Syndicated loans for the borrowers in Russia and Cbonds by MikeJenny


									Syndicated loans for the borrowers in Russia and CIS
countries - characteristics of the instrument, market

Jana Petkova
Syndicated Finance
ING Bank London

                           May 2006 – Page 0
The syndicated loan market in CEE, Russia and CIS is a private market. As a consequence, reliable information and statistics about individual
transactions and the market overall is difficult to obtain.

Various different publicly available sources of information, such as IFR, Euroweek, Loan Pricing Corporation/Reuters, Loanware and Standard & Poors
provide information on the market and general trends, although each has a different methodology. As a result of the lack of a centrally co-ordinated and
verified market database, the information provided by these sources may be inconsistent or indeed unreliable.

                                                                    May 2006 – Page 1
Syndicated Loans

                   A loan provided by a group of banks
                   Single loan agreement, common terms and conditions
                   One or more arranging banks (‘Mandated Lead Arranger’ or ‘MLA’)
  Q. What is a
                   Various roles are divided between the MLAs:
syndicated loan?
                      • Bookrunner
                      • Underwriting bank
                      • Documentation bank
                      • Information memorandum bank
                      • Signing bank
                      • Agent bank
                   Each participant bank may commit a different amount, reflected in the title
                   Structures cover a wide variety of options (e.g. plain vanilla, property finance, acquisition finance)

 Q. What factors
determine which    Size
 borrowers can     Significance nationally & internationally
   access the      Creditworthiness
syndicated loan    Industry sector

                                                     May 2006 – Page 2
Syndicated Loans (cont’d)

                  Discuss funding requirements with potential arrangers
 Q. How does a
                  Decide on best way to meet these requirements
Borrower access
                  Ask for bids or indications
 the Syndicated
                  Select the most suitable bid and appoint arranger
  Loan Market
                  Assist arranger with syndication process

                  Each Loan is different
                  Revolver/ Term Loan
 Q. What is the   Extended drawdown
 Structure of a   Bullet/amortising
    typical       Early repayment
Syndicated Loan   Multi-currency

                  International and local banks
Q. Who are the    Insurance companies
 lenders in the   Hedge funds, relatively new to the market, very aggressive
syndicated loan

                                                   May 2006 – Page 3
Sample syndication timetable

      Pre-launch                                                                    Syndication

            2 weeks                      1 week                     2 weeks                          1 week                      1 week

•   Credit process         •   Agree bank list         •   Commitments                   •   Agree documentation   •   Signing
                           •                               received                          with participants
•   Negotiate term sheet       Prepare information
    & mandate letter           package                 •   Negotiate
•   Mandate awarded        •   Launch of syndication       documentation

                                                                May 2006 – Page 4
Deal partners

                                      Internal: risk management
                                      • Locally: SCO
                                      • Centralised: credit

                Internal: clients                                 Internal: agency
                • Relationship                                    Interface between
                   Management                                     the borrower and the
                • Structured                                      syndicate. For ING
                   Finance                                        based in London
                • Acquisition                                     and Amsterdam

            External: borrowers
            Face to face meetings                                 External: lawyers
            with clients to support                               Draft detailed facility
            internal teams                                        documentation

                                       External: investors
                                       Potential participants
                                       in ING arranged deals

                                            May 2006 – Page 5
Why use a syndicated loan – comparison to Bonds

                      May 2006 – Page 6
Emerging Europe
Dissecting the market

                                                                                                                                     Russia and CIS
Czech Republic
                                                                                                                                     Russian Federation
Non-EU CEE                                                                                                                           Tajikistan
Albania                                              Latvia               Russian Federation
                              Russian Federation                                                                                     Ukraine
Bosnia and Herzegovina                                    Belarus                                                                    Uzbekistan
Bulgaria                   Czech Republic      Poland

Croatia                                       Slovakia     Ukraine
                                 Slovenia                                                                     Kazakhstan
Macedonia                                     Hungary Moldova
Romania                             Croatia
Serbia and Montenegro     Bosnia-Herzegovina         Bulgaria                    Georgia
                         Serbia and Montenegro                                                                          Kyrgyzstan
                                          Albania       Macedonia    Armenia                        Turkmenistan
                                                                Turkey                                             Tajikistan

                                                                  May 2006 – Page 7
Russia and CIS vs Europe
Gross Domestic Product (GDP) per capita, PPP

                              EU CEE

                                       Non EU CEE                       Russia and CIS

Source: CIA World Fact Book

                                                    May 2006 – Page 8
Syndicated loan market vs Eurobond market volume
2004 - 2005

                                       2004                       2005

Source: Dealogic Loanware & Bondware

                                              May 2006 – Page 9
Syndicated loan market volume
1996 – YTD 2006

Source: Dealogic Loanware, ING analysis

                                          May 2006 – Page 10
Russia & CIS transactions
1996 - YTD 2006

Volume and number of deals
                                                  Record volume: 2005 saw the biggest
                                                  volume to date for Russia and CIS
                                                  (c.US$ 54bn). The volume in 2005 was
                                                  over two times bigger than that of 2004
                                                  (c. US$21bn)
                                                  Loans continue to grow in size, with an
                                                  average size of US$243 million in
                                                  2005, compared to US$148 million in
                                                  Volumes very much impacted by large
                                                  Emergence of ‘jumbo’ deals

                             May 2006 – Page 11
Russia & CIS transactions
1996 - YTD 2006

Average maturity
                                           Longer maturity of transactions
                                           Larger number of deals with a
                                           maturity of more than 10 years, but
                                           still under ECA/EBRD or IFC
                                           Russia – tenor for non-structured
                                           loans is usually 1-3 years, with 5
                                           years tested last year for Gazprom
                                           and Russian Railways, followed by
                                           Rosneft and MTS
                                           State-owned banks are able to
                                           borrow for up to 3 years (Russia -
                                           VTB, VEB, Sberbank; Kazakhstan –
                                           KKB, BTA)

