Principles of Syndication

27 february 2007 года
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Vremya Novostey,  February 27, 2007

We have shown that we are in a position to raise considerable funds at record-low rates”

The potential of such financial instruments as syndicated credits is becoming increasingly attractive both to banks and to borrowers. The volumes of the Russian syndicated credit market for financial institutions are on the steady rise: from 2004 to 2006 they more than doubled. The pluses of these financial instruments from the point of view of creditors are easy to understand: they help to reduce risks, diversify loan portfolio and achieve high profitability. But best practices in syndicated banking are just beginning to evolve.

Vnesheconombank is an active market maker in the syndicated market and it acts both as a creditor and a borrower. The fact that the Bank managed to attract syndicated credits twice became highly symbolic for the market: in July 2005, the Bank received a 500-million dollar credit and a year later – an 800-million dollar credit for a three-year period at LIBOR+0.35% per annum. Meanwhile, in 2006, the Bank participated in 8 syndicated credits and the total volume of its participation in these transactions exceeded 30 million US dollars.

Crucial issues relating to the development of syndicated credit market were dealt with at the corporate workshop “Syndicated Lending. Theory and Practice” organized by Vnesheconombank. Together with Vnesheconombank employees the workshop was attended by representatives of 20 Russian and foreign banks and law firms.

Representatives of Dresdner Kleinwort, Bank Austria Creditanstalt, Deutsche Bank, Raiffeisen Zentralbank Osterreich, Vneshtorgbank, as well as such law firms as Bаker&McKenzie and Salans gave master classes. Those who participated in the workshop said that while greater use of syndicated credit transactions is a highly promising and rapidly expanding line of business in Russia it is still hindered by the lack of practical experience in conducting transactions, the absence of special regulation and the limited number of syndicated market makers. Director of Vnesheconombank’s Financial Institutions Department Alexandr Zelenov told Vremya Novostey about the way the Russian syndicated lending sector is developing.

-- What are the special features of conducting syndicated lending transactions in Russia, is there an adequate legal and regulatory framework in this banking sector?

- In fact, there are some special features. There are no separate legislative acts to regulate the syndicated credit market. And in such legislative acts as, for example, the Civil Code these transactions are regulated indirectly as these acts set out only general requirements.

Normative regulation is rather contradictory. Here I mean discrepancies between Bank of Russia regulatory documents and the Loan Market Association’s standard credit documentation applied by foreign credit arrangers. As a consequence, the established standard practice in the Russian syndicated credit market is that agreements made are not fully in line with bank of Russia regulatory standards. And in their reports, foreign lawyers state that regulatory standards themselves are not binding.

In addition to the inadequate regulatory network as a special feature of the Russian syndicated credit market, I would also like to mention the absence of judicial practice, standard credit documentation and generally accepted business principles.

- Judging by the transactions made, Russia banks and companies prefer to attract syndicated credits from foreign syndicates and have foreign credit arrangers. What’s the reason for it? Is it because Russian financial institutions are not experienced enough?

- Nothing of the kind. Although Russian financial institutions haven’t been working in this banking sector for along time, they have acquired appropriate expertise in attracting syndicated credits both for Russian and CIS borrowers. As an example I’d like to mention transactions arranged by VTB, International Moscow Bank and the Bank of Moscow. Lately Vnesheconombank has become an active participant in syndicated credits.

Nevertheless, foreign banks are still in the lead of arranging syndicated credit transactions. The fact is that credit arrangers have the largest share of participation in syndicated credits. Foreign arrangers’ yields are relatively high and this allows them to participate in credits at a rate in excess of traditional ten percent of the credit amount.

Most Russian banks’ yields from participating in syndicated credits are rather low. And syndicated credits’ rates for such banks as Vnesheconombank, VTB (the Russian Bank of Foreign Trade) and Sberbank (the Russian Savings Bank) are so low as to make them unattractive to Russian banks even with commissions for arranging transactions. 

- What are the benefits of syndicated lending now that Russian banks do not have problem attracting credit resources from a single source?

- Application of maximum risk rates for one borrower or a group of tied borrowers as well as limits established by banks do not allow them to extend considerable funds to a single borrower and that was one of the reasons for the syndicated credit market to develop.

