More Opportunities for Russian Issuers in 2008

Elena Khisamova Vice President, ECM Deutsche Bank
The positive dynamic of Russian ECM volumes over the past several years is a clear sign that the local market has entered a new phase of its development and become a stable source of long-term capital. No doubt, last year was one of the most important for Russian issuers, with 32 public offerings totaling about $30 billion (compared to 24 deals totaling $14.5 billion the previous year). The trend of domestic corporations' further expansion, both locally and internationally, and their growing demand for capital have actually become the preconditions for the further successful development of Russian capital markets. It is worth mentioning that Russia became the biggest foreign issuer on the London Stock Exchange in 2007.

The scope of the deals and the diversity of sectors represented in the list of Russian IPOs and secondary offerings might be illustrated by a number of landmark transactions closed last year.

Among those we saw VTB's IPO ($8 billion), the largest transaction in the Russian financial sector to date and the largest world IPO in 2007. The IPO of PIK Group ($1.9 billion) became Europe's largest-ever equity placement in the real estate sector. The Russian metals and mining sector saw Accelerated Book Build (ABB) of Norilsk Nickel ($2.1 billion). The parade of Russian issuers continued with AFI Development and LSR Group (real estate), Polymetal (metals and mining), Dixy Group and M.Video (both retail), OGK-2 (utilities), Bank of St. Petersburg (financial services) and many others.

Each deal played a unique role in the domestic market, and at the same time the importance of the Russian ECM deals became more visible on the international scene. A good example is Polymetal's placement: It is probably the biggest transaction of its kind in the world gold mining sector in the past 15 years. As for Bank of St. Petersburg's IPO, it should be mentioned that the deal took place in the fourth quarter of 2007 and became a clear indicator of investors' interest in the Russian banking sector despite highly volatile and unstable international markets. The sale's success is even more visible if we take into account that Bank of St. Petersburg entered the market after the giant Sberbank and VTB deals, proving again that the appetite for quality assets is very high.

The question is whether 2008 will see a new surge of Russian ECM. In my view, in the coming months we will see positive developments that will continue the previous years' trend. I expect more Russian companies from different sectors like transportation, infrastructure, machinery and financial services to go public. The above sectors are still lacking capital, while investors want to gain exposure to them.

Keeping in mind that debt financing has become much more expensive as a result of the liquidity crunch in the international markets, more and more companies are looking at equity capital markets as a source of long term financing.

While the Russian utilities sector continues to be on the investors' radar screen, the metals and mining sector is expected to play an active role in the Russian ECM given the global demand for natural resources. A good indication of the expected activities in this sector is Mechel's announcement of the planned IPO of its coal assets.

The timid start of 2008 was broken in late March with the announcement of a follow-on offering issued by Magnit, one of the biggest Russian retailers.

ECM activities look rosy for this year considering the fundamental factors of the domestic economy and its correlation with global markets. Ironically, the liquidity crises might even strengthen IPO trends in the Russian banking sector, depending, however, on how healthy the international investors' appetite for Russian financial services companies remains.

The key words in Russian IPOs for investors will be liquidity and diversification. The major "must-have" deals, similar to VTB and Rosneft IPOs in the past, will continue to attract the investment community, although smaller and medium-size transactions might be less attractive. The ECM deals will require more effort to make investors interested in a particular sector and equity story.

To be successful in the international markets, Russian issuers will have to demonstrate a clear strategy, sustainable growth of the company's business and a successful track record. These factors are playing an increasingly important role and will be the key elements in the potential investors' decision along with valuation.