Borrow, borrow, borrow… even when Libor is high

by Simon Pirani

Structured finance still matters to a new generation of Russian and Ukrainian borrowers, for whom historically high Libor rates are an obstacle, but not necessarily an insurmountable one. The lavish generosity of Russian state-owned banks, and the surplus liquidity on the Russian domestic bond market, provide attractive alternative sources of funding. But the wisest financial voices counsel that a combination of dollar debt, usually secured, and ruble (or hryvna) debt is the best option.

So many of Russia’s most important mid-tier companies – particularly exporters of chemical products, metals and coal – are treating themselves to structured loans in the $50-$500 million range. In Ukraine, the leading exporters are now using pre-export finance much as their Russian predecessors did five years ago, as one of the early steps on the road to integration with world markets.

Russian chemical fertilisers producer Eurochem is a case in point. Evgeny Torkhov, cfo, told Trade Finance that the company plans to develop a financing portfolio made up 40% of three-to-five year pre-export finance, 40% of eurobonds and other public debt with longer maturity, and 20% of working capital facilities.

“Historically, the improvement in our margin over Libor was quicker than the increase in Libor itself,” Torkhov said. “This year, that has ceased to be the case and there will be some negative impact. But there are other issues to consider.

“Most of our revenues are in dollars, and it’s a natural hedge. Sberbank lends in dollars as well as rubles, and in some cases this may indeed be cheaper – but we prefer to have loans in dollars from foreign banks. We can usually get longer-term funding that way.”

Another problem is Russian banks’ legalistic approach to security. They focus only on assets, which have to be valued according to strict guidelines, thus incurring extra expense.

“The bankers have to make sure there is documentation for every single item of your fixed assets – and in the chemical industry that can mean thousands of pieces of paper,” Torkhov says. He believes that companies like his own, that have the choice of going to foreign banks, will always do so.

From the western bankers’ viewpoint it doesn’t always look so easy. One Moscow-based corporate banker said: “Sberbank is lending at lower rates than we are able to. Funds are available from Sberbank at 7%, while Libor is 5.5%. There’s no margin there.”

Pavel Gurin, deputy chairman at Raiffeisenbank Austria (Moscow) – which was co-arranger of one of this year’s largest pre-export finance deals, the $400 million for SUEK coal company – says that the largest Russian companies are out of the structured finance market for the foreseeable future. “For borrowers, the structures were important for price, and as a means of offering security. Now they are obsolete, for the larger companies. They can get working capital unsecured, and five-to-seven year lending has become normal.”

But there are mid-tier players, mostly regional companies, “who will use structured transactions to mitigate risk when appropriate”, Gurin says. On-balance-sheet ruble financing is another option, he points out. Raiffeisen and other local and international banks now provide ruble loans at the Mosprime rate, a new rate set by the Russian National Currency Association that Gurin points out “in terms of absolute figures has been more competitive than Libor since December last year”.

Here, Trade Finance highlights the new generation of Russian and Ukrainian customers that remain potential targets for pre-export financing.

Russia: chemicals

Some of Russia’s most significant new-generation borrowers of structured finance are in the chemical fertiliser industry, which is the world’s no. 3 after the US and China, accounting for 10% of total production and a significant proportion of exports.

Eurochem, which produces nitrogen and phosphates fertilisers, has drawn down two major loans from foreign banks this year: a $350 million, 40-month transaction, syndicated by HVB and ING at Libor + 1.9%, and a $50 million working capital facility from Raiffeisen. For the syndicated facility, the security comprises assignment of export and offtake contracts, account pledge, suretyship and negative pledge of exports; repayment includes a 12-month grace period and 28 monthly instalments. The borrowers are the Nevinnomissk, Novomoskovsk and Kovdor fertiliser production units, while Eurochem and one of its trading companies act as guarantors.

Eurochem began to establish a lending record with a $20 million pre-export facility from ING in 2004; A $150 million, 24-month syndicated loan at Libor + 3%, arranged by ING, followed in December that year, and then a further $50 million, 27-month bilateral deal at Libor + 2.1% in August 2005. Year on year, as Libor rose, Eurochem’s margin fell as, along with other Russian industrial producers, it established a credit history and won bankers’ confidence (see table).

Evgeny Torkhov, cfo, says that the renaissance of the agricultural sector in Russia and Ukraine will mitigate the impact of commodity price cyclicality on Eurochem. “We consider Russia and the CIS as one of main markets. Over the next five years, we expect 10% annual growth rate in Russia and 12% in Ukraine.” The company’s capex programme, which is expected to cost more than $1 billion over the next five years, is focused on increasing potash mining capacity, with significant outlay on the nitrogen and phosphate businesses also.

