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

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Presentation on theme: "Current Issues in Russian Securities Offerings May 2004 Mark M. Banovich Moscow Office 2nd Annual Russian Financial Markets Conference."— Presentation transcript:

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

2 1 I.The Domestic Deal Pipeline II.The Cross-Border Deal Pipeline III.Emerging Issues Overview

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 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 bp  Factors affecting pipeline : Plus: October 2003 Moody’s increase of sovereign ceiling to investment grade : Minus: Uncertainty over fate of Yukos Cross-Border Pipeline

11 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 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

12 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 London’s differential advantage – if they are enforced

13 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

14 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

15 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

16 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

17 16  Bottom Line  London’s regulatory advantage may be eroding  London’s 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

18 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 issuer’s shares Emerging Issues

19 18 Miscellaneous Issues Miscellaneous Issues  Exxon Capital A/B Exchange Offers  Sophistication of in-house counsel Emerging Issues

20 2nd Annual Russian Financial Markets Conference QUESTIONS?QUESTIONS?

21 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


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