Current Issues in Russian Securities Offerings May 2004 Mark M. Banovich Moscow Office 2nd Annual...

Current IssuesCurrent Issues

inin

Russian Securities OfferingsRussian Securities Offerings

Current IssuesCurrent Issues

inin

Russian Securities OfferingsRussian Securities Offerings

May 2004May 2004

Mark M. BanovichMoscow Office

2nd Annual Russian Financial Markets Conference

22

I.I. The Domestic Deal PipelineThe Domestic Deal Pipeline

II.II. The Cross-Border Deal PipelineThe Cross-Border Deal Pipeline

III.III. Emerging IssuesEmerging Issues

OverviewOverview

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The Domestic Deal PipelineThe Domestic Deal PipelineThe Domestic Deal PipelineThe Domestic Deal Pipeline

Debt: “Ruble Bonds”Debt: “Ruble Bonds”

Over 80 deals raised more than RUR 80 Over 80 deals raised more than RUR 80 billion (almost USD 3 billion) in 2003billion (almost USD 3 billion) in 2003

Typically managed by Russian investment Typically managed by Russian investment banks (e.g., Troika, MDM, Renaissance)banks (e.g., Troika, MDM, Renaissance)

Quick access to cash with low expenses and Quick access to cash with low expenses and thin documentation and disclosure – usually thin documentation and disclosure – usually done “in house” and unrateddone “in house” and unrated

Market over-saturation began to appear in Market over-saturation began to appear in mid to late 2003mid to late 2003

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Equity: The “Domestic IPO”Equity: The “Domestic IPO”

Four deals since 2002, including two so far in 2004 Four deals since 2002, including two so far in 2004 (RBC, 36.6, Irkut, Kalina)(RBC, 36.6, Irkut, Kalina)

““Domestic” IPOs are in fact “Global” offeringsDomestic” IPOs are in fact “Global” offerings Disclosure and documentation based on London market Disclosure and documentation based on London market

standards for an institutional private placementstandards for an institutional private placement

Western accounts (generally IFRS)Western accounts (generally IFRS)

Western banks act as lead managers (with Russian Western banks act as lead managers (with Russian banks sometimes co-leads), and Western firms act as banks sometimes co-leads), and Western firms act as legal and accounting advisorslegal and accounting advisors

Road show and placement both in Russia and the EU, with Road show and placement both in Russia and the EU, with settlement through a Russian stock exchangesettlement through a Russian stock exchange

Domestic PipelineDomestic Pipeline

55

Problematic past; brighter future?Problematic past; brighter future? Dual listing of RBC on two Russian exchanges Dual listing of RBC on two Russian exchanges

is reported to have created arbitrage problemsis reported to have created arbitrage problems

Book-building has been an issue in the past, Book-building has been an issue in the past, but Irkut and Kalina seem to have been over-but Irkut and Kalina seem to have been over-subscribedsubscribed

Prices have tended to drift lower post-offeringPrices have tended to drift lower post-offering

After-market liquidity has likewise been an After-market liquidity has likewise been an issue; keep an eye on Irkut and Kalinaissue; keep an eye on Irkut and Kalina

Other small to mid-cap Russian issuers are Other small to mid-cap Russian issuers are being courted by investment banks, but the being courted by investment banks, but the size of the pipeline is unclearsize of the pipeline is unclear

Domestic PipelineDomestic Pipeline

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The Cross-Border Deal PipelineThe Cross-Border Deal PipelineThe Cross-Border Deal PipelineThe Cross-Border Deal Pipeline

Factors favoring debt/equity offerings outside RussiaFactors favoring debt/equity offerings outside Russia

Access to a large pool of relatively low-cost capitalAccess to a large pool of relatively low-cost capital

Raise commercial profile in relevant marketsRaise commercial profile in relevant markets

Additional factors for offering equity outside RussiaAdditional factors for offering equity outside Russia

Higher multiples Higher multiples Positive effect on share price Positive effect on share price

LiquidityLiquidity

Acquisition currencyAcquisition currency

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DebtDebt

Credit-Linked NotesCredit-Linked Notes

Ruble bond substitute, or Eurobond (LPN)-lite:Ruble bond substitute, or Eurobond (LPN)-lite: Thin disclosure and unratedThin disclosure and unrated

Sold principally on basis of cash flow, EBITDA Sold principally on basis of cash flow, EBITDA and coverage ratiosand coverage ratios

English law documentationEnglish law documentation

Denominated in “hard currency”Denominated in “hard currency”

Issued by a bank in a tax advantaged EU Issued by a bank in a tax advantaged EU jurisdiction, which on-lends the proceeds to a jurisdiction, which on-lends the proceeds to a Russian companyRussian company

Cross-Border PipelineCross-Border Pipeline

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Credit-Linked Notes (cont.)Credit-Linked Notes (cont.)

