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Debt Capital Markets for Russian Borrowers Russia-Netherlands Economic Forum November 7-8, 2005 Amsterdam, Hilton Amsterdam Henk Paardekooper, Country Executive Russian outlook Russian economic performance is strong and seems sustained: GDP growth in the 5% - 7% range, the Government runs a budget surplus as well as a current account surplus, foreign exchange reserves are rising and external debt is falling. Fitch is the first rating agency who upgraded Russia to BBB and Moody’s has indicated it could follow shortly The economic outlook is favourable based on the assumption that there will not be a sharp fall in the oil price. In the longer term, economic stability will depend on the pace of economic reforms to boost the nonoil economy. Political stability has increased, improving policy making capability significantly. Business remains concerned about reform in legislation, uncertain property rights, red tape, corruption, the risk of rising Government interference in business and economy and the unstructured banking sector. However, current investors in Russia are predominantly positive about their returns on investment and most of them are increasing their operations. The vast potential of Russia (size of the market, growth rates, high quality and competitive labour force) should be better promoted! 2 Evolution of the borrowing cycle in Russia Rating obtained Small bilateral loans Syndicated loan facility Credit Linked Notes Debut international bonds Available for smaller issuers EMTN Program Few major players Structured Bonds Equity/IPO’s Some selective names Source: ABN AMRO 3 1 Russian bond market trends Market trends in emerging markets New flows into dedicated EM funds 1.9 USD bln 1.4 0.9 0.4 -0.1 1Q05* 1Q05 3Q04 3Q04 1Q04 1Q04 3Q03 3Q03 1Q03 1Q03 3Q02 3Q02 1Q02 1Q02 3Q01 3Q01 -1.1 1Q01 1Q01 -0.6 Source: Emerging Portfolio Positive economic fundamentals in Emerging Markets High inflows into EM funds over last two years 5 Russian bond market trends 40 35 30 25 20 15 10 5 0 15,000 10,000 5,000 0 2002 2003 Issuance Volume 2004 Number of deals Issuance Volume, USD mln Bond issuance volumes in Russia 2005 (YTD) Number of deals Source: Dealogic Bondware as of 30.08.2005 International Russian bond issuance has grown dramatically High volume and diversity of issuance expected to continue 6 Russian bond market trends Narrowing credit spreads 1,200 EMBI+ spread Russia spread S&P Moody's Fitch Spread 1,000 800 2002 Russia BB+ Ba2 BB- 2005 Russia BBBBaa3 BBB 600 400 200 0 0 1/ 0 1/ 2 0 0 2 2002 0 1/ 0 1/ 2 0 0 4 2003 2004 2005 Source: ABN AMRO as of 30.08.2005 Russian credit spreads remain at historically low levels driven by Russia’s stronger fundamentals 7 Russian bond market trends Spread development of Russian corporates 700 VTB 6.875% '08 600 MTS 9.75% '08 GAZPROM 9.625% '13 Spread 500 400 300 200 100 0 0 1/ 0 1/ 2 0 0 4 Jan-04 Jul-04 Jan-05 Jul-05 Source: ABN AMRO as of 30.08.2005 8 Russian bond market trends Issuance by industry type 2002-2004 6% 12% 34% 5% 38% Finance Metal & Steel Mining Oil & Gas Telecommunications Other 5% Source: Dealogic Bondware Energy and Banking sectors dominate but new names have been well received 9 Russian bond market trends Issuance by currency 7 800 6 600 5 400 4 200 3 0 2 2002 2003 Average issue size Average Maturity Average Issue Size, USD mln Average issue size and maturity EURO US Dollar 2004 2005 Average Maturity Source: Dealogic Bondware as of 30.08.2005 Longer maturities reflect depth of market Average size: 300 - 400 million USD In terms of currency, the majority of issues are in USD 10 Russian bond market trends Expansion of a bank and corporate yield curve Russia Corporate Comparables (Yield basis) 8.500 8.250 8.000 7.750 7.500 7.250 Yield % 7.000 6.750 6.500 6.250 6.000 5.750 5.500 5.250 5.000 4.750 4.500 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Mod Dur Sovereign Banks OG Industrial Telco Log. (Sovereign) Source: