Finansovy Direktor - May 15, 2008

Interview with RBC group’s General Director Yury Rovensky

Stock exchange bonds are still a novelty in the national legislation regarding securities. From now on, the stock exchanges have the right to register bond issues, thus making it somewhat easier for the issuers. The media holding RBC became the first company to place stock exchange bonds by public subscription on Micex.

- Yury, why did your company need to issue bonds?

- RBC plans to use the proceeds from the issue of stock exchange bonds to finance new acquisitions and refinance the company’s existing debt. Since nearly 60 percent of RBC’s EBITDA has traditionally fallen to the second half of the year, the refinancing of the company’s current debt will allow us to implement our investment program efficiently. It provides for acquisitions that we will try to make within the next three months. This is quite important, as the valuation of these assets will still be based on the 2007 performance figures. The prices for media companies are increasing on the media market, and, therefore, any company’s investment value - calculated on the basis of financial performance for the previous year - will be lower than this year’s valuation.

- What is the difference between simple bonds and stock exchange bonds?

- First of all, this instrument is more readily available, and the procedure for the issue’s registration has been simplified. When issuing stock exchange bonds, the company requires neither state registration of the issue, nor a report on the results of the issue. The stock exchange undertakes some of the organizational work: it registers the flotation and notifies the Federal Financial Markets Service on the matter. At the same time, I would like to point out the low expenditures (see the table on page 16- editor’s note).

One of the requirements for the issue is for the company to be placed in a quotation list, or, in other words, for the company’s shares to be traded on the same stock exchange at the time of the offering. The issuer of stock exchange bonds must be a public joint-stock company that has existed for at least three years. It should also have audited financial statements for the years 2004-2006, as well as a financial statement under IFRS for the same period. And finally, the maturity period of stock exchange bonds is one year, which is considerably less than that of traditional bonds. According to experts’ optimistic forecasts, the new instrument on the Russian market is likely to not only supplement credit notes issuing, but substitute it altogether.

With this in mind, stock exchange bonds are interesting for us primarily thanks to their ability to raise funds that we currently need.

- Were there any changes in the plans for the flotation, for instance a postponement of the dates, during the preparation for the issue?

- Yes. Originally, our company, just like other issuers, planned to issue stock exchange bonds at the end of 2007. At that moment, however, the liquidity situation on the market, which usually deteriorates by the year-end, was favorable, so we decided to postpone the issue until March 2008.

- Can you please say just a few words about the preparations procedure: what did you have to do, and what stages did you have to go through?

- In order to register stock exchange bonds, the company needs to select one of the stock exchanges on which it has a listing. We placed our bonds on Micex. One of the most time-consuming stages of the issue is putting together the securities prospectus and the decision to issue bonds. We prepared all the documents in cooperation with Alfa Bank, which got all the necessary approvals from Micex, on which the stock exchange bonds were to be placed. After the registration of the prospectus by the stock exchange and the decision to issue securities, stock exchange bonds are admitted to trading. The law on securities requires that all stock exchange bond certificates are kept in a depository that procures transactions resulting from deals with stock exchange bonds. In order to make the flotation of stock exchange bonds possible, we signed an agreement with the National Depository Center, which accepted our securities. Moreover, we opened a brokerage account with Alfa Bank, to which the proceeds from the offering were transferred.

At the same time, according to existing regulations, the company is expected to disclose information about all stages of the flotation. These announcements were published in the media and on the company’s website. We informed the business society about the decision to issue stock exchange bonds, of the approval of the decision and the securities prospectus, of the acceptance of stock exchange bonds to trading, of the launch date of the offering (five days prior to the actual flotation), of the fact of having floated securities, and, finally, of the setting of the coupon rate and the completion of the flotation.

- How do you estimate the results of the offering?

The conditions for our offering were quite favorable. Investor demand for our securities exceeded the announced volume of the issue many-fold. Due to this fact, we managed to bring the coupon rate during the auction down to 12.25 percent from the original 12.5 percent. Furthermore, thanks to using a hedging scheme with currency forwards, the interest rate on our debt denominated in dollars stood at roughly 9 percent, which at the moment is a nearly unattainable rate on the international market.

I would like to point out that RBC’s issue of stock exchange bonds had drawn significant interest not only among the Russian banks that are the key participants of the debt market. For the first time since the beginning of the crisis in August 2007, foreign investors participated in the flotation. Meanwhile, regional investors (primarily from the Northwestern region) also demonstrated moderate interest in securities.

- What could you recommend to other companies planning to issue bonds in the near future?

I would not be original and would like to wish the companies that take a chance and issue stock exchange bonds successful in this endeavor. This instrument is not just new for the market, but I believe it to be very interesting and full of great potential.

