State-linked firms borrow boldly as Yukos crisis mounts

by Simon Pirani

Trade finance deals kept going into Russian oil and gas this month [July] even as the Yukos affair reached its climax, bringing fears of default on the company's $1 billion structured financing.

Societe Generale, lead arranger of that deal, Russia's biggest ever structured loan, gave notice of default on Monday 5 July, after the tax ministry sent the company a second $3.4 billion bill, for 2001, and Yukos's bank accounts were frozen by court-appointed bailiffs.

It is understood that Societe Generale, along with co-arrangers HSBC and Citigroup, invoked a material adverse change clause to protect lenders’ rights, but are not seeking immediate repayment.

In the weeks that followed, hopes of a negotiated settlement of the crisis faded. The trial of Yukos owners Mikhail Khodorkovsky and Platon Lebedev resumed in Moscow, and bailiffs began impounding Yukos property – starting with 15% of Sibneft’s shares, seized on 14 July. A sense of the Yukos affair’s long-term repercussions began to descend on the market: it is indicative that Konrad Reuss, managing director of sovereign ratings at Standard & Poor’s, said in an interview on 7 July that – given the high political risks overshadowing strong macroeconomic fundamentals – Russia could not expect a sovereign investment-grade rating soon.

Steve Thunem, who as ABN Amro’s country representative for Russia has been involved in negotiations on many of the biggest structured transactions of recent years, told Trade Finance: “It’s very unfortunate that the government and Yukos have not been able to come to an agreement. As the OECD stated, this could be perceived as a selective application of the law.”

He added: “A bankruptcy or break-up of Yukos could have unforeseen consequences that are difficult to predict at this stage. It would certainly have a strong impact on foreign direct investment. None of this is very positive, regardless of the merits of the law suit.”

State-controlled companies

The combination of strong economic fundamentals and high political risk has tilted the structured finance market away from privately-owned oil companies to the state-controlled companies, Gazprom and Rosneft.

Gazprom, which can be marketed as a Russian company not about to be struck by the Yukos syndrome, is twinning a gigantic structured facility with the first-ever export-secured note issued in debt capital markets by a Russian company.

The structured transaction, for which Gazprom has mandated ABN Amro as lead arranger, will at $1.1 billion set a new Russian record for volume. The six-year deal will replace no less than six outstanding loans. It is understood that the company intends to use the deal to rationalise the patchwork of security arrangements, by using as collateral a single export contract – probably the one with Transgas of the Czech republic – and freeing up other contracts.

The structured deal follows hard on the heels of the $1 billion, 15-year secured export note for which Gazprom and arrangers ABN Amro, Merrill Lynch and Morgan Stanley started a road show in London on 12 July. The note, the first deal from Russia using the securitisation of export receivables that was first developed by strong Latin American exporters, was on course to get the first-ever investment grade rating for a Russian company’s paper.

The note received preliminary ratings of BBB- from both Standard & Poors and Fitch Ratings on 15 July, higher than Russia’s sovereign rating. The offshore repayment structure – from the proceeds of gas export sales to Gasunie of the Netherlands and ENI of Italy, via Gazprom International SA of Luxemburg – made it possible for the rating to pierce the sovereign ceiling. But it was also seen by the market as further proof of the attractiveness of the state-controlled companies in the current political climate.

Both these deals are part of Gazprom’s programme to rationalise and reduce the use of its export contracts as loan collateral, and follow the recent restructuring by Credit Lyonnais of outstanding payments on its $3 billion 1997 loan, which freed up contracts with French and Finnish buyers.

The market will watch closely to see what progress the company makes towards its other stated intention of reducing pricing. Certainly appetite is there for a state-controlled company perceived to carry little political risk: in June ABN Amro arranged a $200 million, three-year unsecured corporate transaction for Gazprom, which doubled to $400 million in syndication. Rates were 275bps over Libor, and fees reportedly 80bps.

Another innovation from Gazprom’s finance team is the company’s first export credit agency-backed deal. The $60 million transaction, to fund the purchase of gas processing equipment from ABB by Gazprom’s procurement division, Gazkomplektimpeks, is guaranteed by EKN, the Swedish ECA. The EKN portion comprises 15% of the deal; the remainder is funded by Deutsche Bank.

Aleksei Kruglov, Gazprom’s chief financial officer, said at a briefing in Moscow last month that the company sees ECA deals as “a satisfactory way to get relatively cheap long-term funding”, and that further such deals could be expected.

Rosneft, Russia’s remaining significant state-owned oil company, has been the other beneficiary of the market’s preference for borrowers not likely to fall foul of the Kremlin. In June a structured deal for Rosneft was syndicated to the market by ABN Amro, HVB and Societe Generale: the company sought $400 million and the deal was closed at $500 million. The interest rate on the five-year deal was Libor + 220bps.

