Transcript Presentation title - FINAS:Next meeting

Debt Capital Markets for Russian Borrowers
Russia-Netherlands Economic Forum
November 7-8, 2005
Amsterdam, Hilton Amsterdam
Henk Paardekooper, Country Executive
Russian outlook


Russian economic performance is strong and seems sustained: GDP growth in the 5% - 7% range,
the Government runs a budget surplus as well as a current account surplus, foreign exchange
reserves are rising and external debt is falling.
Fitch is the first rating agency who upgraded Russia to BBB and Moody’s has indicated it could
follow shortly

The economic outlook is favourable based on the assumption that there will not be a sharp fall in
the oil price.

In the longer term, economic stability will depend on the pace of economic reforms to boost the nonoil economy.

Political stability has increased, improving policy making capability significantly.

Business remains concerned about reform in legislation, uncertain property rights, red tape,
corruption, the risk of rising Government interference in business and economy and the
unstructured banking sector.

However, current investors in Russia are predominantly positive about their returns on investment
and most of them are increasing their operations.

The vast potential of Russia (size of the market, growth rates, high quality and competitive labour
force) should be better promoted!
2
Evolution of the borrowing cycle in Russia
Rating obtained
Small
bilateral loans
Syndicated
loan facility
Credit Linked
Notes
Debut
international
bonds
Available
for smaller
issuers
EMTN
Program
Few major
players
Structured
Bonds
Equity/IPO’s
Some
selective
names
Source: ABN AMRO
3
1 Russian bond market trends
Market trends in emerging markets
New flows into dedicated EM funds
1.9
USD bln
1.4
0.9
0.4
-0.1
1Q05*
1Q05
3Q04
3Q04
1Q04
1Q04
3Q03
3Q03
1Q03
1Q03
3Q02
3Q02
1Q02
1Q02
3Q01
3Q01
-1.1
1Q01
1Q01
-0.6
Source: Emerging Portfolio

Positive economic fundamentals in Emerging Markets

High inflows into EM funds over last two years
5
Russian bond market trends
40
35
30
25
20
15
10
5
0
15,000
10,000
5,000
0
2002
2003
Issuance Volume
2004
Number of deals
Issuance Volume, USD mln
Bond issuance volumes in Russia
2005 (YTD)
Number of deals
Source: Dealogic Bondware as of 30.08.2005

International Russian bond issuance has grown dramatically

High volume and diversity of issuance expected to continue
6
Russian bond market trends
Narrowing credit spreads
1,200
EMBI+ spread
Russia spread
S&P
Moody's
Fitch
Spread
1,000
800
2002
Russia
BB+
Ba2
BB-
2005
Russia
BBBBaa3
BBB
600
400
200
0
0 1/ 0 1/ 2 0 0 2
2002
0 1/ 0 1/ 2 0 0 4
2003
2004
2005
Source: ABN AMRO as of 30.08.2005

Russian credit spreads remain at historically low levels driven by
Russia’s stronger fundamentals
7
Russian bond market trends
Spread development of Russian corporates
700
VTB 6.875% '08
600
MTS 9.75% '08
GAZPROM 9.625% '13
Spread
500
400
300
200
100
0
0 1/ 0 1/ 2 0 0 4
Jan-04
Jul-04
Jan-05
Jul-05
Source: ABN AMRO as of 30.08.2005
8
Russian bond market trends
Issuance by industry type 2002-2004
6%
12%
34%
5%
38%
Finance
Metal & Steel
Mining
Oil & Gas
Telecommunications
Other
5%
Source: Dealogic Bondware

Energy and Banking sectors dominate but new names have been well
received
9
Russian bond market trends
Issuance by currency
7
800
6
600
5
400
4
200
3
0
2
2002
2003
Average issue size
Average Maturity
Average Issue Size, USD mln
Average issue size and maturity
EURO
US Dollar
2004
2005
Average Maturity
Source: Dealogic Bondware as of 30.08.2005

Longer maturities reflect depth of market

Average size: 300 - 400 million USD

In terms of currency, the majority of issues are in USD
10
Russian bond market trends
Expansion of a bank and corporate yield curve
Russia Corporate Comparables (Yield basis)
8.500
8.250
8.000
7.750
7.500
7.250
Yield %
7.000
6.750
6.500
6.250
6.000
5.750
5.500
5.250
5.000
4.750
4.500
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Mod Dur
Sovereign
Banks
OG
Industrial
Telco
Log. (Sovereign)
Source: ABN AMRO as of 14.10.2005