ABN AMRO as of 14.10.2005 Investors can now participate in a wide credit spectrum 11 International bond markets vs local capital markets Local capital markets International capital markets Issuers First tier or few selected second tier issuers. Regional and municipal governments are still not allowed to borrow. Available for first, second and third tier borrowers. The majority of borrowers are blue chips with RUR cash flows or large exporters. Issuers - corporate, governments, municipals Investors European, US, Asian investors. Larger investor audience available. Local investors, off shore investors with access to local bond market through foreign banks Currency Any. The majority of deals - USD, EUR denominated. RUR Minimum Issue Size USD 100 mln EUR 1 mln Average Issue Size (USD equiv.) USD 300 mln USD 55 mln Liquidity High Depends on specific issuer Maturity Range 6 months - 30 Years 1 to 15 years Listing/Trading Luxembourg or London Moscow, Saint Petersburg Amount of documentation High High Time needed prior to launch Generally 4-6 weeks for documentation 3-4 months for first tier borrowers Cost Fees include rating fees, legal fees, trustee/paying agents/listing agents Smaller fees, no rating requirements Total bond market volume USD 40,678.991 bln (since 2000 to date; excl aries) USD 13 bln (since 2000 to date) 12 Prospects in the International Markets vs Local Bond Markets There are distinct advantages to Russian companies available in the international bond markets, including: – Relatively lower yields and longer tenors than the Rouble bond market and the international Credit Linked Note (CLN) market – Deeper and more sophisticated investor pool – Diversification away from higher cost and shorter dated Russian loan and bond markets – Larger amounts, and longer tenors, can be raised on a per issuer basis – Enables expansion of investor awareness thereby potentially enhancing future stock market valuation – Greater secondary market liquidity, thereby enabling stronger secondary market performance reflecting improving company or market fundamentals 13 Main Requirements to Pursue an International Bond Key Requirements for Russian companies to access the international bond markets, including: – Two Year historical IFRS audited financial statements – Listing on an international stock exchange (typically Luxembourg, London or Dublin) – Establishment of a Special Purpose Company in a double taxation jurisdiction to reduce Russian Witholding Tax on interest payments – Stock exchange compliant disclosure on company business transparancy in shareholder structure and corporate governance description, – Offering Circular containing Company Description, Terms & Conditions, Investor Restrictions, and various associated legal documents – 3-5 day international investor roadshow to various Asian, European and US investors 14 Eurobond versus Syndicated Loan Pros Eurobond Syndicated Loan Cons Capacity to raise large amount for long term; Diversification of international investor base; International awareness and publicity; Usually standard eurobond covenants; Highly standardized documentation; Better liquidity - pricing Higher cost of funds; Inflexible with regards to repayment; Satisfactory rating; Company already known in the banking sector; Amortizing structure; Limited maturity; Restrictive covenants; 15 2 Russian syndicated loan market trends Russian loan market trends 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 140 120 100 80 60 40 Number of deals Issuance Volume Loans by volume, 2002- 2005 (USD m) 20 0 2002 2003 Volume, USD m 2004 2005 Number of transaction Source: Dealogic Loanware as of 30.08.2005 Bank market capacity for Russia credits has developed significantly 17 Russian loan market trends Transactions by industry, 2005 7.2% 4.1% 21.7% 8.0% Financial Institutions Oil and Gas Metals and Mining Telecom Transportation Other 17.5% 41.5% Source: Dealogic Loanware as of 30.08.2005 Traditional Oil & Gas