Equity Capital Markets Overview

Elena Khisamova
Head of Equity Capital Markets
VTB Capital

Macroeconomic trends were improving and the markets looked up in the first quarter of 2010, prompting more equity capital market activity. At the same time, investors became more selective with their investments.

The first half of 2010 saw more offerings on equity capital markets than the whole of 2009. Furthermore, the year 2010 put an end to the hiatus in Russian initial public offering transactions — the RusAl IPO arranged in January became the first post-crisis IPO deal.

We believe that the dramatic increase both in the number of equity capital market transactions and their total volume in the first quarter of 2010 does not necessarily indicate a reversal to pre-crisis levels. However, our outlook for the second half of 2010 is generally positive.

Russian IPO/SPO transactions are on the rise, but many of them have veered from the path to successful closure. Has anything gone awry in the process?

Firstly, IPOs are often priced at the bottom or lowest part of the announced range — for instance, the FMCG company Russian Sea was priced at the bottom of its announced range, while the coal mining company KTK was priced at the bottom of its revised range in its initial public offering. Even one of the most successful deals this year, the IPO of pharmaceutical company Protek, was priced below the middle of the range. Sometimes issues are priced with a serious discount to guidance: For example, the Mechel issue of preferred shares was priced at $7.50 per American Depositary Receipt, representing a 26 percent discount to the previous day’s market close price of ordinary shares and a 50 percent discount to the price shown three weeks prior to pricing.

ECM Transactions, year-to-date
IssuerTotal deal size,
$ mln
United Co. RusAl (IPO)2,239
TMK (Convertible Bonds +
accelerated placement of GDRs)
413+62
Rosinter Restaurants (SPO)28
Eurasia Drilling (accelerated placement)227
Russian Sea (IPO)90
Cherkizovo Group (accelerated placement)63
Protek (IPO)400
LSR Group (SPO)398
KTK (IPO)167
Mechel (preferred shares)251

Secondly, for this year-to-date companies seem to be decreasing the volume of transactions by cutting the secondary part of the initial deal size. For instance, Russian Sea and KTK shareholders have reduced the secondary part more than twice at the IPO, as opposed to the initial plan.

Finally, several deals have been canceled, essentially because of the serious breakout of market volatility, caused by European sovereign debt problems. The market turmoil was the ultimate cause of adverse circumstances that effectively precluded the sugar producer Rusagro and fertilizer producer UralChem from going forward with its plans for an IPO. The struggle to attract investors to these deals has been apparent from very early on, with chatter around the deal making it clear that orders were not forthcoming. Also, when the issuers embarked on a series of road shows, the interest appeared rather lackluster and some days of the road shows were reportedly disappointing.

Nevertheless, current indications are that the macro situation for the second half of 2010 is looking up. Equity capital markets could become more accessible. Market players have a number of IPO/SPO projects in the pipeline, while foreign investors’ interest in emerging markets may be rekindled by the prospects of future growth.