Investors can now participate in a wide credit spectrum
11
International bond markets vs local capital
markets
Local capital markets
International capital markets
Issuers
First tier or few selected second tier issuers. Regional and
municipal governments are still not allowed to borrow.
Available for first, second and third tier borrowers. The majority of
borrowers are blue chips with RUR cash flows or large exporters.
Issuers - corporate, governments, municipals
Investors
European, US, Asian investors. Larger investor audience
available.
Local investors, off shore investors with access to local bond
market through foreign banks
Currency
Any. The majority of deals - USD, EUR denominated.
RUR
Minimum Issue Size
USD 100 mln
EUR 1 mln
Average Issue Size (USD equiv.)
USD 300 mln
USD 55 mln
Liquidity
High
Depends on specific issuer
Maturity Range
6 months - 30 Years
1 to 15 years
Listing/Trading
Luxembourg or London
Moscow, Saint Petersburg
Amount of documentation
High
High
Time needed prior to launch
Generally 4-6 weeks for documentation
3-4 months for first tier borrowers
Cost
Fees include rating fees, legal fees, trustee/paying
agents/listing agents
Smaller fees, no rating requirements
Total bond market volume
USD 40,678.991 bln (since 2000 to date; excl aries)
USD 13 bln (since 2000 to date)
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Prospects in the International Markets vs Local Bond
Markets

There are distinct advantages to Russian companies available in the
international bond markets, including:
– Relatively lower yields and longer tenors than the Rouble bond market and the
international Credit Linked Note (CLN) market
– Deeper and more sophisticated investor pool
– Diversification away from higher cost and shorter dated Russian loan and bond
markets
– Larger amounts, and longer tenors, can be raised on a per issuer basis
– Enables expansion of investor awareness thereby potentially enhancing future stock
market valuation
– Greater secondary market liquidity, thereby enabling stronger secondary market
performance reflecting improving company or market fundamentals
13
Main Requirements to Pursue an International Bond

Key Requirements for Russian companies to access the international bond
markets, including:
– Two Year historical IFRS audited financial statements
– Listing on an international stock exchange (typically Luxembourg, London or Dublin)
– Establishment of a Special Purpose Company in a double taxation jurisdiction to
reduce Russian Witholding Tax on interest payments
– Stock exchange compliant disclosure on company business
transparancy in shareholder structure and corporate governance
description,
– Offering Circular containing Company Description, Terms & Conditions, Investor
Restrictions, and various associated legal documents
– 3-5 day international investor roadshow to various Asian, European and US
investors
14
Eurobond versus Syndicated Loan
Pros
Eurobond






Syndicated
Loan


Cons
Capacity to raise large
amount for long term;
Diversification of
international investor base;
International awareness and
publicity;
Usually standard eurobond
covenants;
Highly standardized
documentation;
Better liquidity - pricing



Higher cost of funds;
Inflexible with regards to
repayment;
Satisfactory rating;
Company already known in
the banking sector;
Amortizing structure;


Limited maturity;
Restrictive covenants;
15
2 Russian syndicated loan market trends
Russian loan market trends
15,000
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
140
120
100
80
60
40
Number of deals
Issuance Volume
Loans by volume, 2002- 2005 (USD m)
20
0
2002
2003
Volume, USD m
2004
2005
Number of transaction
Source: Dealogic Loanware as of 30.08.2005

Bank market capacity for Russia credits has developed significantly
17
Russian loan market trends
Transactions by industry, 2005
7.2%
4.1%
21.7%
8.0%
Financial Institutions
Oil and Gas
Metals and Mining
Telecom
Transportation
Other
17.5%
41.5%
Source: Dealogic Loanware as of 30.08.2005


Traditional Oil & Gas dominance with growing telecom, banking and
metals and mining volumes
The international market for regional and municipal borrowers is still
not accessible
18
Russian loan market trends
Loan Pricing trends
Margin to Libor
400
300
5 year Sec
USD 500 m
5 year Sec
USD 500 m
5 year Sec
USD 450 m
200
5 year Sec
USD 800 m
6 year Sec
USD 1,100 m
1 year
USD 270 m
100
6 year Sec
USD 1,100 m
1 year
USD 275 m
3 year
USD 450 m
0
1H03
2H03
VTB
1H04
Rosneft
2H04
1Q05
Gazprom
Source: Dealogic Loanware as of 30.08.05