dominance with growing telecom, banking and metals and mining volumes The international market for regional and municipal borrowers is still not accessible 18 Russian loan market trends Loan Pricing trends Margin to Libor 400 300 5 year Sec USD 500 m 5 year Sec USD 500 m 5 year Sec USD 450 m 200 5 year Sec USD 800 m 6 year Sec USD 1,100 m 1 year USD 270 m 100 6 year Sec USD 1,100 m 1 year USD 275 m 3 year USD 450 m 0 1H03 2H03 VTB 1H04 Rosneft 2H04 1Q05 Gazprom Source: Dealogic Loanware as of 30.08.05 Bank liquidity demonstrated by growing size and falling margins Reduction in margin is driven by: – improved Sovereign rating – strong commodities prices – tough competition between banks 19 3 Landmark transactions Russian Standard Bank (Ba2/B+), US$500m 7.50% due October 2010 Transaction Details Issuer: Issuer Rating: Russian Standard Finance S.A. B+/Ba2 Settlem ent Date: 07 October 2005 Issue Size: US$ 500mln Coupon: 7.500% Maturity: 07 October 2010 Spread: 5 Yr UST + 336bps Form at: Reg S/144A ABN AMRO acted as a bookrunner for Russian Standard Banks (“RSB’s”) second bond issue off its US$1.5bln EMTN Programme on the 30th September 2005. This US$500mln 5 year eurobond was the largest bond issue for RSB to date and also marks the largest and longest dated bond issue for a private sector bank from Russia. After a focused and condensed two team international roadshow visiting financial centers in Asia, Europe and the US (organised by ABN AMRO), the orderbook drew a final size of US$2.3bln (oversubscription of >4.5x) with 209 accounts receiving allocations. The strong book allowed RSB to increase the size of the issue from US$300mln to US$500mln and to decrease the pricing from an initial price guidance of 7 5/8% 7/8% to 7.5%. Distribution by Region 27% 42% 31% US 27% Asia 31% Europe 42% Distribution by Investor Type 2% The new issue achieved a very broad geographical distribution, Europe receiving 42%, Asia 31% and US 27%. Banks received 23%, Fund Managers 35%, Private Banks 40% and others 2%. The bond was accepted very well in the secondary markets and traded up slightly at the day of issuance. The issue established RSB as one of the most frequent and sophisticated bond issuers out of Russia. 23% 35% 40% Banks 23% Private Banks 40% Fund Managers35% Others 2% 21 Industry & Construction Bank (Ba1/B+), Lower Tier II, US$400m 6.20% due Sept. 2015 callable Oct. 2010 Following the successful debut bond issue for ICB in July 2005, ABN AMRO acted as a Joint Bookrunner for ICB’s Industry & US$400mln Lower Tier II (“LTII”) subordinated LPN’s in Construction Bank September 2005. B+/Ba1 Transaction Details Issuer: Issuer Rating: Distribution by Region 7% 5% 12% 8% Settlem ent Date: 29 September 2005 ICB’s LTII issue marks the third hybrid capital deal out of 12% Russia. Issue Size: US$ 400mln Coupon: 6.200% – Vneshtorgbank (US$750mln, 10NC5, Coupon: 6.315%) Maturity: 29 September 2015 – Sberbank (US$1,000mln, 10NC5, Coupon: 6.23%) Callable: October 1, 2010 – ICB (US$400mln, 10NC5, Coupon: 6.20%) Step-Up: 5 Yr UST + 150bps With the success of the inaugural senior issue in mind, investors immediately started to show interest in this subordinated deal. Supported by a two day roadshow in London, the book reached approx. US$850mln (oversubscription of more than 2x). Initial price guidance was set at 6.375% area on the 20th of September, then revised downwards to 6.25% area on the 21st September and later that day moved to 6.20-6.25%. The deal eventually priced at 6.20% on the 22nd of September, making this the lowest coupon LTII deal out of Russia so far. 31% 25% UK 31% Eastern Europe 25% Asia 12% Switzerland 8% Germany 7% Greece 5% Other 12% Distribution by Investor Type 8% 41% 3% Geographic distribution was UK 31%, Eastern Europe 25%, Asia 12%, Switzerland 8%, Germany 7%, Greece 5% and other 12%. By type of accounts, Banks 48%, Fund Managers took 41%, Retail 8% and other 3%. ABN AMRO was responsible for the documentation of this bond issue and assisted ICB in its dialogue with the Central Bank to receive Tier II capital approval. 