                      May 2006 – Page 12
Russia & CIS transactions
1996 - YTD 2006

Average margin
                                           Borrower’s market
                                           Pricing under increasing pressure
                                           Margin for state-owned borrowers
                                           sets the direction for the market
                                           Margin spread between private and
                                           public types of borrowers has
                                           grown since 2004

                      May 2006 – Page 13
Syndicated loan market volume
Russia 1996 - May 2006

                                                                                                                                  Transactions becoming less
                                                                                                                                  Oil and gas sector deals are still
                                                                                                                                  Shift to corporate deals from
                                                                                                                                  traditional trade finance deals
                                                                                                                                  Increase in unsecured deals
                                                                                                                                  Unsecured lending allowed
                                                                                                                                  borrowers form wider industries to
                                                                                                                                  access the syndicated loan market
                                                                                                                                  Unlike 2004, in 2005 unsecured
                                                                                                                                  deals - RNG US$7.5bn, Gazprom
                                                                                                                                  US$972m, Sberbank US$1000m and
                                                                                                                                  Russian Railways US$600m - were
                                                                                                                                  among the biggest
                                                                                                                                  In Russia within the US$44.6bn total
                                                                                                                                  volume, unsecured deals accounted
                                                                                                                                  for almost US$16bn, exceeding the
                                                                                                                                  total aggregate volume of the market
                                                                                                                                  in 2004
                                                                                                                                  Domestic currency earners entered
                                                                                                                                  the market
Note: Multilaterals – financing where country risk is mitigated by involvement of multilateral agencies (EBRD, IFC, OPIC, ECAs,
Source: Dealogic Loanware May 2006, ING Bank

                                                                                        May 2006 – Page 14
Russia: Comparable transactions

       Rosneft OAO          Gazprom OAO               MTS                  TNK-BP               VTB

           Feb-06              May 2006             Apr-06                 Feb-05            May-2006
        US$2,000m             US$1,526m          US$1,330m              US$1,000m            US$600m
       Trade finance,
                               Refinancing     General Corporate        Working Capital    General Corporate
      Debt Repayment
              5y                   4y                3y/5y                   9m                   3y
                                               80bps / 100bps y1-
            65bps                55bps           3,115bps y4-6              55bps             37.5bps

       Rosneft OAO          Gazprom OAO               MTS                  TNK-BP               VTB

           Oct-05               May-05              Sep-04                 Nov-05              Apr-05
        US$2,000m              US$972m            US$600m                US$500m              US$450m
       Trade finance,         Trade finance,                                                 Trade Finance
                                                 Debt Repayment        General corporate
      Debt Repayment         Debt Repayment
              5y               3y3m / 5y                3y                    3y                 3y
          180bps            125bps / 150bps          250bps                 70bps              120bps

Source: Dealogic Loanware

                                                  May 2006 – Page 15
Has the price found its bottom?

• Prevailing in the last 18-24 months

• Witnessed in all segments of CEE/CIS market                                                   Few ‘Blue Chip’
• Very few defaults
                                                                            Competition from
                                                                                                                   Excess local
• Returns are driven down by excess liquidity                               capital markets,
                                                                              local banks
• Underwriters are trying to offload risk as soon as possible

• ‘Conservative’ syndication strategies applied for most deal –            Insufficient deal      MARKET
                                                                                                                     Entry of new
  senior and general syndication stage                                                                                investors
                                                                                  flow            DRIVERS
                                                                                                                   into the market
• ‘MLA’ titles given in syndication

• ‘Relationship’ syndications                                                                                       Increasing
                                                                              Refinancing                          competition
• Sub-underwritings become rarer                                             before maturity                         between
• Limitations of ‘market flex’ – the bond market principle ‘can                                Big deals clubbed
  sell anything at a price’ does not apply

                                                             May 2006 – Page 16
Why do we keep doing it?
Difficult deals still get done

1. Returns still attractive                                         5. ‘Turf’ war
   Internal return models adjusted                                        Client defining exercise
   Countries’ risk upgraded                                               Defensive – protect existing client relationship
   Still existing premium over Western Europe / other                     Aggressive – client winning exercise
   emerging markets                                                       Market share
                                                                          League tables
2. Additional income                                                      Credentials
   Currency conversion                                                    Future business in the country/region
  Account opening / Deposit / Overnight placement                         Future business in the sector

3. Follow up transactions                                           6. Spin-off opportunities
   Refinancing                                                           ‘Pay to play’
   Positioning for more attractive business, e.g. larger                 Investment banking/corporate finance/debt and equity capital
   and more lucrative M&A                                                markets
                                                                         Cash management
4. Access to Group companies
                                                                         Payroll solutions
   Subsidiary / affiliate finance
                                                                         Staff benefits
   Similar companies in the sector

                                                           May 2006 – Page 17
Outlook for 2006

• At current growth rate, the size of the market will double in two years
• New borrowers will enter the market driven by attractiveness of the syndicated loan market
• Investor inflow will continue – driven by still attractive yields and low recent default rates
• Fragile market – ‘a single ‘failed’ deal can shake market confidence

• Arranging banks will look for new borrowers; move to 2nd tier

• Growth of event-driven deals, including sponsor-driven LBOs

• Relationship-defining syndications and local currency syndications

• Syndicated loan market – substitution for volatile DCM

•Top names will follow the ‘longer tenor’ trend

Rest of CIS

• Shift away from secured deals

• Industry diversity

• Returns for investors likely to be lower, but still remain attractive

                                                       May 2006 – Page 18
Thank you

            May 2006 – Page 19

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