Bank liquidity demonstrated by growing size and falling margins

Reduction in margin is driven by:
– improved Sovereign rating
– strong commodities prices
– tough competition between banks
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3 Landmark transactions
Russian Standard Bank (Ba2/B+), US$500m 7.50% due
October 2010
Transaction Details
Issuer:
Issuer Rating:

Russian Standard
Finance S.A.
B+/Ba2
Settlem ent Date: 07 October 2005
Issue Size:
US$ 500mln
Coupon:
7.500%
Maturity:
07 October 2010
Spread:
5 Yr UST + 336bps
Form at:
Reg S/144A

ABN AMRO acted as a bookrunner for Russian
Standard Banks (“RSB’s”) second bond issue off its
US$1.5bln EMTN Programme on the 30th September
2005. This US$500mln 5 year eurobond was the largest
bond issue for RSB to date and also marks the largest
and longest dated bond issue for a private sector bank
from Russia.
After a focused and condensed two team international
roadshow visiting financial centers in Asia, Europe
and the US (organised by ABN AMRO), the orderbook
drew a final size of US$2.3bln (oversubscription of
>4.5x) with 209 accounts receiving allocations. The
strong book allowed RSB to increase the size of the
issue from US$300mln to US$500mln and to decrease
the pricing from an initial price guidance of 7 5/8% 7/8% to 7.5%.
Distribution by Region
27%
42%
31%
US 27%
Asia 31%
Europe 42%
Distribution by Investor Type
2%

The new issue achieved a very broad geographical
distribution, Europe receiving 42%, Asia 31% and US
27%. Banks received 23%, Fund Managers 35%,
Private Banks 40% and others 2%.

The bond was accepted very well in the secondary
markets and traded up slightly at the day of issuance.

The issue established RSB as one of the most
frequent and sophisticated bond issuers out of
Russia.
23%
35%
40%
Banks 23%
Private Banks 40%
Fund Managers35%
Others 2%
21
Industry & Construction Bank (Ba1/B+), Lower Tier II,
US$400m 6.20% due Sept. 2015 callable Oct. 2010
Following the successful debut bond issue for ICB in July
2005, ABN AMRO acted as a Joint Bookrunner for ICB’s
Industry &
US$400mln Lower Tier II (“LTII”) subordinated LPN’s in
Construction Bank
September 2005.
B+/Ba1
Transaction Details
Issuer:
Issuer Rating:
Distribution by Region
7%
5%
12%
8%
Settlem ent Date: 29 September 2005 ICB’s LTII issue marks the third hybrid capital deal out of
12%
Russia.
Issue Size:
US$ 400mln
Coupon:
6.200%
–
Vneshtorgbank (US$750mln, 10NC5, Coupon: 6.315%)
Maturity:
29 September 2015
–
Sberbank (US$1,000mln, 10NC5, Coupon: 6.23%)
Callable:
October 1, 2010
–
ICB (US$400mln, 10NC5, Coupon: 6.20%)
Step-Up:
5 Yr UST + 150bps With the success of the inaugural senior issue in mind,
investors immediately started to show interest in this
subordinated deal. Supported by a two day roadshow in
London,
the
book
reached
approx.
US$850mln
(oversubscription of more than 2x).
Initial price guidance was set at 6.375% area on the 20th of
September, then revised downwards to 6.25% area on the
21st September and later that day moved to 6.20-6.25%. The
deal eventually priced at 6.20% on the 22nd of September,
making this the lowest coupon LTII deal out of Russia so
far.
31%
25%
UK 31%
Eastern Europe 25%
Asia 12%
Switzerland 8%
Germany 7%
Greece 5%
Other 12%
Distribution by Investor Type
8%
41%
3%
Geographic distribution was UK 31%, Eastern Europe 25%,
Asia 12%, Switzerland 8%, Germany 7%, Greece 5% and
other 12%. By type of accounts, Banks 48%, Fund Managers
took 41%, Retail 8% and other 3%.
ABN AMRO was responsible for the documentation of this
bond issue and assisted ICB in its dialogue with the Central
Bank to receive Tier II capital approval.
48%
Banks 48%
Funds 41%
Retail 8%
Other 3%
22
Gazprom Intl. SA (BBB-/BBB-), USD 1.25bln, 7.201%,
due 2020
Transaction Details

