Russia has a significant ongoing requirement for investment in infrastructure and key industries, much of which is supported by the development oriented banks. Similarly many Russian industrial corporates require access to significant sources of funding in order to modernise and expand.
During and after the global financial crisis many of the sources of funding which were hitherto available to Russian banks and companies, such as the Eurobond and syndicated loan markets, were to become increasingly restricted. In addition, where these commercial sources of finance remained, tenors have generally decreased and spreads risen.
In this environment ECA funding has proven to be an extremely useful source of financing, supporting trade into Russia throughout the crisis period by maintaining the availability of long term funding at competitive pricing to those entities procuring overseas. This is strongly attested to by the US$7 billion of Export Credit Financings concluded in the market during 2010, as well as the US$3.8 billion total for the first half year of 2011.
HSBC has responded to this need through increasing our resources in country to manage the Export Finance business, as well as promoting these solutions through our corporate banking network.
Landmark structures propel HSBC to the number one spot for ECA financings in Russia
“2011 has been an exceptionally good year for HSBC’s Export Finance business in Russia” states Peter Luketa, Global Head of HSBC’s Export Finance and Global Specialised Finance Division. “To date this year we have booked over US$800 million of ECA business in this market, including several landmark transactions like the RusVinyl Project Financing and the Rouble denominated ECA financings completed for VimpelCom and Vnesheconombank.” Luketa pointed out that, although HSBC has a long history of concluding ECA facilities in Russia, during the crisis it shifted its activities to other markets.
Revamping HSBC’s corporate activity in Russia
It is no co-incidence that the re-emergence of HSBC as a market leader for Russian ECA business and the growth of our corporate banking business in general accelerated with the arrival of Chris Hurd as the Head of Global Banking at HSBC Russia and the development of a whole new corporate strategy for the market.
HSBC Russia’s Global Banking business emerged from the financial crisis in a sound condition, but undersized relative to our global footprint. We have therefore been focussing our energies over the past year on increasing our local footprint and servicing our clients’ needs across four key sectors, namely, Local Corporates, Resources and Energy, Financial Institutions and Multinationals. We have not been afraid to make sizeable balance sheet commitments to support their funding and development and this has positioned us well to diversify our business profile across other areas of strength. In addition to headline roles in the ECA space, as outlined above and below, we have undertaken lead positions in transactions in Debt Capital Markets, Syndicated Loans, FX and Derivatives, Advisory and Trade Services.
In addition to our ECA successes, high profile transactions in Russia include:
· Vimpelcom, Mandated Lead Arranger and Underwriter on a US$2.5 billion bridge financing to acquire WIND Telecom.
· Russian Federation, Joint Lead Arranger on a RUB40 billion 7-year bond issue and subsequent tap.
· Eurochem, Mandated Lead Arranger on a US$1.5 billion Pre-Export Finance Facility.
· TNK-BP, Mandated Lead Arranger on two major club financings this year.
Underlying our deal momentum is our imperative to deliver the HSBC Group to our Russian clients, for whom we make our full product and geographic reach available.
Landmark PF Structure
One such landmark deal, as referred to by Peter Luketa, is the Rusvinyl Project. HSBC co-ordinated the project financing for the construction of a 330 thousand t/y Polyvinyl Chloride (PVC) Integrated Plant near Kstovo in the Nizhniy Novgorod region, Russia. The plant will be operated by RusVinyl LLC, a joint venture created by SolVin Holding Nederland BV and CJSC SIBUR Holding. Split between a Eu350 million export credit facility backed by COFACE, a Eu100 million export credit facility backed by ONDD, and two Eu150 million loans provided by EBRD and Sberbank, the remaining 40% of the a1.3 billion project is being funded through equity. Unusually for a financing of this nature – in Russia or elsewhere – there are no offtake contracts. Particularly unusual for a Russian project financing RusVinyl’s products are aimed at the Russian domestic market not the export market and therefore HSBC, the other MLAs and the ECAs have had to come to terms with taking Russian market risk. A number of innovative structures were put in place to mitigate such risks (see Case Study).
Rouble denominated ECA facilities – the way forward
Another landmark transaction is the US$200 million equivalent EKN supported, Rouble denominated financing for Vimpelcom. HSBC’s ECA team pioneered Rouble denominated ECA financings in Russia in 2007 when we closed the first ever Rouble denominated Export Credit for Vimpelcom (again using support from EKN). At that time, it was expected that a whole plethora of Rouble deals would follow, but the financial crisis hit and even plain vanilla ECA facilities were difficult to close. Once again, HSBC has led the market back to Rouble denominated deals with Vimpelcom’s second transaction after a four year gap, achieving a competitive rate for Vimpelcom in a relatively volatile market.
At the same time as closing its second transaction of this type for Vimpelcom, HSBC has used its unique capabilities to structure complex RUB-denominated ECA financing solutions in conjunction with Denmark’s Eksport Kredit Fonden. This has been used to provide a further c. RUB6.9 billion (a160 million equivalent) buyer credit facility to Vnesheconombank, in support of their financing for the Kaluga Cement plant, which when completed will be the only cement facility in the Kaluga region, roughly 200 km south of Moscow. Further details of this financing, which was provided alongside a RUB5 billion bridge financing also arranged by HSBC, are set out in the case study below.
The outlook for the Russian ECA and project finance market – where are the next round of deals going to be?
It is our view that Russia will remain one of the major ECA markets globally based on continuing investments across all sectors:
Telecommunications:
– Ongoing investments in replacement and upgrade of existing network infrastructure for both mobile and fixed line telephony
– Planned orders of new satellites
Transportation:
– Renewal of current aircraft fleet, infrastructure and other equipment
Chemicals/Fertilizers:
– New equipment for Greenfield projects, especially in mining support industries, and upgrade of existing processing facilities
Metals & Mining:
– Modernisation of existing plants and mining equipment
Oil & Gas/Petrochemicals:
– Expansion of current manufacturing facilities and new Greenfield projects
Agribusiness:
– Further Greenfield investments planned
Based on the successful conclusion of RusVinyl, further domestically orientated Project Finance transactions are bound to follow across a range of sectors. A special focus over the coming years will also be infrastructure projects and related investments linked to the FIFA World Cup hosted by Russia in 2018.