What’s more, in principle, it’s easier to attract one credit from 27 banks as Vnesheconombank did it in 2006 despite all the problems associated with this business than 27 separate credits for the same amount and expenses on attracting credits in the second case would be higher. It should be remembered that such a deal is made public. Bilateral credits tend to go unnoticed for a wide range of investors whereas syndicated credits are made public. In the course of syndication, credit arrangers and the borrower involve many creditors who in the end might not participate in the credit but they get to know the borrower better. That is why for many banks a syndicated credit is the first step towards issuing eurobonds and conducting IPO.

- How does Vnesheconombank see its role in promoting syndicated lending in the Russian market?

- In view of the fact that Vnesheconombank is soon to be transformed into a National Development Bank and, in fact, is already acting in this capacity, it sees its role as a chance to attract substantial financial recourses from foreign and maybe Russian banks and at the same time as a chance to make available credit resources to individual economic entities through extending credits to Russian financial institutions in the case that objectives of credits attracted by these banks are in line with Vnesheconombank’s objectives as a development bank.

I would like to emphasize that Vnesheconombank has shown that it is in a position to attract considerable funds at record-low rates. It was the first of Russian financial institutions to attract a syndicated credit with a margin of less than 100 basis points. Making special mention of the debut-syndicated credit, the well-known magazine Global Trade Review said it was the best transaction of the year 2006.

In 2006, Vnesheconombank continued to be successful in borrowing financial funds in the international market: in the agreement on a 800-million dollar syndicated credit signed in July 2006, the LIBOR rate was +0.35% per annum, at that time the rate was the lowest for Russian financial institutions especially taking into account increased risk insurance costs under Russian banks’ debt obligations. I hope that this transaction won’t go unnoticed in leading financial publications.  

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Finances for the Kyoto Protocol: Action Program

20 february 2007 года
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Rossiiskaya Gazeta, February 20, 2007

Climate change is a FACT that can’t be ignored any longer, especially in the view of projections about future climatic changes and their adverse consequences that have been causing mounting concern recently. VEB Deputy Chairman Alexei Smirnov told Rossiiskaya Gazeta about Vnesheconombank’s participation in implementing the Kyoto Protocol.

Rossiiskaya Gazeta (RG) Alexei, how is Vnesheconombank participating in this world project?

 Alexei Smirnov| In fact, the problem of global warming has become increasingly urgent lately. And it was no accident that it was discussed separately at the Davos Forum this year. We all witnessed the abnormally warm winter in Russia and various natural cataclysms throughout the world. The fact of ice sheet depletion in the Arctic Regions, Greenland and Antarctica has been established. Scientists are warning about catastrophic impacts of intensive ice thawing in these regions. These changes are directly linked to the build-up of greenhouse gases in the atmosphere as a result of human industrial activities.

To meet this challenge, the world community made a decision to commit itself to reducing carbon dioxide atmospheric emissions and this was stipulated in the Kyoto Protocol to the United Nations Framework Convention on Climate Change of December 11, 1997. The Protocol was signed by Russia on March 11, 1997 and ratified by the Russian Federation on November 4, 2004.

In 2006, the Government of the Russian Federation made a number of decisions to establish a register of carbon units and a system for the estimation of anthropogenic emissions from sources and absorption by absorbers of greenhouse gases. We have yet to adopt a number of regulatory and legislative acts related to the system of national inventory of general emissions register and to the procedure for a country of destination to approve projects carried out jointly with an investor country. Considering that full-scale emissions quota trading will start in 2008, we have to finish preparing legislative and regulatory network for Russia to participate in this trading.

RG | Why did Vnesheconombank undertake initiative to establish a mechanism to finance the Kyoto Protocol on the part of Russia?

Smirnov| This is one of Vnesheconombank’s toppriority tasks because it is of national interest to create an environment-friendly economy.

In our opinion, the right to trade quotas on greenhouse gases emissions should be exercised by the state. In this case, we’ll have to establish a financial mechanism and appoint a financial institution responsible for managing payments between sellers and buyers.