Summing up

Interview with Alfa Bank’s Director for debt capital market operations Alexander Kuznetsov

- Can a company increase the amount of the borrowing if the demand – as it was in the case of RBC – exceeds the volume of the offering?

- Unfortunately, this is impossible. If we were talking about Euro bonds, it would have been possible to change the volume of the issue. The Russian legislation, however, does not provide for this. RBC had its issue registered at RUB 1.5bn, which means that the company could not place more than this amount, only less than that. In reality, what happened? Investors placed bids specifying an interest rate which they found satisfactory: the rates ranged from 12, 12.25 to 12.5 percent. The overall investor demand exceeded the forecasted volume by 1.5 times. With this in mind, the issuer managed to decrease the coupon rate to 12.25 percent from the original 12.5 percent.

- Can we say that the coupon rate on RBC’s stock exchange bonds is profitable and the flotation a success?

- I would say yes, since the market has not really seen any offerings for a while. Meanwhile, in RBC’s case, we witnessed an actual bidding. Trading in bonds began on the next day after the flotation, and their rate edged up more than 0.2-0.3 percentage points. This means that the initial price was set correctly. Moreover, everything is relative. Before the crisis, the average rate on the market was several percent lower than at the time of our offering. If we floated bonds in August 2007, we could have hoped for a coupon rate of 9-9.5 percent. Unfortunately for us, however, conditional clause cannot be attributed to either offerings or stock exchange trade.

- What advantages does RBC get from entering into currency forward agreements?

- It is relatively simple. What is the idea of a forward contract? Borrowing one dollar at the current rate of RUB 23.5, you sign an agreement to sell it in one year, and you will receive RUB 24.5 at that time. This is an indicative rate for the end of the year. RBC converted the full amount of the borrowing into foreign currency and sold this currency under a forward contract at RUB 1 higher. By borrowing in rubles at the rate of 12.25 percent, in light of the current forward dollar exchange rate, RBC basically borrowed money at 9 percent.

Meanwhile, there is a certain degree of incongruence. At the moment, the dollar is steadily sinking on the currency market, and the supply exceeds the demand on the part of exporters. On the forward market, the futures market, however, the situation is just the opposite. Many foreign investors who have come to the Russian market at different times invested in the country’s economy in rubles. In the hopes of getting a return on their investments in one year, they prefer to take profit in foreign currency. As a result, we see their willingness to buy currency under forward contracts. Meanwhile, no one is offering U.S. dollars at the rate of RUB 23.5 on the futures market, as there are more buyers than sellers. RBC used all of these factors to its advantage. What is even more important, the company also benefited from the unique situation on the market.

- What made RBC’s stock exchange bonds attractive to investors, as the amount of the borrowing is not that big, thus limiting its liquidity?

- When we are talking about RBC, the company’s securities are basically no different than traditional one-year bonds. Investors may be interested in the instrument, as the bonds will be placed for secondary trading as early as the next day after the flotation. This is not very characteristic of traditional bonds, as the company must register a report on the results of the issue. Therefore, a board of directors needs to meet in order to make a resolution on the registration of such a report, submit the documents to the Federal Financial Markets Service, wait for the decision, prepare notary copies of all the documents, etc. This whole process can take up to two months. An investor purchasing bonds on the primary market is in a sense ‘putting the money to freeze’ for the same period of 1.5 months. Sometimes this is very risky. In the summer of 2007, for instance, investors who purchased securities were unable to sell them, despite the deteriorating situation on the market. Meanwhile, if you look at stock exchange bonds, all of the events happen on the stock exchange itself: the exchange registers the issue, admits stock exchange bonds to trade, thus avoiding all ‘freezes’ of investor money.

- What is the outlook for stock exchange bonds?

- I believe this instrument will liven up the market. The crises will be over, and positions on the bond market will start getting longer, since it is more efficient for companies to borrow money for long periods. The debt market will be split into two segments: a segment dominated by stock exchange bonds with a maturity period of up to a year, and a segment dominated by securities whose maturity exceeds one year. This is very convenient, as the company can switch to a different option at any time. If we look at the American market, commercial papers have a maturity period of 14 days, as the supply is enormous – several hundred offerings per day. For instance, the company’s treasurer sees that there is available ‘short’ money, balances on accounts, and considers it a good idea to make a small amount of interest on it. There is another category of investors – large players, such as funds similar to our mutual funds. Their contributors may decide to take out money at any time, so the funds keep a certain amount of all investments as a so-called ‘liquidity cushion.’ At the same time, Russian funds place money for these purposes only on deposits. It is important to point out that in Europe, stock exchange bonds have a longer maturity period than in the USA – about one month. Meanwhile, the first-ever stock exchange bonds in Russia were floated for a period of one year. I think the term of the borrowing for such instruments is most likely to shrink.