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

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  • Slide 1
  • Current Issues in Russian Securities Offerings May 2004 Mark M. Banovich Moscow Office 2nd Annual Russian Financial Markets Conference
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  • 1 I.The Domestic Deal Pipeline II.The Cross-Border Deal Pipeline III.Emerging Issues Overview
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  • 2 The Domestic Deal Pipeline Debt: Ruble Bonds Debt: Ruble Bonds Over 80 deals raised more than RUR 80 billion (almost USD 3 billion) in 2003 Typically managed by Russian investment banks (e.g., Troika, MDM, Renaissance) Quick access to cash with low expenses and thin documentation and disclosure usually done in house and unrated Market over-saturation began to appear in mid to late 2003
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  • 3 Equity: The Domestic IPO Equity: The Domestic IPO Four deals since 2002, including two so far in 2004 (RBC, 36.6, Irkut, Kalina) Domestic IPOs are in fact Global offerings Disclosure and documentation based on London market standards for an institutional private placement Western accounts (generally IFRS) Western banks act as lead managers (with Russian banks sometimes co-leads), and Western firms act as legal and accounting advisors Road show and placement both in Russia and the EU, with settlement through a Russian stock exchange Domestic Pipeline
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  • 4 Problematic past; brighter future? Dual listing of RBC on two Russian exchanges is reported to have created arbitrage problems Book-building has been an issue in the past, but Irkut and Kalina seem to have been over- subscribed Prices have tended to drift lower post-offering After-market liquidity has likewise been an issue; keep an eye on Irkut and Kalina Other small to mid-cap Russian issuers are being courted by investment banks, but the size of the pipeline is unclear Domestic Pipeline
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  • 5 The Cross-Border Deal Pipeline Factors favoring debt/equity offerings outside Russia Factors favoring debt/equity offerings outside Russia Access to a large pool of relatively low-cost capital Raise commercial profile in relevant markets Additional factors for offering equity outside Russia Additional factors for offering equity outside Russia Higher multiples Positive effect on share price Liquidity Acquisition currency
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  • 6 Debt Debt Credit-Linked Notes Ruble bond substitute, or Eurobond (LPN)-lite: : Thin disclosure and unrated : Sold principally on basis of cash flow, EBITDA and coverage ratios : English law documentation : Denominated in hard currency : Issued by a bank in a tax advantaged EU jurisdiction, which on-lends the proceeds to a Russian company Cross-Border Pipeline
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  • 7 Credit-Linked Notes (cont.) Several deals in the $50-$200 million range have been placed this year; the pipeline going forward appears to be substantial Market is significantly driven by Russian banks relationships, but Western banks may co-lead (complementary book-building) Cross-Border Pipeline
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  • 8 Eurobonds Two structures, driven principally by double tax-treaty considerations: : Loan participation notes (LPNs) are similar in structure to credit-linked notes : Guaranteed notes issued by a wholly-owned finance subsidiary of the Russian company that provides the guarantee : Most recent deals have been in the form of LPNs Standard Eurobond disclosure and documentation Sold on the basis of ratings Listed on Luxembourg or London Cross-Border Pipeline
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  • 9 Eurobonds (cont.) Almost 20 deals in 2003 raised almost USD 5 billion 2004 pipeline is strong : Several have already closed in 2004 : Competition among banks for mandates is fierce, driving commissions to 40-50 bp Factors affecting pipeline : Plus: October 2003 Moodys increase of sovereign ceiling to investment grade : Minus: Uncertainty over fate of Yukos Cross-Border Pipeline
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  • 10 Equity Equity Overshadowed in 2002 and 2003 by cheap financing in the debt markets With large gains in the Russian equity markets, valuations are approaching the point where an IPO becomes attractive 2004 pipeline is small Pre-IPO restructuring is being commenced by issuers contemplating an offering in a 2005-2007 horizon The fate of Yukos may affect the willingness of certain IPO candidates to make their ownership and management structures sufficiently transparent Cross-Border Pipeline
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  • 11 Emerging Issues London versus New York London versus New York The London Stock Exchange has been aggressively competing against the NYSE and Nasdaq for listings by Russian issuers Corporate Governance Russian issuers are concerned over Sarbanes Oxley (certifications, audit committees, director independence, internal audit controls, auditor independence, etc.) Recent amendments to Russian stock exchange listing rules, due to take effect 1 January 2005, may tend to reduce Londons differential advantage if they are enforced
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  • 12 Accounting Russian legislation has been moving in the direction of convergence with IFRS, but slowly Parmalat and other European accounting scandals have reduced the advantage of the IFRS principles- based system over the US GAAP rule-based system that had been perceived at the time of Enron and Worldcom New Russian stock exchange listing requirements for first level A listed issuers permit either US GAAP or IFRS accounts LSE permits either US GAAP or IFRS, whereas the SEC requires US GAAP reconciliation from IFRS Accordingly, a choice of IFRS may be more limiting than a choice of US GAAP Emerging Issues
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  • 13 Disclosure The EU prospectus directive and transparency directive are moving the EU public company disclosure regime in the direction of the US disclosure regime LSE permits the use of Form 20-F under a wrapper; the US offers no reciprocal accommodation The Russian disclosure regime is moving in the direction of real-time or even continuous disclosure Emerging Issues
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  • 14 Deregistration The Hotel California Effect In practice, it is difficult for non-U.S. issuers to deregister their shares : Deregistration under Rule 12g3-2(a): Must have fewer than 300 U.S. holders; however, accounts of brokers, dealers, banks and nominees are subject to a look-through rule : Rule 12g3-2(b) is unavailable to a non-U.S. issuer that has, or has had, any securities registered during the previous 18 months (e.g., due to a US public offering or listing) Emerging Issues
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  • 15 An issuer may try a tender or exchange offer to reduce the number of U.S. holders below 300, but: Non-U.S. issuers with registered shares are subject to the disclosure rules and procedural requirements of Regulations 14D and 14E, making this process time- intensive and expensive Even Level I ADR programs subject an issuer to the tender and exchange offer procedural rules of Regulation 14E (and related disclosure requirements driven by Rule 14e-3 and Rule 10b-5) Particularly in the case of Russian issuers, for which US holders may represent a large percentage of the unaffiliated public float, meaningful exemptions are unlikely to be available Emerging Issues
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  • 16 Bottom Line Londons regulatory advantage may be eroding Londons willingness to accommodate US compliant governance, accounting and disclosure may make it attractive to do a primary US IPO with a secondary LSE listing We see competition between London and New York returning to market-based considerations such as valuation (multiple), depth of investor base, liquidity, location of acquisition targets, etc. Emerging Issues
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  • 17 Depositary Receipts versus Ordinary Shares Depositary Receipts versus Ordinary Shares Depositary as registered shareholder DTT relief Anti-monopoly issues program caps Vote-splitting and exercise of voting rights Russian share registrar risks diminishing? Regulatory approval Unsponsored programs not required Sponsored programs required, and limited to 40% of any class of the issuers shares Emerging Issues
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  • 18 Miscellaneous Issues Miscellaneous Issues Exxon Capital A/B Exchange Offers Sophistication of in-house counsel Emerging Issues
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  • 2nd Annual Russian Financial Markets Conference QUESTIONS?QUESTIONS?
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  • w w w. r u s s i a n l a w s. c o m w w w. r u s s i a n l a w s. c o m w w w. l l g m. c o m w w w. l l g m. c o m