Q. You made you debt capital market debut earlier this year with the USD350mn participation loan notes – what was the rationale behind this transaction? Why did you go with this particular instrument and how did it help you achieve your goals?
A. There were a number of drivers for the transaction and why it took the shape of a Eurobond over comparable alternatives, particularly in the local market. Eurobonds allow us to secure longer tenors. As one of the largest private sector borrowers in Belarus, we are already heavily exposed to the local banking sector – but the tenors on that debt are shorter. We were also keen to hedge interest rate risk by transforming more of our debt portfolio into fixed-rate funding; following the Eurobond transaction, we were able to take the total proportion of fixed-rate debt vis-à-vis our overall stock of debt from 40% to 65%. One of the most important points is that Eurobonds offer the opportunity to generate unsecured financing, in contrast to what is available from local banks. More than 50% of our debt portfolio is unsecured following the Eurobond issuance.
We were also able to successfully diversify our sources of investment and our key credits, which is essential from a risk management perspective.
Our debut on the international capital markets was the first move in a longer-term journey, and we look forward to launching more transactions on the international capital markets in the years to come. We also want to ensure that existing shareholders and investors aren’t excluded from a potential IPO in the future, were that to happen.
Q. Was the pricing on the deal as you expected? How did you go about determining the price range seeing as it was the first corporate notes from Belarus?
A. We were lucky to have seen the sovereign bonds issued in months prior to our placement. In the absence of the sovereign benchmark, price discovery would have been much more challenging, so the sovereign paved the way for Eurotorg in an important way. We started with the sovereign bond yield curve as one of the key benchmarks, and we also used other single B credits and similar issuances from the CIS region as key pricing indicators – including transactions in Russia and Ukraine. Other factors that influenced pricing was the strong appetite for emerging market credits.
Pricing for the transaction was inside our initial pricing corridor, so it fit within our expectations – but because we were the first Belarussian corporate, we knew we had to pay a new issue premium, albeit a marginal one. Nevertheless, we are happy to see the bond performing very well in the secondaries, which suggest strong appetite for Eurotorg’s credit, and we are optimistic that when we return to the bond market in the future, we should see those benefits feed back into the pricing of new transactions.
Q. How did the recent return to the market of the sovereign issuer impact pricing and investor sentiment?
A. Those who invested in the sovereign bond made strong returns within a very short period, which certainly contributed to generating positive sentiment around the country and helped reduce some of the work that would have otherwise gone into educating investors on the country’s economic fundamentals. It gave us more time to focus on communicating our unique strategy and strong positive trajectory, rather than fielding questions about the country in a broad sense. It’s important to have as much time as possible to communicate your credit story, especially when you are making your debut, so it was very helpful.
Q. What are the kinds of challenges facing Belorussian corporate issuers looking to tap the debt markets? Do they have the regulatory clarity and DCM instruments at their disposal to successfully place Eurobonds?
A. The core challenges we faced are broadly similar to those faced by others in the CIS region and indeed a number of emerging markets more broadly. You need to be of a particular size and scale, and have a fairly high floor in terms of funding needs, to successfully tap the market. You need a clear investment story, and to demonstrate the company is being led by a capable management team. Some of the challenges Eurotorg faced may eventually ease for Belarussian corporates, as we were the first corporate to tap the cross-boarder market, and as the market develops further we are likely to see more corporate bond issuances – particularly from entities seeking long-term financing; but these challenges are likely to remain nevertheless.
The challenges also depend on the sector. We are fortunate that there is a wealth of research and information available to investors that allow them to benchmark companies like Eurotorg against food retailers globally, which makes it easier for them to understand the uniqueness of our strategy and the strength of our position in the market. This is not necessarily the case in other sectors, particularly because Belarus is not a widely covered by global investors – whether credit-focused or otherwise.
As far as legislation is concerned, we are of the view that there are no material barriers on issuing imposed by the regulatory framework.
Q. How is the retail sector likely to perform in 2018?
A. The retail sector has been very different since the 2007 credit crisis, and the biggest shift to have emerged is the growing tension between brick-and-mortar retailers and e-retailers. This is playing out in a very interesting way, particularly in the CIS, where e-retail is gaining acceptance in niche areas but not yet dominating; the model, in our view, is still immature for the mass market. The right model probably blends the best of both worlds – convenience and tangibility.