January 23, 2013 / 11:01 AM / in 5 years

Russia's VTB to cut dollar bond issuance

* Russian bank plans further Asian currency diversification

* CFO considering additional Tier 2 sales

* Euro issues unfavourable due to swap rates

By Sudip Roy

LONDON, Jan 23 (IFR) - Russia’s VTB Bank will reduce issuance in the US dollar bond market this year and diversify its investor base with more Asian currency issues instead, the bank’s chief financial officer told IFR.

In 2012, the bank issued USD5.75bn in the dollar market through senior and subordinated bonds - the lion’s share of its total issuance of about USD7bn.

The state-owned lender, rated Baa1/BBB/BBB, has USD2.5bn of dollar-denominated debt coming due this year, which it will refinance through one or two transactions. But any additional dollar deals will be opportunistic and will depend on being able to reprice the bank’s curve.

“This year we will be less active in vanilla issuances,” CFO Herbert Moos said in an interview with IFR.

“Our refinancing profile is USD2.5bn, which we will definitely do and is a relatively manageable amount. Any extra will be opportunistic, but we will seek to price well inside our secondary curve.”

Instead, said Moos, “we want to push the envelope by continuing to diversify our investor base and issue at or within our dollar levels - therefore not pay concessions.”


That diversification will mostly come through Asian markets. Last week, for example, the bank tapped its 4.50% October 2015 renminbi bond for a further Rmb1bn (USD160.7m) to take the note’s outstanding size to Rmb2bn. At an issue yield of 3.802%, the deal came 15bp through the bank’s dollar curve.

Other Asian currencies VTB will target include renminbi again, Australian dollars (in which it priced a USD500m, five-year bond in December), Singapore dollars and Hong Kong dollars. VTB is also considering other new markets.

“We are focusing on Asia a lot,” said Moos. “The new market realities mean that the incremental growth of investment capital is coming from Asia.”

The strategy is to grow its presence in these markets gradually, with each new issuance extending the bank’s tenor or deal size and improving its cost of funding.

Moos pointed to the bank’s transactions in the Singapore dollar market, where its first deal in 2010 was a S$400m two-year bond at 4.2%, followed the next year by a S$300m three-year bond at 3.4%. In 2012, VTB returned with a S$400m three-year note at 4.0% that refinanced the 2010 bond.

“Our target is to reach a USD1bn debt stock target in Singapore dollars. At the moment we are at roughly half that amount,” Moos said, adding that the target was not necessarily set for 2013.

“In each market, if we can develop our capacity to a similar size, our debt profile will change away from the mainstream markets,” he said.

“Those markets are still important, but we want to create enough alternatives so that we can control our issuance and tighten our cost of funding.”

One of the incongruities of VTB’s debt profile is that, in the dollar market, its bonds trade at a premium to fellow state-owned lender Sberbank.

“If you look at the overall economics of both banks, they are absolutely indistinguishable,” Moos said.

“We have the same ratings, the same liquidity facilities from the central bank, state support - in fact, at 75%, ours is even greater. So from a credit quality perspective there is no difference.”

But while they borrow at similar levels in the domestic market, VTB has to pay more in the dollar market, mostly because of its larger funding programme over the past decade, and its acquisition of Bank of Moscow in 2011, as VTB tries to catch up its bigger rival in terms of total assets.

“Ten years ago we had 10% of Sberbank’s assets, now we are at two-thirds,” Moos said. “So we’ve had a tremendous amount of growth in our asset base. That has needed to be funded in size and led us to pay up.”


Now, though, the bank is changing its approach to funding.

“We will see a convergence of spreads with Sberbank, although it won’t happen tomorrow,” Moos said. “But that’s why we’re diversifying.”

In addition, the bank expects corporate and retail deposits to fund about 30% of its balance sheet, in line with Sberbank. “We don’t have any funding pressures as we have a lot of options - central bank facilities, increasing corporate and retail deposits, as well as the international markets,” said Moos.

One currency that VTB is unlikely to issue in anytime soon, though, is the euro.

“It’s not a question of investor interest or the market, but the swap. On a post-swap basis it’s hard to justify euros. Having said that, there are tentative signs that the European crisis is being resolved, and if that continues then dollar/euro swap rates will continue to converge. At some point it will make sense to issue.”

VTB will also consider a Tier 2 bond. Last year, it was the biggest Russian issuer in the bank capital market. It became the first Russian borrower to execute a Tier 1 instrument through a USD2.25bn perpetual non-call 10.5 years note (including tap). In addition, it sold a USD1.5bn 10-year Lower Tier 2 bond.

Moos said further Tier 1 issuance was not likely because the bank was close to the regulatory limit of 15% of its overall capital base. But he said the bank would consider a Tier 2 bond as it seeks to boost its capital adequacy on the back of expected high net income for 2012, which would be comparable in size to the profits for the prior year, when VTB earned about USD3bn.

Moos said he was delighted with the perpetual transaction. “The original deal was about price discovery, as no Russian bank had issued a Tier 1 note before. Then with the tap we saw demand well exceed the first transaction. We were very happy with the outcome.”

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