Judging objectively, Vnesheconombank is best suited for the said purposes; it is an agent for the Russian government in managing foreign debt and foreign financial assets. VEB is also a state trust management company responsible for managing pension savings funds.

Being aware of our responsibility, we got down to working out mechanisms for implementing the Kyoto Protocol even before it was ratified by the Russian Federation. We are working in close contact with specialists from such key ministries and departments as the Russian Ministry of Trade and Economic Development, the Russian Finance Ministry, Rosgidromet, the Russian Ministry of Industry and Energy and the Natural Resources Ministry.

Drawing on its multiyear experience of operating in the international market and its well-established ties with the largest western financial institutions, Vnesheconombank is studying thoroughly best practices of its partners in this line of banking business and taking practical steps to establish business contacts to implement mechanisms provided for by the Kyoto Protocol

In 2005, Vnesheconombank held a workshop for Russian and Austrian business circles within the framework of the financial and banking subgroup of the Russian-Austrian Intergovernmental Commission. The participants discussed a wide range of issues related to carrying out joint projects and reached a number of preliminary agreements. The workshop was praised highly by both the business community and government institutions of the two countries. 

Vnesheconombank also maintains business contacts with other countries keen on getting the Kyoto Protocol to function efficiently.

For example, KfW Bank, Germany’s largest state-run financial institution, is our reliable partner. The Carbon Fund was established on its basis and it is designed to encourage investment in projects to reduce CO2 emissions and promote the transfer of modern climate protection technologies.

KfW acts solely as a trust fund manager. The Bank makes in its own name and at the expense of companies and institutions incorporated in the Fund long-term agreements with sellers on purchasing emissions reductions units, with these units being purchased with respect to particular projects and for particular purchasers.

At present, we are preparing an agreement with KfW to jointly select projects that can be carried out within the Kyoto Protocol

RG|   And what about the situation in other countries?

Smirnov | The situation in France is somewhat different.  There, the Bank Caisse des Depots is formulating a concept of establishing a Carbon Fund for the French government. This concept provides for making a trading space available to conduct transactions including arbitration operations.

As we can see, there are different approaches and each country goes its own way and in our opinion we should explore practices of other countries adopt the best of them and work out an optimal option. It should be fully functional and efficient.

RG| Is it economically profitable for Russia, are we going to spend or manage to earn some money?

Smirnov Russia is sure to be a net-exporter of quotas as the Kyoto Protocol established acceptable emissions quotas at 1990 levels, and at the moment they are even much lower. On World Bank projections, reduction quota price for 1 ton of carbon dioxide may amount to 50 US dollars by 2020 and according to Russian independent experts’ estimates, volumes of emissions reductions and increased absorption of the greenhouse gases could amount to 30 to 100 million tons.

  RG|  We know that the US and Australia signed the Protocol but refused to ratify it.

Smirnov| The Americans have boycotted it so far. But there’s a hope that with Democrats in power, Washington will change its attitude to the Protocol. Natural disasters caused by the greenhouse effect affected the US territory very much. California’s agriculture alone has lost more than a billion dollars due to freak weather.

RG| What are your projections for the future?

Smirnovl There are some good prospects associated with the decision made by the President and the Russian government to establish a development institution in Russia. The draft law on establishing a development bank has been already submitted to the State Duma and our hope is that it would be passed in he first half of this year.

The Bank with an authorized capital of 70 billion rubles will finance Russian top-priority economic projects including environment protection and energy saving projects. At the moment Vnesheconombank has a portfolio of projects that can be authorized to be carried out using mechanisms provided for by the Kyoto Protocol.

Naturally, this portfolio will be transferred to the new bank, as well as its team of highly qualified specialists capable of evaluating these projects’ economic feasibility and assessing potential risks.

Thus, to our mind, the Bank for Foreign Economic Affairs and Development is best suited for implementing the Kyoto Protocol.

The Bank’s expertise in this banking sector, wide-ranging international ties, a great number of partner customers in the country, highly qualified personnel, and finally, its solid resource base demonstrate that it is best equipped to achieve the above mentioned purposes.

Interviewed by Vladimir Bogdanov
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