Uralkalii, the largest potash producer in Russia and the fifth largest in the world, exports more than 90% of its production, a substantial part of that via the Belarussian Potash Company, a trader that it jointly owns with Belaruskalii. In 2005 Uralkalii 5.4 million tonnes of potash fertilisers, the best results in its history, but in October it suffered a setback with the flooding and subsequent closure of its mine no. 1, which accounted for about one-fifth of its output.

Uralkalii has revised its production targets for 2007 to 5.2 million tonnes from 6.4 million tonnes. In 2005 the company took a $65 million, four-year syndicated loan, consisting of a $34.5 million “A” loan from the EBRD and a $30.5 million “B” loan arranged by RZB and West LB, with participation from Cordiant and Raiffeisen Landesbank Nideerosterreich-Wien (see Trade Finance, July/August 2005, p. 6), and continues discussion with lenders. The company came close to doing an IPO on the international capital markets in October, but cancelled it when it was unable to realise its target price.

Akron, Russia’s third largest chemical fertiliser producer, which has two plants in Russia and one in China, has so far limited itself to bilateral loans. Among the recent deals reported in Akron’s accounts for the first half of 2006 are a $12.9 million, four-year loan from Moscow International Bank in December 2005 at Libor + 2.75%-3.75%, of which $2 million was outstanding on 30 June 2006; a $30 million loan from Moscow Narodny Bank at Libor + 3.45%, due for repayment in 2008; and a $26.5 million, three-year loan from Sberbank, made earlier this year at 7.9%-8.4%. Smaller sums are outstanding on loans from Chinese banks and ruble bond issues by its production subsidiaries. Silvinit of Solikamsk, in the northern Urals, the second potash producer after Uralkalii, whose financial results have impressed equity analysts, is another potential target for structured deals.

Companies in the giant petrochemicals complex in Tatarstan that western bankers follow with interest include Nizhnekamskneftekhim, which entered the export credit market with a splash at the end of 2003, with a $132 million deal arranged by Citigroup and backed by SACE of Italy (see Trade Finance December 2003-January 2004, pages 42-44). Since then the company has issued a second local-currency bond, taken bilateral loans – $40 million over seven years from Sberbank in July 2004, and $44 million over three years from Citibank International in January this year – and successfully launched a $200 million credit-linked note on the eurobond market, in December last year.

BNP Paribas has been in talks with Nikzhnekamskneftekhim about items in its investment programme including ethylene plant expansion, the construction of new production facilities for polypropylene, ABS-plastics and expandable polystyrene. Both BNP and Citigroup, which has a strong relationship with Nikzhnekamskneftekhim, face stiff competition from Sberbank, from which the company this year received a further 3 billion ruble loan.

Sberbank will also prove hard to beat for bankers seeking business with Kazanorgsintez, Russia’s largest polyethylene producer, which is also based in Tatarstan. The company has drawn down more than $270 million of loans, including a seven-year project finance deal, under a $444 million framework agreement with Russia’s largest bank.

Russia: metals

While Russia’s big metals producers, from Norilsk Nickel and Rusal to Severstal and Evraz, have become world-class players with access to international capital markets and a much-reduced appetite for structured finance, smaller groups that are flourishing on the back of strong commodity and steel prices are anxious to get into the pre-export finance market, usually balanced with domestic bank loans and credit linked notes (CLNs) or ruble bonds.

Typical of the new clients is the Estar group, which groups two special steels producers (Zlatoust and Nytva), four pipe makers (Novosibirsk, Volgograd, Engels and Bor), and is building a 750,000 tpy steel mini-mill at Rostov, the Rostov Electrometallurgical Plant (REMZ), for which it secured a groundbreaking $50 million, two-year deal from Moscow Narodny bank last year (see Trade Finance, March 2006).

Lomprom, the scrap metal division of Estar, is constructing a processing plant on the same site, to feed the electric arc furnace at REMZ. Equipment is being purchased from Metso Lindemann and Liebherr of Germany, with much of the €16 million price tag being financed by Promsviazbank.

Sergei Gora, Estar’s financial director, told Trade Finance: “Once the Rostov plant is completed, about 60% of our overall production will be exported, mostly to Europe. The group has substantial expansion plans and so our credit portfolio will need to grow, too.” The group’s main strategic goals are to establish its own rolling capacity at Rostov, to build a presence on the export market for its special steels products, and to establish trading infrastructure in Europe.

