The EBRD has just launched its latest rouble bond, worth RUB 3 billion and with a five-year maturity. The EBRD’s rouble bond shows the importance that the Bank continues to attach to local currency financing. EBRD Deputy Treasurer Isabelle Laurent explains how the bond issue fits in with the EBRD’s crisis response strategy.
Why is lending in roubles particularly important at the present time?
The rouble lost some of its value earlier this year. It has since stabilised but that doesn’t mean it will not come under further pressure. The Russian government doesn’t have unlimited resources to support the rouble; much will depend on the oil price, which has also stabilised, but is not immune to further falls. The banks may need further support given rising levels of non-performing loans and the need to restructure debt; and recent economic data has not given undue cause for optimism.
So, as we have learned so often, not least during the recent crisis, and especially in Russia during the 1998 crisis, currency speculation should remain the preserve of currency traders and investors actively seeking currency plays, rather than being embedded in a company’s financing. Ultimately, it’s risky for the viability of a project to borrow in foreign currency if the project income is exclusively in domestic currency. The EBRD’s latest rouble bond shows the importance that the Bank continues to attach to local currency financing.
What is a domestic rouble bond issue and how does it work?
The Bank issues bonds – essentially IOUs (acknowledgement of debt) – to investors who pay for them in roubles. The bond pays interest quarterly linked to the three-month MosPrime rate, and at the bond’s maturity – in this case, five years – the institutions receive their investment back. The advantage of bonds to investors is that they offer security, particularly when they are issued by a very stable, triple-A rated institution such as the EBRD. The Central Bank of Russia also accepts EBRD’s bonds for repo (repurchasing agreements), which allows the banks to use them to obtain cash funding. This is especially important to their appeal and performance, as in the Russian domestic market the investor base is made up predominantly of financial institutions, rather than the insurance companies, asset managers and pension funds that constitute a significant part of the international investor base.
A domestic rouble bond is listed and traded on the MICEX stock exchange, the documentation is in Russian, the process follows domestic legislation and regulations, and all payments are made onshore. This means that there are significant bureaucratic hurdles and market idiosyncrasies to negotiate, but fortunately, we now have a very strong and experienced team within the Bank to deal with this.
The EBRD uses the roubles it raises from such bond issues to lend roubles to clients whose projects produce a rouble income stream, thereby sheltering them from potential fluctuations in the currency markets. For example, if a company financed its activities by borrowing in dollars but earned revenue in roubles, it may struggle to repay its dollar-denominated debt if there were a significant devaluation in the rouble.
How was the latest bond issue received?
It was nearly three times oversubscribed, which shows there is a healthy appetite among foreign and domestic banks for investment in rouble bonds. The fact that the EBRD’s bond has a five-year maturity boosted confidence in the rouble market, as the crisis has seen a reversal in the trend of the last few years to lengthening maturities.
At the start of the year, we were unsure how much demand there would be for rouble bonds in 2009, especially as financial institutions have been disproportionately affected by the crisis and new issuance had consequently been scant. Therefore in March 2009, we informed the Russian authorities of our intention to issue two new bonds – one worth five billion roubles and another worth three billion – so that we might place the smaller amount if demand were insufficient.
When we assessed the market this April immediately prior to launching the first of these bonds, we found there was significant demand for our name, and we therefore opted to place the five billion rouble issue first. We even managed to achieve a coupon of 25 basis points below MosPrime – which is the Russian equivalent of Libor – and that was a first for the market. The success of that transaction both in the primary and secondary market allowed us to place a second bond last week at a spread of 55 basis points below MosPrime, despite the fact that three-month MosPrime has fallen since April from around 16 per cent to some 12 per cent.
How much appetite do you think there will be among banking clients to borrow in roubles?
The Central Bank of Russia’s measures to stop speculation on rouble devaluation drove MosPrime up substantially for a short period of time earlier this year. But MosPrime has now returned to low double digits (between 10 and 12 per cent for one- to three-month terms) and appears to have stabilised at these levels. This should encourage clients to once again look at more appropriate means of financing their rouble projects.