Several deals in the $50-$200 million range Several deals in the $50-$200 million range have been placed this year; the pipeline have been placed this year; the pipeline going forward appears to be substantialgoing forward appears to be substantial

Market is significantly driven by Russian Market is significantly driven by Russian banks’ relationships, but Western banks banks’ relationships, but Western banks may co-lead (complementary book-building)may co-lead (complementary book-building)


99

EurobondsEurobonds Two structures, driven principally by double Two structures, driven principally by double

tax-treaty considerations:tax-treaty considerations: Loan participation notes (LPNs) are similar in Loan participation notes (LPNs) are similar in

structure to credit-linked notesstructure to credit-linked notes Guaranteed notes issued by a wholly-owned Guaranteed notes issued by a wholly-owned

finance subsidiary of the Russian company that finance subsidiary of the Russian company that provides the guarantee provides the guarantee

Most recent deals have been in the form of LPNsMost recent deals have been in the form of LPNs

Standard Eurobond disclosure and Standard Eurobond disclosure and documentationdocumentation

Sold on the basis of ratingsSold on the basis of ratings

Listed on Luxembourg or LondonListed on Luxembourg or London


1010

Eurobonds (cont.)Eurobonds (cont.)

Almost 20 deals in 2003 raised almost Almost 20 deals in 2003 raised almost USD 5 billionUSD 5 billion

2004 pipeline is strong2004 pipeline is strong Several have already closed in 2004Several have already closed in 2004

Competition among banks for mandates Competition among banks for mandates is fierce, driving commissions to 40-50 bpis fierce, driving commissions to 40-50 bp

Factors affecting pipelineFactors affecting pipeline Plus: October 2003 Moody’s increase of Plus: October 2003 Moody’s increase of

sovereign ceiling to investment gradesovereign ceiling to investment grade

Minus: Uncertainty over fate of YukosMinus: Uncertainty over fate of Yukos


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EquityEquity

Overshadowed in 2002 and 2003 by cheap financing Overshadowed in 2002 and 2003 by cheap financing in the debt marketsin the debt markets

With large gains in the Russian equity markets, With large gains in the Russian equity markets, valuations are approaching the point where an IPO valuations are approaching the point where an IPO becomes attractivebecomes attractive

2004 pipeline is small2004 pipeline is small

Pre-IPO restructuring is being commenced by Pre-IPO restructuring is being commenced by issuers contemplating an offering in a 2005-2007 issuers contemplating an offering in a 2005-2007 horizonhorizon

The fate of Yukos may affect the willingness of The fate of Yukos may affect the willingness of certain IPO candidates to make their ownership and certain IPO candidates to make their ownership and management structures sufficiently transparentmanagement structures sufficiently transparent


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Emerging IssuesEmerging IssuesEmerging IssuesEmerging Issues

LondonLondon versus New Yorkversus New York

The London Stock Exchange has been The London Stock Exchange has been aggressively competing against the NYSE and aggressively competing against the NYSE and Nasdaq for listings by Russian issuersNasdaq for listings by Russian issuers

Corporate GovernanceCorporate Governance Russian issuers are concerned over Sarbanes Oxley Russian issuers are concerned over Sarbanes Oxley

(certifications, audit committees, director (certifications, audit committees, director independence, internal audit controls, auditor independence, internal audit controls, auditor independence, etc.)independence, etc.)

Recent amendments to Russian stock exchange Recent amendments to Russian stock exchange listing rules, due to take effect 1 January 2005, may listing rules, due to take effect 1 January 2005, may tend to reduce London’s differential advantage – if tend to reduce London’s differential advantage – if they are enforcedthey are enforced

1313

AccountingAccounting

Russian legislation has been moving in the direction of Russian legislation has been moving in the direction of convergence with IFRS, but slowlyconvergence with IFRS, but slowly

Parmalat and other European accounting scandals Parmalat and other European accounting scandals have reduced the advantage of the IFRS principles-have reduced the advantage of the IFRS principles-based system over the US GAAP rule-based system based system over the US GAAP rule-based system that had been perceived at the time of Enron and that had been perceived at the time of Enron and WorldcomWorldcom

New Russian stock exchange listing requirements for New Russian stock exchange listing requirements for first level “A” listed issuers permit either US GAAP or first level “A” listed issuers permit either US GAAP or IFRS accountsIFRS accounts

LSE permits either US GAAP or IFRS, whereas the LSE permits either US GAAP or IFRS, whereas the SEC requires US GAAP reconciliation from IFRSSEC requires US GAAP reconciliation from IFRS

