Market Insights en-gb Fri, 20 Apr 2018 23:24:36 GMT 1842 Top Dealmaker: RenCap’s Dmitry Gladkov on Russian Corporate Issues and Ratings Boost Renaissance Capital has in the past two years overseen and participated in a significant volume of DCM deals out of Russia and the CIS, positioning itself as one of the top dealmakers for Russian corporates looking to tap the international markets. Dmitry Gladkov, the Global Head of Financing at Renaissance Capital, shares his assessment of the market and the bank’s role in it, as well as his vision of where the investment bank sees the biggest growth opportunities in the coming months. Despite recent volatility deal flow has been strong in 2018 20 Apr 2018 Russia & CIS Market Insights 57 Fri, 20 Apr 2018 14:31:07 GMT Renaissance Capital recently participated with a number of prominent issues out of Russia and the CIS, including Gazprom, PhosAgro, Polyus, Eurotorg and Rusal, among others. How would you assess the Russian corporate issuance pipeline this year? What is pricing like?

For Russia and the region, this has probably been the busiest first quarter for many years in terms of the volume and number of issues. Clearly, macro considerations and a certain view on how the Fed policy will develop played a part. Also notable is the fact that issuers this year are demonstrating a great tactical astuteness and skill, so even January alone we saw the likes of PhosAgro and Polyus completing very successful transactions that delivered either lowest cost of funding or a successful yield-curve extension or other milestones.

Corporate issuers have achieved what they set out as their targets at the end of last year, as the concept of a “window” became more blurred. That is to say, in the last few years, on the back of lower US rates, it was mostly assumed that you would have windows either open constantly or reappearing regularly. This year, with the benefit of hindsight – amid the worsening market conditions – coming to market in January was a good decision. The combination of inflows in EM portfolios, strong performance of EM as an asset class and strong demand for corporate credit really drove the deal flow out of the region, up until the recent period of volatility.

Over the past year we have seen a lot of corporates refinancing as rates were favourable. Another dominant theme were potential new sanctions, which many saw as the driver behind the winter deal flow; those fears mostly seem to have subsided, despite some individual sanctions coming through recently. Does that prolong the current window? What do you see as the dominant themes for the next 12 months?

The windows are driven by multiple factors – as for sanctions, I agree, to some extent, it prolongs the window, but it won’t be a defining factor. Some of the January issuances were driven to an extent by the wish to avoid some of the detailed sanctions, but also the broader unfavourable market backdrop those sanctions would entail. The worst case scenario didn’t materialize, but politics remain on investors’ radar, though at the beginning of the year we have seen that macro factors and rate dynamics have taken the upper hand.

The other factor, as you rightly pointed out, is refinancing – that was, notably, the main driver behind the PhosAgro placement. While those themes remain important, 2017 and Q1 2018 saw many of the names complete their refinancing activities and now many issuers have got as far as 2020 in maturities - whether Russian issuers, or CIS, like Kazakhstan Temir Zholy. It certainly allows these issuers to smooth out peak maturities; and also, they have done it in the positive market with comfortable yields, without exerting additional pressure on the secondaries or their own yield curve, which was important.

We are now in a healthier environment, in terms of leverage levels and public security, and we saw that feeding into the recent rating upgrades of corporates from the region. We’ve gone through a massive deleveraging stage for Russian original corporates, with a combination of deleveraging and extending maturities – something that as recently as five years ago was a major concern for investors.

How will these upgrades impact the pricing in the coming months? Many investors felt Russian corporates were undervalued, so what will be the price dynamic under the higher ratings? How will it impact demand?

It’s an interesting question. To a certain extent those upgrades have been priced in – look at PhosAgro for example: it’s hard to claim their notes are undervalued or are trading too wide. Some borderline IG/non-IG corporates have been trading relatively tight.

The actual credit rating upgrades also brought some of the new names or larger orders to the market. Gazprom is a recent example, where the upgrade came literally during the roadshow, opening up a whole new pocket of institutional investor demand and positively  influencing the pricing.

There is repricing still going on, evident from every new transaction out of Russia, but I would say the tightness in the levels for some of the names reflected the market already pricing in upgrades, based on the credit profile and debt levels decline. Now we have a slightly more difficult market and will need to find a balance between improving credit quality and demand in more challenging conditions with higher new issue premiums, even for great names.

