REFILE-Six banks head pack for new Rosneft bond

Mon Oct 29, 2012 8:21am EDT

Related Topics

* Russian company hired 6 banks for summer deal

* Rosneft needs US$45bn in total for TNK-BP acquisition

* No bonds currently outstanding, could sell US$15bn

By Michelle Meineke and Sudip Roy

LONDON, Oct 29 (IFR) - Rosneft mandated six banks - rumoured to be BofA Merrill, Barclays, BNP, Citigroup, JP Morgan and VTB Capital - earlier in the summer for an inaugural US dollar bond, sources told IFR.

That deal was unrelated to its subsequent agreement to buy TNK-BP and never materialised, but those banks are likely to be the frontrunners for the new bond financing for the acquisition, although nothing official has been confirmed. None of the banks was willing to comment.

The Russian state-owned oil company will need to raise US$45bn through both the bond and loan markets to back its US$55bn purchase of domestic oil producer TNK-BP. It has already been hit by a wave of offers from banks, quashing doubts that Rosneft faces a liquidity shortage.

The multi-billion financing package will boost loan bankers reeling from a dramatic fall in deal volume this year, particularly for M&A, and Rosneft will see significant support from the most bullish bond market in living memory.

Rosneft's prominence as the top oil supplier in the world's top oil-producing country has boosted support, especially as it will pump more oil and gas than ExxonMobil after the acquisition.

"Everyone is being massively gung-ho and banks are phoning from all over," one loan banker said. "It is a feeding frenzy."

Banks that find themselves unable to raise enough funds to join the biggest loan of the year risk being locked out of the future ancillary business bonanza that Rosneft is expected to provide.

ASSETS REJIGGED

The first part of Rosneft's Kremlin-backed acquisition of TNK-BP, Russia's third-largest oil firm, will fold BP's 50% stake into Rosneft - which will pay US$17.1bn in cash and shares, representing 12.84% of Rosneft, to BP.

The UK oil major will use US$4.8bn of the cash to buy a further 5.66% of Rosneft. That will take BP's stake to 19.75%, including its existing shareholding of 1.25%, and give it US$12.3bn of cash.

The second stage of the acquisition will see AAR, BP's joint venture partner in TNK-BP, receive US$28bn in cash for its remaining 50% stake.

Banks including Bank of America Merrill Lynch, BNP Paribas and Citigroup are jockeying for the coordinating role on the loan. Barclays, Bank of Tokyo-Mitsubishi, Morgan Stanley, Royal Bank of Scotland, Sumitomo Mitsui Banking Corp and Societe Generale are also close to the loan, bankers said.

The scale of the acquisition means that significant sums will need to be raised in the loan and bond markets. In the latter, Rosneft will need to borrow at least US$15bn, according to bankers. It could follow the path trodden by Brazil's Petrobras, which since January 2011 has visited the bond markets five times, raising nearly US$20bn through US dollar, euro and sterling transactions.

"Rosneft has zero outstanding debt [in the capital markets] so can easily support US$15bn or more of bonds," said one banker.

STRONG INFLOWS

Given the strong inflows into emerging market bond funds, bankers said, the company could borrow at least half of that through one transaction in a multi-tranche offering - albeit one that would be expected to offer a premium to its peers.

"If it can get itself into a fully registered programme position, it could hit the US market full on. Liquidity is so huge," said another banker. Earlier this year, Russia raised US$7bn through the sale of five-, 10- and 30-year notes, a structure that Rosneft could replicate.

The one issue could be timing. With the US presidential election next week, and then public holidays in the US for Veterans' Day and Thanksgiving thereafter, there are only a few full weeks left before investors start shutting up shop for the year, though fund managers might decide they could not afford to stay out even if a deal came later than they would like. Getting the necessary documentation in place, with updated facts and figures, is also complicating matters, added bankers. Still, financiers believe that Rosneft has until early December to issue a bond if it wants to raise money this year.

It's not clear yet whether Rosneft will try and do an accelerated bond deal or wait first for its bridge loan to be put together. It could still be that any bank on the bridge that wasn't a member of the original consortium of mandated banks ends up as a lead manager on the new bond transaction.

Rosneft received a boost last week when S&P revised the outlook on its BBB- rating to positive from negative, in stark contrast to Moody's (Baa1) and Fitch (BBB), which put the company on review for a downgrade because of the debt it was taking on. S&P believes it is likely that the government will provide extraordinary support to the new enlarged company, offsetting the potential financial risks. Maintaining an investment-grade rating is crucial to Rosneft's capacity to raise funds in the bond markets.

TAKING SHAPE

The loan deal itself is already taking shape. Rosneft is eyeing commitments from banks of US$1.5bn each for a total US$15bn. That would be the biggest syndicated corporate loan in EMEA since October 2010.

Loan bankers' huge appetite for the deal, which is split between a two-year bridge facility and a five-year term loan, prompted Rosneft to cut pricing and commitments on the deal in late September.

Under the revised terms lenders are asked for commitments of US$1bn on a bridge loan - halved from US$2bn - and about US$500m on a five-year term loan, which remains unchanged. The bridge loan is split between one-year and two-year maturities.

The term loan initially carried a margin of 240bp and an all-in cost of 300bp - at parity with the borrower's US$2.6bn deal in April. However, lender demand has resulted in all-in pricing being reverse-flexed for both the bridge and the term loans to well below 300bp, making it very unprofitable for banks.

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