Accordingly, a choice of IFRS may be more limiting Accordingly, a choice of IFRS may be more limiting than a choice of US GAAPthan a choice of US GAAP

Emerging IssuesEmerging Issues

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DisclosureDisclosure The EU prospectus directive and The EU prospectus directive and

transparency directive are moving the EU transparency directive are moving the EU public company disclosure regime in the public company disclosure regime in the direction of the US disclosure regimedirection of the US disclosure regime

LSE permits the use of Form 20-F under a LSE permits the use of Form 20-F under a “wrapper”; the US offers no reciprocal “wrapper”; the US offers no reciprocal accommodationaccommodation

The Russian disclosure regime is moving in The Russian disclosure regime is moving in the direction of “real-time” or even the direction of “real-time” or even “continuous” disclosure“continuous” disclosure


1515

Deregistration – The “Hotel California” EffectDeregistration – The “Hotel California” Effect

In practice, it is difficult for non-U.S. issuers to In practice, it is difficult for non-U.S. issuers to deregister their shares deregister their shares Deregistration under Rule 12g3-2(a): Must Deregistration under Rule 12g3-2(a): Must

have fewer than 300 U.S. holders; however, have fewer than 300 U.S. holders; however, accounts of brokers, dealers, banks and accounts of brokers, dealers, banks and nominees are subject to a “look-through” rulenominees are subject to a “look-through” rule

Rule 12g3-2(b) is Rule 12g3-2(b) is unavailable unavailable to a non-U.S. to a non-U.S. issuer that has, or has had, issuer that has, or has had, any any securities securities registered during the previous 18 months (e.g., registered during the previous 18 months (e.g., due to a US public offering or listing)due to a US public offering or listing)


1616

An issuer may try a tender or exchange offer to reduce An issuer may try a tender or exchange offer to reduce the number of U.S. holders below 300, but:the number of U.S. holders below 300, but:

Non-U.S. issuers with registered shares are subject to the Non-U.S. issuers with registered shares are subject to the disclosure rules and procedural requirements of disclosure rules and procedural requirements of Regulations 14D and 14E, making this process time-Regulations 14D and 14E, making this process time-intensive and expensiveintensive and expensive

Even Level I ADR programs subject an issuer to the Even Level I ADR programs subject an issuer to the tender and exchange offer procedural rules of Regulation tender and exchange offer procedural rules of Regulation 14E (and related disclosure requirements driven by Rule 14E (and related disclosure requirements driven by Rule 14e-3 and Rule 10b-5)14e-3 and Rule 10b-5)

Particularly in the case of Russian issuers, for which US Particularly in the case of Russian issuers, for which US holders may represent a large percentage of the holders may represent a large percentage of the unaffiliated public float, meaningful exemptions are unaffiliated public float, meaningful exemptions are unlikely to be availableunlikely to be available


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Bottom LineBottom Line

London’s regulatory advantage may be erodingLondon’s regulatory advantage may be eroding

London’s willingness to accommodate US London’s willingness to accommodate US compliant governance, accounting and disclosure compliant governance, accounting and disclosure may make it attractive to do a primary US IPO may make it attractive to do a primary US IPO with a secondary LSE listingwith a secondary LSE listing

We see competition between London and New We see competition between London and New York returning to market-based considerations York returning to market-based considerations such as valuation (multiple), depth of investor such as valuation (multiple), depth of investor base, liquidity, location of acquisition targets, etc.base, liquidity, location of acquisition targets, etc.


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Depositary Receipts versus Ordinary SharesDepositary Receipts versus Ordinary Shares

Depositary as registered shareholderDepositary as registered shareholder

DTT reliefDTT relief

Anti-monopoly issues – program capsAnti-monopoly issues – program caps

Vote-splitting and exercise of voting rightsVote-splitting and exercise of voting rights

Russian share registrar risks diminishing?Russian share registrar risks diminishing?

Regulatory approvalRegulatory approval

Unsponsored programs – not requiredUnsponsored programs – not required

Sponsored programs – required, and limited to Sponsored programs – required, and limited to 40% of any class of the issuer’s shares40% of any class of the issuer’s shares


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Miscellaneous IssuesMiscellaneous Issues

Exxon Capital A/B Exchange OffersExxon Capital A/B Exchange Offers

Sophistication of in-house counselSophistication of in-house counsel


2nd Annual Russian Financial Markets Conference

QUESTIONSQUESTIONS??

QUESTIONSQUESTIONS??

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w w w . l l g m . c o mw w w . l l g m . c o mw w w . l l g m . c o mw w w . l l g m . c o m

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