What trends have you seen emerge in hard currency and local currency borrowing in the country in recent months? How will the CBR policy impact that? Where do you anticipate the biggest risks to come from for Russian fixed income this year?

The CBR is in an interesting position at the moment, with continued easing just as the US Fed speeds up the rate hikes. The domestic market has been going at full throttle last year and early this year, as the cost of rouble borrowing kept going down. The rouble remains the natural currency for a lot of Russian issuers; for some of them, the impediment in the past has been the high underlying rates, so as those declined, the rouble issues have boomed. Complimentary to the hard currency market activity, for a large number of names the local currency will still be prioritized to avoid currency mismatches. In terms of declining costs and transaction costs – the local market has been very competitive.

Having said that, domestic liquidity will not be limitless, even as it is a relatively deep market. For a number of names, going to international markets will become more competitive, particularly on the back of the ratings upgrade. Refinancing and liability management will still make sense for them over the next 12 months.

But, with the core drivers now being quite different – consider the mismatch between the Central Bank of Russia’s and the US Fed’s monetary policies – it would mean a smoother and more predictable domestic market, and the international market increasingly being subject to issuance windows and a constructive new issue premium environment. But in general, I expect issuers in both markets to be quite active.

Looking at the broader corporate plans, what are some of Renaissance Capital’s core strategic initiatives in the pipeline for 2018? Where do you see the biggest growth opportunities, in terms of geographies and sectors?

We see extensive opportunities across all our geographies. We remain specialized on frontier and emerging markets, that’s what differentiates us – delivering a focused view to our clients thanks to our unique geographic footprint and integrated product offering.

Russia and the CIS have been incredibly important over the last few years – looking at the recent corporate transactions, we’ve been on most of them; we played a leading role on pioneering deals such as the transaction for the USD300mn Georgia Capital bond, for example. One of the most successful deals last year for us was Eurotorg, the Belarussian retailer, which resonated with international investors.  Kazakhstan is another important geography that is now becoming more attractive in international capital markets.

Our Annual Russia Investor Conference, which was held this year jointly with the Moscow Exchange on 10-11 April, saw one of the highest turnouts in the past couple of years of both corporates and investors.  

Africa is also a key region of focus for us, where we see tremendous opportunity in both primary and secondary markets. We’ve led some of the African issues last year, including the Fidelity Bank and Viathan bond offerings out of Nigeria among others, and this year’s pipeline is pretty strong too. We have four offices in Sub-Saharan Africa - in Lagos, Nairobi, Johannesburg and Cape Town, as well as an office in Cairo due to open shortly. It is a broad footprint that creates a strong platform for our DCM activity in the region – those offices work as centres of execution and origination of transactions for respective sub-regions.

Secondary market activity has been encouraging – a lot of our investor client base has come into the African space that they haven’t participated in before. Our role here is to channel that interest and to help them achieve their goals on the continent. The Middle East is also on our focus map. 

Deals Currencies Global Russia & CIS
1840 SWOT Analysis: Nigeria, West Africa’s Largest Market In advance of our Bonds, Loans & Sukuk Nigeria 2018 conference and forthcoming special report on the region, Bonds & Loans met with a broad range of local finance leaders in order to get a sense of the risks and opportunities on the horizon. Elections, FX, and shift in government borrowing 19 Apr 2018 Africa Market Insights 44 Thu, 19 Apr 2018 10:23:03 GMT The below is a look at the strengths, weaknesses, opportunities and threats present in West Africa’s largest market over the next 12 months.

To learn more about our Bonds, Loans & Sukuk Nigeria 2018 (6 November 2018, Eko Hotel and Suites, Lagos, Nigeria), click here.