Finance will be sourced from a combination of structured loans and public debt, Gora says. In February this year, Impex Bank managed the issue of a 1.2 billion ruble domestic bond for the Novosibirsk works, and Gora expects this to be followed by a CLN issue on the eurobond market. “We want to restructure some of our short-term debt. We will also be interested in ECA finance in the future, for which we first need to establish a track record.”

Banks are taking interest in the other businesses controlled by Estar’s main owner Vadim Varshavskii, and in September Moscow Narodny provided a $33.25 million medium-term loan for Grand-City Siberia for a trade centre construction project in Novosibirsk – the bank’s first venture into development finance.

Other metals companies being kept in the frame by bankers are Russian Copper Company, Russia’s third biggest producer of refined copper, which in October closed a $80 million, three-year syndicated pre-export finance facility arranged by ABN Amro (see Trade Finance, November 2006, p. 8), and Urals Mining and Metallurgical Company, beneficiary in 2005 of a three-cornered deal under which KBC lent $150 million over three years to Glencore International for pre-payment of copper deliveries from the Russian producer (see Trade Finance July/August 2005, p. 6).

Russia: coal

SUEK (Siberian Coal Energy Company), showed the coal industry’s potential with the $400 million syndication arranged in October by RZB and SG CIB (see Trade Finance, October 2006, p. 12). This deal came only a few months after its first syndicated loan, a $100 million deal lead-arranged by RZB in March this year – and was directly followed by a $175 million credit-linked note issued on the eurobond market by ING and Trust Investment Bank, at an annual coupon rate of 8.625%, which was oversubscribed more than three times.

Russian Coal, the third-largest independent producer on the Russian market and one of the world’s largest anthracite coal producers, also intends to build up its structured finance portfolio. In September 2005 the company took a $25 million, 40-month loan from Moscow Narodny Bank and it has also worked with Credit Suisse group. Vasily Storozhuk of MirInvestment, financial advisers to Russian Coal, told Trade Finance: “Russian Coal has export flows worth about $100 million per year. The coal goes to a variety of destinations, so it is possible to diversify market risks. The group has a quite detailed modernisation and capex programme, and plans to use structured finance deals in future for this.” Russian Coal’s owners include Mikhail Gutseriev, majority owner of Russneft, the Duma deputy Vadim Varshavskii and Sergei Veremeenko.


A $275 million, four-year deal, with a margin of 270 bps, for Ferrexpo, the trader that controls the Poltava iron ore mine, is now being syndicated by ABN Amro, BNP Paribas and Societe Generale. It improves slightly on the benchmark set for the Ukrainian market was set by the $400 million, three-and-a-half year loan, with a Libor + 280 bps margin, arranged in the summer by BNP Paribas for Metinvest, the metals holding company controlled by Rinat Akhmetov’s SCM group (see Trade Finance, July/August 2006, p. 10). Poltava Mining signed a groundbreaking bilateral financing deal with CSFB in 2003, under which about $100 million was borrowed, and took a bilateral loan from West LB in November 2004 (see Trade Finance, September 2004, and March 2005, p. 38). But this is its first venture into the syndicated loan market, in line with the higher profile being adopted by all the large Ukrainian steel producers.

Standard Bank has landed a significant coup with its $100 million bilateral pre-export financing (two equal tranches of one year (Libor + 295 bps) and three years (Libor + 420 bps)) for Grain Trading Company, Ukraine’s largest producer of sunflower oil. The deal is expected to be completed in December.

Grain Trading Company had already made the leap beyond the one-year tenors that are usual in the agri sector with a $30 million, three-year pre-export facility from ING Bank in November 2005 – and this deal will refinance that, and other debt, on improved terms. Peter Bryde, head of agribusiness at Standard Bank, says: “The deal gives Grain Trading Company longer-term financing at a more competitive price. It’s a balance sheet restructuring: the loan will refinance local and other debt.”

Grain Trading Company is a leader in the Ukrainian grain market. It controls the Kirovograd and Ekstrol (Nikolaev) oil extraction plants, and as well as sunflower oil production specialises in the bulk purchase and export of wheat, barley, corn, peas and sunflower seeds. It is owned by Sergey Riabukhin, Viacheslav Petrishe and Vladimir Vinnichenko, according to the Russian business information web site C-Bonds.

A version of this article appeared in Trade Finance magazine,
December 2006-January 2007.
Posted January 2007; © 2006 Simon Pirani

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