Ben Aris in Moscow
June 14, 2013
It should have been a fairly routine bit of work. VTB completed a sale of new shares on May 23 that raised RUB102.5bn ($3.3bn), which provided the Russian bank with some fresh financial firepower to continue its global expansion. However, this secondary public offering (SPO) was offered exclusively on the Russian stock market, a trial run for further such share issues now that President Vladimir Putin wants these to be done solely at home rather than abroad, part of the ongoing effort to develop Russia's capital market and turn Moscow into an international financial centre.
In the end, the trial run didn't go entirely smoothly – but that was the point. The first job of the SPO was to raise badly needed capital for the bank. But the more important job was to knock some of the corners off the legal system governing the whole business of SPOs in Russia, so that the newly merged stock exchange can be better used by all of Russia's companies looking to raise money.
Russia's capital market was linked into the international financial system at the start of this year. But as the first big equity transaction involving foreign investors - about half of the issue was bought by sovereign wealth funds from oil-rich Norway, Qatar and Azerbaijan, each of them making their first big investment in Russian equities - the VTB deal threw up a raft of technical problems.
The government launched a big reform effort to turn Moscow into an international financial centre in April 2008 and merged the main exchanges – the RTS and Micex – in 2011. The reform was made real in January when the Russian capital market was connected to the international settlement and clearing companies Euroclear and Clearstream. Foreign investors have rushed in, buying up some $20bn worth of state bonds since, but the equity market will only be included in the international settlement systems from next year at the earliest. VTB's SPO was a "wet run" partly designed to test the system. "It was a pioneering transaction," Herbert Moos, VTB's chief financial officer, says in an exclusive interview with bne. "All the shares sold were common ordinary shares paid for in Russian rubles with no GDR tranche, and there were many regulatory and financial infrastructure changes that were needed to make the deal possible for western investors."
One of the main hurdles is that trades in Russia are settled on a "T+0" basis. This means that investors have to deposit the cash to pay for shares with a bank ahead of the deal so that the trade can be settled immediately; in the West, "T+2" is more normal, where the buyer of stocks has up to two days to pay for their shares or else the deal is cancelled. "Investors are not comfortable with settlement system on the Moscow Exchange in the T+0 regime, but the exchange is changing its technology and in spring this year introduced pilot T+2 settlement cycle," says Moos.
The three aforementioned countries' sovereign wealth funds bought a majority of the shares, but according to Moos there were "hundreds of other funds that participated too," including many of the large institutional investors in places like London.
The deal is important, as these investors for the first time had to thrash through the Russian system: the devil is in the details, as the saying goes. "The law on pre-emptive rights imposes an impossible 45-days-long approval process, which exposes the investor to tremendous volatility," says Moos. "We were delighted that the Duma [parliament] reduced the period to eight days, so it is better than it used to be."
Moos says the work is far from over and VTB is continuing to lobby the Duma for more changes that will streamline the legal regime and make it more accommodating to potential investors' needs. For example, under current rules Russian pension funds are forced to report a profit each year, says Moos, which in effect forces them to buy bonds and puts equities out of bounds – a rule that VTB is lobbying to have relaxed. "I have a long list of things that we want to see changed," says Moos. "Half of the work is done, but there is still a lot more to do."
Investors that already own VTB's global depository receipts (GDR), a proxy share that is traded overseas, were nevertheless keen on the new share issue and accounted for over 60% of the purchases.
The issue was aimed at institutional and long-term investors in Russia. One group that was excluded were hedge funds, which had already been shorting VTB's stock ahead of the issue in anticipation of winning allotments of shares – allotments they didn't get. "Lots of hedge funds were shorting the stock going into the transaction that was driving the price down, but after the issue they had to close out their positions which pushed it back up again," says Moos.
The bank's focus on quality and attracting committed investors scored it several firsts with this issue. Amongst the sovereign funds was the Government Pension Fund of Norway with $500m. "These are very serious people and their due diligence on the bank took six months," says Moos. "I had to sit with them as they went through the books in detail. They don't make investments lightly and wouldn't invest unless they were satisfied. It was their first big investment into Russia."
Qatar's sovereign wealth fund also made its first big investment in Russia with $1bn, while Azerbaijan's new sovereign wealth fund likewise made its debut in Russia with a $500m investment. Together, the three funds bought 55% of the placement, existing investors bought 14% and the rest were new investors. China Construction Bank was also a big investor. "We have been working with [the Azerbaijani sovereign wealth fund] on a real estate investment in Moscow, their first investment, and they have a 20% allocation to Russia so they made a strategic decision to invest in us and become a business partner," says Moos.
It should be a good deal for these investors, as the stock was sold at a 9% discount to the closing price on the open market the day the book was closed (although the discount was actually 3.2%, as the bank decided to exclude the new shareholders from the dividend payout).
This will not be the last VTB offer, but the Russian government still has not decided how far it will go in the privatisation of the country's second-largest bank. After the SPO, the state's stake fell from 75.5% to 60.9%, but a roadmap for the bank's privatisation is under consideration at the moment and will be released soon, which is believed to call for the state to reduce its share to 50%+1 share by 2016. At that point, a second roadmap will be drawn up and only then will the state decide if it is going to sell off the bank completely or hang on to a majority share, says Moos.