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EBRD's first rouble bond pays off

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It would take a lot of these...

...or even these, to make the equivalent of the EBRD rouble bond.

It was a long time coming. EBRD's Treasury department started looking into a bond issue in local currency in Russia in 1999 – and worked long and hard with the Russian authorities to develop the legal and regulatory framework to launch a long-term rouble bond. In May this year, the efforts paid off with the issuance of a five-year, five billion rouble bond (equivalent to €140 million). The event broke new ground for Russia and the EBRD, bringing more transparency and accountability to Russian capital markets.

The following is an interview with Isabelle Laurent, EBRD Deputy Treasurer and Head of Funding, on the rouble bond issue which has been labelled a landmark event for finance in Russia.

Why was this so significant for the EBRD?

Issuing a rouble bond was significant because it means that we can consistently commit to on-lending in roubles for our projects in Russia. This makes it easier for Banking to offer rouble loans to clients and we will now be able to cover all projected demand.

In the past, we had to rely on short-term financial instruments in roubles to fund the long-term loans that clients require – and had prudently limited the project pipeline to the rouble equivalent of EUR 90mn to contain the liquidity risk. In other words, we had to deal with the fact that there was a fundamental mismatch between the short-term funding we could get in roubles and the loan maturities we typically offer.

The results are good for the Bank and good for potential clients. We can more easily offer loans to a wider customer base – those without assets in foreign currency.

Is this also significant for the Russian capital markets?

The EBRD is the first foreign issuer of a rouble-denominated bond – and an issuer with an international “AAA” rating at that, which therefore serves as a benchmark for others. We changed the legal and regulatory environment to allow issuers to use international accounting standards – which brings with it a level of transparency and comparison that other investors will notice and reference.

Our bond is also the first true "floating rate note" in the market, where the coupon resets every 3 months off a transparent index – the Moscow Prime Offered Rate, also known as MosPrime. This introduces a less risky instrument to investors in the Russian capital markets, which to date has no hedging instruments.

Beyond facilitating more projects in Russia, is there a transition aspect to this event?

Part of the EBRD’s mandate is to stimulate and encourage the development of capital markets in its countries of operation. In order to be able to issue our rouble bond we needed to work intensively with Russia’s National Currency Association and prime banks to develop a transparent money market index – the MosPrime Rate. Why? Because a new index was needed that was transparent, undistorted and generated by a more homogenous group of banks (in terms of credit rating and liquidity position) to produce a rate that would be the Russian equivalent of LIBOR. The result is a credible, floating rate index which in turn is instrumental in creating a transparent market reference for all sorts of other transactions including the development of money-market futures, and Forward Rate Agreements (FRAs).

In a nutshell, we have provided a benchmark for the local market for bank loans, floating rate notes and hedging instruments – contributing overall to greater pricing transparency and consistency in the Russian markets.

To find out more about Treasury’s activities in the countries of operation, consult the Capital Markets pages of ebrd.com You might also want to look at recent press releases on the Bank’s first rouble bond issue in Russia (18 May and 24 June 2005).

This article was written by EBRD Deputy Director of Communications Larry Sherwin.

2 August 2005