-          Appetite for Nigerian bonds remains strong in both local and international markets

-          The Government is prioritising new spending on large-scale infrastructure projects

-          Nigeria’s economy (and currency) has stabilised following a deep recession

-          Foreign exchange reserves are rising, aided by rising oil prices



-          High inflation and high interest rates continue to put pressure on the economy

-          Corporate governance issues are prevalent and remain largely unaddressed

-          Disparities between official and black-market exchange rates – with Nigeria operating a complex set of four major exchange windows



-          Nigerian government is committed to boosting market liquidity by issuing offshore bonds regularly

-          Corporates are starting to access local bond markets for funding

-          The government is mobilising pension funds to invest into infrastructure projects

-          Interest and opportunities in renewable and sustainable financing is high



-          Elections in 2019 could cause market volatilities

-          Government efforts for structural reforms may be derailed by the return to liquidity (driven by rising oil prices)

-          Monetary policy regulators’ initiatives to fully liberalise the currency are laboured and may not be moving fast enough

Macro Ratings Currencies Policy Africa
1839 CASE STUDY: Tajikistan Opens Floodgates and Makes Strong Debut with USD500mn Eurobond The Central Asian Republic saw 9x peak oversubscription and impressive yield tightening of nearly 900bp with its inaugural Eurobond transaction to source funds for the construction of the world’s tallest dam. The issue saw 9x peak oversubscription 18 Apr 2018 Russia & CIS Market Insights 57 Wed, 18 Apr 2018 17:41:11 GMT Background

In summer 2017 Tajikistan, the minute landlocked Central Asian republic was looking to kickstart the ambitious Rogun hydropower dam project. The dam, construction on which began back in the 1970s but halted at the fall of the Soviet Union due to lack of funding or resources – would at its completion become the largest in the world, have an installed capacity of 3,600MW and – its creators hope –supply electricity for the whole region.

The funding for the project has been sourced from different sources, at various stages of its development. Construction of the dam was suspended in August 2012 pending the World Bank assessment, and in 2010 Tajikistan launched an IPO to raise USD1.4bn to finish construction of the dam. By April 26 of that year the Tajik government had raised just USD184mn, enough for two years of construction.

However, following the coming on board of one of Italy’s most prominent and renouned construction firms, Salini Impregilo, the overall cost was set at USD3.9bn mark, and the Tajik government began to explore financing options, eventually deciding to tap the Eurobond market for the first time in its history with a USD500mn benchmark 10-year issue.

Transaction Breakdown

In September 2017 the Republic of Tajikistan took advantage of favourable market conditions to successfully price its debut Eurobond transaction ahead of a busy pipeline of other issuers targeting the autumn execution window.

Prior to announcing the transaction, Tajikistan carried out an intense 5-day roadshow in Zurich, London, Boston and New York, receiving positive feedback, with high degree of engagement from a large number of US and UK accounts.

The order book opened at on September 7 with IPTs at the 8% area, and already within the first 30 minutes it reached USD1bn. The bookbuilding momentum was sustained and at 13:50 CET the volume of orders exceeded USD3bn. A price guidance was released upon the US market open in the 7.50% area, with the deal size settling at USD500mn.

The orderbook reached peak orders of USD4.5bn, equating to 9x oversubscription, with overwhelming investor demand tightening the yield further to 7.125%. The granular final order book of over USD3.1bn (6.2x oversubscription), and comprised of almost 300 accounts, resulted in the placement of a USD500mn 10-year amortising deal.

The book saw fairly balanced distribution by geography: 38% of the notes were placed with US-based accounts, 35% went to Europe, 24% to the UK and the remaining 3% were picked up by Asian and Middle Eastern investors.

By type, the vast majority of the notes were snapped up by fund managers (85%), another 6% went to banks and private banks, and the remaining 9% - to hedge funds.

All of the proceeds will be used to finance the Rogun dam construction project, which is expected to have a ground-breaking effect on the country’s economy, as well as on the region more broadly.

Projects Deals Deal Case Studies Russia & CIS
1838 Colombia Sees Improving Internal, External Economic Conditions Colombia's Central Bank Governor Juan José Echavarría speaks with Bonds & Loans about the economy, interest rates, and blockchain. The BanRep chief is bullish on economic growth 17 Apr 2018 Colombia Market Insights 72 Tue, 17 Apr 2018 12:58:53 GMT The Colombian economy slowed more than expected in 2017 to growth rates not seen in a decade. What were some of the main drivers in play? And are you seeing more opportunities for a rebound in 2018? What are the biggest economic risks to Colombia in 2018?

The Colombian economy grew 1.8% in 2017, slightly below the growth figure for 2016, or 2.0%. This digit was close to the one forecasted by the Central Bank's technical staff months ago, 1.6%, and to the expectations by the majority of market analysts. The fall in the terms of trade since mid-2014 and the sharp slowdown or even contraction of the country's main trading partners in the region have been the most important reasons behind the slower growth of the economy in the last few years, including 2017. Additionally, the Colombian economy continued to face some adverse transitory supply shocks.