The toughest negotiations with Rosneft concerned the financial covenants, which the company sought to loosen. Bankers raised concern about Rosneft’s breaching of covenants on its eurobonds last year when it bought Severnaya Neft. “This pushed the thresholds of credibility,” said one banker close to the deal. “The company wanted more flexilibility on the covenants and on structure. The lenders conceded some ground, but not easily.”

In June, Natexis completed a three-year $60 million reserves-based financing for Rosneft subsidiary Yeniseyneft. Rosneft expects to produce 1.5 million tonnes per year from Yeniseyneft’s deposits by next year, and 6 million tonnes per year by 2008. The deal structure was similar to that pioneered by Standard Bank in its deal for KMOC, Marathon Oil’s small Russian subsidiary, last year.

Privately-owned companies

The shadow of the Yukos case hangs over the privately-owned oil companies. It has not stopped transactions, but it has made banks’ credit committees much more careful.

The most obviously affected company is Sibneft, which at the start of this year mandated Citigroup and ABN Amro to raise a $1 billion, three- and five-year structured financing. As the legal spider’s web surrounding Khodorkovsky gummed up Sibneft’s attempts to reverse its merger with Yukos, its plans changed. Now a modest $75 million, two-year deal is to be syndicated.

Tatneft, which last year borrowed on a bilateral basis from CSFB, may also find it tough to arrange loans this year until it clears up the questions arising from a note to the 2003 accounts from its auditors, Ernst & Young, stating that it had been provided with insufficient information on “some unusual deals, the nature and aim of which was not clear”. Tatneft’s shares fell 10% on the news, on 4 July, and bankers told Trade Finance they shared the equity market’s concerns.

One deal unlikely to be affected by Yukos-style worries is BP-TNK’s. The company has mandated Citigroup to coordinate a $600 million five-year loan, its first since it was brought into being by last year's $6 billion merger of TNK with BP's Russian assets. Sources in the bank market say that talks on interest rates are hovering around a figure of Libor + 1.4%.

It is understood that ING and Societe Generale are Citi’s co-arrangers, with ING acting as facility agent, passport bank and bookrunner. The deal, which is expected to be closed next month [August], is reportedly being structured with a club of eight banks. It is not known whether there will be portions to syndicate to the wider market. One bank source said that the borrower is seeking to amend the covenants on the deal to allow the sort of flexibility that an international major would expect.

BP-TNK will use the deal to restructure previous borrowings by TNK. The company's new finance team, which is led by senior figures from BP who bring strong traditions with them, is said to have made clear that it would concentrate on cutting margins on existing debt and achieving maximum efficiency. BP-TNK declined to comment on the transaction.

Bankers’ continuing belief that, whatever the outcome of the Yukos case, structured deals into Russia are still well worth doing, is well illustrated by a $200 million, four-year deal being arranged for Varieganneft by BNP Paribas. The deal is reported to be priced at 500 bps over Libor and to provide for monthly repayments from export contracts with Glencore International.

Varieganneft is controlled by Russneft, a new oil holding company founded in September 2002 by Mikhail Guseriev, the former general director of state-owned Slavneft. Russneft has impressed the market by a series of acquisitions of production assets and in 2003 produced 6 million tonnes of oil. Varieganneft first came to the structured finance market last summer, when Glencore arranged a $73 million loan with 18- and 30-month tranches.

The deal confirms that, even in this hazy political environment, the structured finance market can move beyond the very small group of big-name Russian borrowers.

Ukraine deal expected

by Simon Pirani

Naftogaz Ukrainy is understood to be in talks with bankers about a pre-export deal with a volume of between $250 and $300 million.

The state-controlled gas production and transit company is believed to have mandated ABN Amro to arrange the financing, which it hopes will have a repayment period of five years. The bank deal may be combined with a eurobond.

A source close to the talks indicated that the financing may involve a restructuring of Naftogaz’s $1.4 billion-plus debt to Gazprom, part of the “mother of all gas bills” built up by Ukraine during the 1990s, when it failed to pay for Russian gas imports for several years.

The negotiations over the debt have dragged on for years. In April last year, the two companies announced that Gazprom had agreed to take payment in the form of eurobonds. In November last year, Gazprom announced that its board had agreed to take 12-yeear eurobonds with a Libor + 1% interest rate and a three-year grace period.

In April this year, official Ukrainian sources reported Naftogaz chairman Yuri Boiko as saying the deal was being renegotiated. Naftogaz has also said earlier this year that it mandated ABN Amro and UBS to raise a $600 million eurobond for its own investments.

Naftogaz Ukrainy first came on to the structured finance market in December 2002, taking a $30 million bilateral one-year deal, to be repaid from export receivables but with additional security over natural gas stocks, from West LB (see Trade Finance March 2003, page 35).