russian banks need to swap the proceeds of any deal into US dollars or roubles because they are not wholesale lenders in Asian currencies.
“Nevertheless, it makes sense for Russian issuers to tap the offshore renminbi market: investors are attracted by coupons that are high relative to similar Asian credits, and issuers can lower their costs of funding by entering attractive currency swap arrangements,” said Solovyev.