In 2017, the process of adjustment of expenditure continued after the huge negative shock to national income due to the fall of the international price of oil and other commodities exported by the country. While an increase in the terms of trade was reported in the same year, their levels remained significantly lower than those observed before 2014. Similarly, the adjustment of both public and private expenditure has taken place gradually in a less favorable external context. However, there has been a significant advance in this process, as suggested by the reduction of the external imbalance.

For 2018, the external and internal conditions are more favorable than in previous years, which allows to trust in an acceleration of growth. In its most recent projection, the technical staff of the Central Bank forecasts a growth figure of 2.7%, and considers that, within a stable international economic context, it may continue to improve and converge towards potential growth in coming years. On the one hand, the average of international oil prices would increase again compared to the previous year, even after considering any foreseeable correction on its level in the coming months. Additionally, the economies of the region begin to show signs of recovery, and advanced economies are at their best moment in the last ten years, which suggests that sectors such as non-traditional exports and services may gain momentum and help consolidate long-term growth. On the domestic front, the decline of inflation and the expansionary monetary policy should help to stimulate demand in the coming months. In addition, investment in civil works announced by the government will continue to contribute significantly to growth, as happened in 2017.

However, the possibility of a strong decline of oil prices by an excessive supply that may be deemed to be permanent may require greater and more prolonged adjustments in domestic spending besides those already foreseen. Likewise, the decisions on monetary, fiscal and trade policies that are being made in advanced economies must be considered. Particularly, those related to unforeseen changes in the Fed's benchmark interest rate could cause increases in the volatility of financial markets as well as in the risk perception of the economies of the region, increasing the costs of the sources of funding.

Commercial lending looks set to rise by more than triple the rate seen the previous year, according to Asobancaria's estimates. How do you see this impacting banking sector liquidity and entities' reliance on the capital markets?

Given that the observed nominal annual growth rate of the stock of commercial loans in 2017 was 3.3%, Asobancaria’s estimate for 2018, somewhere slightly below 10%, is still relatively low compared to the average of the last five years, 11.7%. As a consequence, an expansion of commercial credit of such magnitude should not have significant effects on the liquidity of banks, considering that the banking sector has enough liquid assets to finance this growth. This is supported by the analysis presented in Box 2 of the September 2017 Financial Stability Report of the Central Bank of Colombia, where it is shown that banks have enough capital and liquidity to support a greater growth of the total loan portfolio.

Regarding the reliance of financial entities on capital markets, Colombian banks traditionally have shown a relatively low dependence on this type of funding. As such, the impact of higher credit growth on capital markets should be small.

In January the Central Bank cut its benchmark rate in a narrow decision but called an end to its easing cycle, which lasted over a year, and has held rates steady since. Where do you anticipate rates heading in the medium term given the Bank's outlook on the economy?

The latest press release after the monetary policy meeting of the Board of Directors of the Central Bank announced that, facing the macroeconomic scenario under analysis and with the information available at the time, the Board considered that by reducing the benchmark interest rate to 4.5%, the cycle of rate reductions initiated in December 2016 had been completed.

Thus, future decisions on the benchmark interest rate will depend on the analysis of the risk balance, between the expected recovery of the economy along with the high levels of excess capacity, and the pace of convergence of inflation to its target. Should this balance not differ much from expectations, the rates would remain at their current level until new information indicates something different.

Blockchain is becoming increasingly popular with Banks and Financial Institutions, not only to support process efficiency but to also bolster transparency / data integrity, helping them meet evolving regulatory requirements. Do you see a role for blockchain among the country's FIs? What is the Colombian Central Bank doing in this area?

Cryptocurrencies, or virtual coins, are a digital asset whose value is highly volatile; therefore, it can generate huge profits or losses to its holders. This is why it is important for them to adequately understand the risks they face. Virtual currencies are not backed by physical assets nor by any central bank, so their exchange value could be drastically reduced in a short period of time.