48% Banks 48% Funds 41% Retail 8% Other 3% 22 Gazprom Intl. SA (BBB-/BBB-), USD 1.25bln, 7.201%, due 2020 Transaction Details The transaction was the first ever future flow Distribution by Region receivables-backed international bond issue from the Issuer: Gazprom Intl. SA Rating: BBB-/BBB- Issue Date: July 23, 2004 Issue Size: USD 1.25bln Coupon: 7.201% Maturity: February 1, 2020 investment grade ratings, and was marketed to an Spread: UST 2012+299bps entirely new investor base of investment grade Former Soviet Union. This allowed Gazprom to raise funds at almost 150bps savings to the secondary trading levels of its unsecured bond curve. The offering marked Russia’s first ever issue with two investors, previously unable to buy Russian securities. 3% 3% 3% 2% 5% 1% 3% 66% 14% US 66% UK 14% Non-Japan Asia 3% Scandinavia 1% transaction was priced through initial price guidance Sw itzerland 5% Germany&Austria 3% Benelux 2% Italy 3% and upsized to achieve a transaction size of USD Other 3% With an order book approaching USD 6.0bln across over 300 separate international investors, the 1.25bln. The bond attracted a wide audience of investors from Europe, the US and Asia. The issue was priced at 299bps over UST Feb 2012 Distribution by Type (equiv. to bond average life of 7.4yrs) producing 45% Gazprom’s all time lowest spread to date. The innovative nature of the structure drove many first time 11% buyers to the Russian Federation and to Gazprom, specifically. 21% The stable secondary trading performance after launch 3% exhibited ABN AMRO’s strong market making capacity. ABN AMRO’s strong distribution network enabled Gazprom to ever diversify its investor base across Europe, the US and Asia. 20% Fund Man.&Insur. Co's 45% Bank 20% Retail 3% Hedge Funds 21% Other 11% 23 Gazprom (Baa3/BB/BB-), EUR 1 bln, 5.875%, due 2015 Transaction Details On May 20, ABN AMRO acted as Joint Bookrunner for the highly Distribution by Region successful benchmark EUR1billion 5.875% 2015 bond offering for Issuer: Gaz Capital OJSC Gazprom. Rating: Baa3/BB/BB- Participation Notes issued by Gaz Capital under Gazprom’s existing Issue Date: May 20, 2005 US$5bn EMTN Program. Issue Size: Eur 1 bln Coupon: 5.875% borrowing requirement of EUR1bn equivalent, with a stated desire to Maturity: June 1, 2015 establish a EUR benchmark. Given the volatile market conditions at Spread: DBR 2015+255bps the time, the Joint Bookrunners advised Gazprom to pursue a dual The transaction has been structured as Loan 15% 32% 23% tranche EUR 10year and US$ 10year offering with the objective to defined at 6.0% area and 7.00% area, respectively. When it became clear that there would be sufficiently large investor 5% 4% At the outset of the premarketing, Gazprom defined a particular reach the defined borrowing requirement. Initial price guidance was 10% 11% UK 32% USA 23% Germany 15% Sw itzerland 11% Other Europe 10% Russia 5% Asia 4% appetite in either currency to meet Gazprom’s defined borrowing requirement, Gazprom elected to pursue a EUR only offering. The total EUR orderbook drew a final size of EUR4.28bn across over Distribution by Type 275 international investors and allowed Gazprom to revise price 12% guidance from 6.00% area to a range of 5.75 to 6.00%. In the end, Gazprom was able to price at 5.875% in the middle of the revised range. 3.7% 16.5% At the final pricing the orderbook consisted of a total of EUR3.75bn in total orders and allocations were made to 225 33% investors. Gazprom’s EUR1bn benchmark offering was the first Russian EUR offering in 2005, and nearly matches the US$1.425bn of total Russian eurobond supply to date in 2005. The new issue achieved a very broad geographical distribution, with particularly strong diversification into new accounts from Europe, US, and Asia. 52% Banks 15% Asset Managers 52% Retail 9% Insurance / Pension Funds 12% Hedge Funds 12% 24