2nd Annual Russian Financial Markets Conference
Current Issues
in
Russian Securities Offerings
May 2004
Mark M. Banovich
Moscow Office
Overview
I.
The Domestic Deal Pipeline
II. The Cross-Border Deal Pipeline
III. Emerging Issues
1
The Domestic Deal Pipeline
 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
2
Domestic Pipeline
 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
3
Domestic Pipeline
 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 oversubscribed

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
4
The Cross-Border Deal Pipeline
 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
 Higher multiples  Positive effect on share price
 Liquidity
 Acquisition currency
5
Cross-Border Pipeline
 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
6
Cross-Border Pipeline
 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)
7
Cross-Border Pipeline
 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
8
Cross-Border Pipeline
 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 Moody’s increase of
sovereign ceiling to investment grade
 Minus: Uncertainty over fate of Yukos
9
Cross-Border Pipeline
 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
10
Emerging Issues
 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
11
Emerging Issues
 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 principlesbased 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
12
Emerging Issues
 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
13
Emerging Issues
 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)
14
Emerging Issues
 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 timeintensive 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
15
Emerging Issues
 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.
16
Emerging Issues

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
17
Emerging Issues
 Miscellaneous Issues
 Exxon Capital A/B Exchange Offers
 Sophistication of in-house counsel
18
2nd Annual Russian Financial Markets Conference
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