The use of blockchain as a means of payment may generate some kind of disruption in the way financial services are provided. These risks can be heightened given the fragility in the value of cryptocurrencies, which could induce collapses of the prices of these assets. At the same time, there could be new risks and legal implications should they be allowed to operate together with the rest of the financial system. Particularly, they could induce greater instability in times of financial crisis by facilitating bank runs. Therefore, the regulation should look at competition issues, interoperability with intermediaries, and infrastructure of the financial system.

In Colombia, cryptocurrencies are not recognized as currency, and, therefore, they are not legal tender. Thus, it is not mandatory to receive it as a means to fulfill obligations. In other words, cryptocurrencies are not an asset equivalent to legal currency, neither recognized as foreign currency by the exchange rate regime. Consequently, they cannot be used in foreign exchange operations.

Macro Policy Americas
1837 Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead EM FX was mixed Friday, capping a mixed week as a whole. COP, CLP, and MXN were the best performers last week, while RUB, BRL, and TRY were the worst. While concerns about trade wars and Syrian missile strikes have ebbed, risks to EM remain elevated. US retail sales Monday and Fed Beige Book Wednesday are the economic highlights this week. Head of EM Strategy Win Thin on key data drivers this week 16 Apr 2018 Global Market Insights 55 Mon, 16 Apr 2018 16:51:49 GMT Indonesia reports March trade Monday. Bank Indonesia meets Thursday and is expected to keep rates steady at 4.25%. CPI rose 3.4% y/y in March, near the bottom of the 3-5% target range. As such, Bank Indonesia should be able to keep rates on hold for most of this year.

Turkey reports February IP Monday, which is expected to rise 10.4% y/y vs. 12% in January. The economy remains fairly robust even as inflation remains elevated, raising concerns about overheating. The central bank next meets April 25, and much will depend on the lira. If it remains under pressure, the bank may be forced to tighten.

Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. CPI will be reported over the weekend and is expected at 0.1% y/y, which is well below the 1-3% target range. The lack of any price pressures should allow the central bank to keep rates on hold this year.

Colombia reports February retail sales and IP Monday. The former is expected to rise 5.7% y/y and the latter by 1.4% y/y. It then reports February trade Friday. Officials are starting to get concerned about the strong peso and its impact on the economy. Next policy meeting is April 25, and rates are expected to be cut 25 bp to 4.25%.

Singapore reports March trade Tuesday. NODX are expected to rise 4.2% y/y vs. -5.9% in February. Last Friday, the MAS tightened policy modestly whilst voicing some concerns about the global trade outlook. We expect the MAS to proceed cautiously.

China reports March retail sales and IP as well as Q1 GDP Tuesday. GDP growth is expected to remain steady at 6.8% y/y, while sales and IP are expected to pick up slightly. For now, the economic outlook is one of stability.

Malaysia reports March CPI Wednesday, which is expected to rise 1.6% y/y vs. 1.4% in February. Although Bank Negara does not have an explicit inflation target, low price pressures should allow it to remain on hold for much of this year. Next policy meeting is May 10, rates are likely to be kept steady at 3.25%.

South Africa reports March CPI and February retail sales Wednesday. Inflation is expected at 4.1% y/y vs. 4.0% in February, while sales are expected to rise 3.0% y/y vs. 3.1% in January. Inflation is likely to remain in the bottom half of the 3-6% target range, which should allow for another 25 bp rate cut at the next SARB policy meeting May 24.

Poland reports March industrial and construction output as well as PPI Thursday. Real sector data is expected to slow from February, while PPI is expected to be flat y/y vs. -0.2% in February. The central bank tilted even more dovish last week, with Governor Glapinski talking about potential for a rate cut. For now, we see steady rates well into 2019.

Taiwan reports March export orders Friday. Regional indicators suggest activity has been slowing in Q1, and so the orders data will be watched closely. For now, low inflation and downside growth risks should keep the central bank on hold in 2018.

Brazil reports mid-April IPCA inflation Friday, which is expected to rise 2.84% y/y vs. 2.8% in mid-March. If so, inflation would remain near the bottom of the 2.5-6.5% target range. The central bank signaled that the easing cycle would likely end after one more cut. Next COPOM meeting is May 16, and markets are pricing in one final 25 bp cut to 6.25%.

Check out the EM Preview for the Week Ahead and other musings & insights on Emerging Markets at BBH’s “Mind on the Markets” blog.

Global Macro