The
transaction
was the
first
ever future
flow
Distribution by Region
receivables-backed international bond issue from the
Issuer:
Gazprom Intl. SA
Rating:
BBB-/BBB-
Issue Date:
July 23, 2004
Issue Size:
USD 1.25bln
Coupon:
7.201%
Maturity:
February 1, 2020
investment grade ratings, and was marketed to an
Spread:
UST 2012+299bps
entirely new investor base of investment grade
Former Soviet Union. This allowed Gazprom to raise
funds at almost 150bps savings to the secondary
trading levels of its unsecured bond curve.

The offering marked Russia’s first ever issue with two
investors, previously unable to buy Russian securities.
3% 3% 3%
2%
5%
1%
3%
66%
14%
US 66%
UK 14%
Non-Japan Asia 3%
Scandinavia 1%
transaction was priced through initial price guidance
Sw itzerland 5%
Germany&Austria 3%
Benelux 2%
Italy 3%
and upsized to achieve a transaction size of USD
Other 3%
With an order book approaching USD 6.0bln across
over
300
separate
international
investors,
the
1.25bln. The bond attracted a wide audience of
investors from Europe, the US and Asia.

The issue was priced at 299bps over UST Feb 2012
Distribution by Type
(equiv. to bond average life of 7.4yrs) producing
45%
Gazprom’s all time lowest spread to date. The
innovative nature of the structure drove many first time
11%
buyers to the Russian Federation and to Gazprom,
specifically.

21%
The stable secondary trading performance after launch
3%
exhibited ABN AMRO’s strong market making capacity.
ABN AMRO’s strong distribution network enabled
Gazprom to ever diversify its investor base across
Europe, the US and Asia.
20%
Fund Man.&Insur. Co's 45%
Bank 20%
Retail 3%
Hedge Funds 21%
Other 11%
23
Gazprom (Baa3/BB/BB-), EUR 1 bln, 5.875%, due 2015

Transaction Details
On May 20, ABN AMRO acted as Joint Bookrunner for the highly
Distribution by Region
successful benchmark EUR1billion 5.875% 2015 bond offering for
Issuer:
Gaz Capital
OJSC Gazprom.
Rating:
Baa3/BB/BB-
Participation Notes issued by Gaz Capital under Gazprom’s existing
Issue Date:
May 20, 2005
US$5bn EMTN Program.
Issue Size:
Eur 1 bln
Coupon:
5.875%
borrowing requirement of EUR1bn equivalent, with a stated desire to
Maturity:
June 1, 2015
establish a EUR benchmark. Given the volatile market conditions at
Spread:
DBR 2015+255bps
the time, the Joint Bookrunners advised Gazprom to pursue a dual

The transaction has been structured as Loan
15%
32%
23%
tranche EUR 10year and US$ 10year offering with the objective to
defined at 6.0% area and 7.00% area, respectively.

When it became clear that there would be sufficiently large investor
5%
4%
At the outset of the premarketing, Gazprom defined a particular
reach the defined borrowing requirement. Initial price guidance was
10%
11%
UK 32%
USA 23%
Germany 15%
Sw itzerland 11%
Other Europe 10%
Russia 5%
Asia 4%
appetite in either currency to meet Gazprom’s defined borrowing
requirement, Gazprom elected to pursue a EUR only offering.

The total EUR orderbook drew a final size of EUR4.28bn across over
Distribution by Type
275 international investors and allowed Gazprom to revise price
12%
guidance from 6.00% area to a range of 5.75 to 6.00%. In the end,
Gazprom was able to price at 5.875% in the middle of the revised
range.
3.7%
16.5%
At the final pricing the orderbook consisted of a total of
EUR3.75bn in total orders and allocations were made to 225
33%
investors.

Gazprom’s EUR1bn benchmark offering was the first Russian EUR
offering in 2005, and nearly matches the US$1.425bn of total Russian
eurobond supply to date in 2005.

The new issue achieved a very broad geographical distribution, with
particularly strong diversification into new accounts from Europe,
US, and Asia.
52%
Banks 15%
Asset Managers 52%
Retail 9%
Insurance / Pension Funds 12%
Hedge Funds 12%
24