Russian corporates: Back with tight pricing and long tenors despite volatility

Towards the end of last year, the Russian loan market experienced a bit of a tumbleweed moment. With commercial banks slapping on hefty ‘Covid premiums’ on deals throughout 2020, commodity-linked borrowers in Russia were determined to hold off from fundraising in Q4 - even though that premium was beginning to wane by year-end - in the hope pricing would fall even further at the beginning of 2021. 

No surprise then that syndicated loan market activity in the region was tipped to boom in the first half of 2021. And despite rising geopolitical headwinds in Russia, deal flow is undoubtedly picking up - albeit at a slower pace than first thought. For example, aluminium producer Rusal raised a $200 million sustainability-linked pre-export finance (PXF) facility and a RUB45 billion ($606 million) syndicated loan for its Taishet smelter project in February and March respectively. 

Meanwhile, iron ore and HIB group Metalloinvest signed a five-year $350 million PXF facility on 20 April, with the option to be extended up to seven years, pushing out the tenor envelope in Russia’s syndicated loan market. The deal has the lowest interest rate among all the dollar-denominated loan facilities raised by the company with a tenor of over three years. The metals producer joins state-owned shipping firm Sovcomflot in defying the impact of new sanctions to raise capital, with the company hitting the market on Tuesday to raise a seven-year dollar-denominated Eurobond dollar just days after a fresh wave of sanctions on Russia.

Military tensions between Russia and Ukraine have escalated over the past few weeks. Last week, the US Treasury Department and White House announced new sanctions against Russia, targeting Russian sovereign rouble debt and a number of IT firms linked to Russian security services as punishment for cyber attacks and election meddling. And it seems the timing of Sovcomflot’s fundraising is somewhat of a two fingers to the US, as Russia proves it can still access the capital markets even amid new sanctions. There is also significant appetite for Russian corporate paper from European lenders, especially in Geneva. 

Regardless of these rising geopolitical headwinds, there are some major syndicated deals still in the pipeline for 2021: potash producer Uralkali is out to banks for its first ever ESG-tied loan, which has an initial volume of $700 million and is due to close by the end of May; as well as gold miner Nordgold, which is also rumoured to be out to banks alongside other unnamed Russian companies. Outside of Russia, in CIS countries such as Ukraine, a serial PXF issuer  - DTEK Energy - is also looking to restructure a hoofing chunk of its debt.  

From an outside perspective, it might seem as if a state of equilibrium has returned to the Russian loan market amid a broader decline in emerging market deals. The clash between Russian borrowers and commercial banks - as borrowers dodged pricing premiums by holding off from raising debt altogether - is now a thing of the past. But there is still a distinct lack of harmony when it comes to borrower-bank pricing expectations. 

According to one banker familiar with the region, Russian borrowers are pushing to price their deals very tightly, and in some cases, they are winning the battle. “If the majority of banks in a syndicate agree to a low cost of debt, then the borrower has a certain amount of control over the remainder of the banks,” says the source. “In rejecting the pricing, you run risk of losing ancillary.”

This imbalance in pricing expectation between Russian borrowers and lenders is an ongoing issue. A banker who works closely with the Russian commodities market told TXF that this was a particular problem throughout 2019. But in early March 2020, the same source reported that the gap between Russian borrower and lender pricing expectations had narrowed and the structuring of deals had become a much more agreeable process. 

Of course, this was a short-lived victory, as this was just before the pandemic caused pricing to universally skyrocket, with banks enforcing ‘Covid-premiums’ of up to 70bp. When TXF spoke to the banker in June 2020, unsurprisingly, he said that the mutual harmony between bank and borrower had flown out of the window. 

Around this same time in June last year, Uralkali closed a five-year $665 million PXF which was priced at 180bp, around 30bp higher than its original expectation. Now that the company is out to market again, it will be interesting to see the pricing outcome this time round. Perhaps for Russian borrowers, the idea of paying pricing premiums for the second year in a row is what is prompting negotiation mode. 

The banker concludes: “In terms of the current gap in pricing expectation, the market is returning to what I would call its ‘usual’ level of bargaining - not worse than what it was in 2019, but certainly better than the end of 2020.” 

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