In the eight months since Lehman went bust, some of the
Euromarkets best-known faces have disappeared as banks
are forced to slash costs in a desperate response to plummeting
deal volumes and revenues.
Central and eastern European loan volumes for the first four
months of this year crumpled to $6.236 billion from $41.45
billion in the same period last year or compared to the $68.293
billion in the first four months of 2007, according to data
The bond market has fared slightly better, registering just
over $19 billion in the months through April this year, against
$24 billion in the same period last year. But even these
numbers pale when contrasted with the first four months of
2007, when $41 billion was issued by central and eastern
European (CEE) borrowers.
Its the same as elsewhere in the markets: there
is not enough dealflow to go around, and banks are under huge
pressure to reduce their cost bases, says the head of
syndicated loans at a European bank in London.
Shapes and sizes
Teams were built on models that assumed a regular dealflow.
But that dealflow has fallen off a cliff but we are still
left with these teams which start to become incredibly
expensive with no revenues coming in through the door, he
says. Its bloody and unfortunate but we have to
adapt to the new era.
The question is how this new era will shape
central and eastern European debt capital markets
Senior bankers have had little choice but to act. When
we were reviewing our strategy for 2009 we were obviously
looking at where we should cut costs, says the head of
debt capital markets (DCM) at a prominent global bank in
He says that Russia and central Europe took the brunt of the
chop, since deal volumes had fallen sharply and are expected to
remain low. Along with many others we were over-staffed
and over-exposed, he says, although he notes that his
firm held back from cutting headcount in the Middle East.
The encouraging flow of bond deals so far this year from
[that region] indicates we made the right decision.
And while central and eastern Europe remain a key market for
many banks, most bankers do not expect to grow their region
teams. We are committed to the region, and we will
certainly maintain our corporate and investment banking teams,
for example in Moscow, says the head of DCM. But on
the DCM side we are not expecting to enlarge our team over the
next two years. We do not expect the dealflow to pick up enough
to grow that team.
Teams are likely to be cut back permanently relative to the
boom years of 200607, even though most firms will
continue to operate in the region and have staff on the ground
in places such as Moscow as well as dedicated EM specialists in
While central and eastern European capital markets is
not becoming an after-thought for western banks, in many cases
it is becoming less important, says one senior capital
Teams covering the region really dont have to be
that big any more. Even the banks that want to dominate the
business dont need more than six or eight people in the
DCM team. And those smaller houses really dont need more
than two to three people on the origination side. As for
syndicate well, an EM syndicate specialist is really
becoming a bit of a luxury.
Changing of the guard
The emerging market bond syndicate community in London has
been especially hard hit. Deutsche Bank, Citi, UBS and Merrill
Lynch in recent months have all begun ditching their EM
syndicate specialists. Other houses such as Credit Suisse and
JP Morgan have persuaded their EM syndicate bankers to switch
their focus to the European corporate sector. This is partly a
reaction to the dearth of dealflow in central and eastern
Europe but also a way to bolster their western European
investment grade corporate businesses which are having
Others, who have seen their EM syndicate specialists leave
voluntarily, have chosen not to replace the position, instead
sharing the workload around the syndicate team. CEE loans
bankers are also falling in number.
The big bet
For the banks that have stuck with the region, Russia
with its enormous financing needs spread across banking, oil
and gas, telecoms, metals and mining and retail sectors
remains the main focus, despite the turmoil that has beset its
markets and economy since September. In contrast, Kazakhstan
and Ukraine, having fallen foul of the credit crisis, are not
expected to concern primary market bond and loan bankers in the
Russia is fundamentally important: natural resources
and size make it a must for most financial institutions,
says Christopher Marks, head of debt capital markets, EMEA
(Europe, Middle East and Africa), at BNP Paribas.
There are of course obstacles but this is the country
where we can expect a large volume of business to come
there are a lot of names to work with. We think the top tier of
banks should be in a position to issue successful bonds. Oil
and gas companies will get a decent reception.
The international loan market in Russia remains largely
frozen, despite signs recently of a tentative thaw for some
bigger borrowers. Lukoil is planning a $750 million syndicated
loan, reduced from $1 billion; TNK BP is looking for $315
million pre-export financing; and MTS, the telecom company, is
planning to refinance $630 million of a multi-maturity $1.3
billion loan that its 13 bookrunners hope to launch into
general syndication later this year, in what would be the first
retail phase in Russia since the Lehman collapse last
But most observers say this cluster of activity does not
represent the beginnings of a concerted recovery for the
market, despite the fact that loan facilities pay much higher
margins and fees than two years ago.
Instead, central and eastern Europe is likely to see bonds
replacing syndicated loans as the key funding tool for
companies, a trend seen in western Europe this year. We
may well be seeing a permanent shift in the way companies are
looking to raise their money, says Mike Elliff, managing
director and head of CEEMEA (Central Eastern European, Middle
East and Africa) debt origination in London.
Indeed, for Russia, many are placing their faith in the
bonds whether new financings or liability
Loans had long been the first choice of product for most
borrowers, given the liquidity available in the bank market.
But since loan market capacity plummeted, many borrowers are
increasingly looking to diversify their funding more into the
bond market. Bonds might be more expensive than loans
were in the boom years, but the bond market has liquidity, and
there are signs that treasurers are now prepared to pay up for
it, says Elliff.
He says it wont be long before the market sees the
return of Russian corporates. There are now signs that it
is beginning to settle down.
Although spreads are still wide relative to pre-crisis
levels, they have fallen substantially from the highs reached
last year. Investors are willing to look at new deals again.
If other blue-chip corporates, particularly from the
energy sector, wanted to do deals, they probably could
although most dont want to pay the price that their
current CDS [credit default swap] and cash secondary levels
indicate, says Elliff.
Most potential issuers feel that spreads will have to
come down further still before they are tempted to issue again,
although with the potential remaining for a significant further
sell-off later this year, this is obviously a risky view to
Central Europe: capital markets
While Russia is providing some hope, the crisis has taken a
heavy toll on banker confidence in central Europe.
Rightly or wrongly, the market has a strong sense that
the central European region is on a challenging road to prompt
rehabilitation, says Marks at BNP Paribas. He notes the
fact that the region has seen four IMF packages for
Hungary, Latvia, Romania and Poland.
While these are only positive for confidence, there is
lots of negative noise and misinformation coming out of the
region. This has helped to create the impression that the
region is structurally complicated, with little differentiation
across countries, making it is a much tougher place for capital
markets teams to operate in, he says.
Another problem for many capital markets teams focused on
central Europe is that it lacks a critical mass of regular
borrowers to justify dedicated coverage.
Many of the countries have small consumer-driven economies
compared to Russia and western European countries, no
big commodity businesses to speak of. Moreover, the issuers
that tap the capital markets with the possible
exceptions of Czech energy firm, Cez and the Hungarian gas
company, Mol do so irregularly, which means that cherry
picking mandates has become a popular strategy for many of the
big investment banks.
Nevertheless, several sovereign bond mandates from central
Europe are likely on their way as governments look to shore up
their balance sheets. Croatia is expected first and Serbia,
Montenegro, Macedonia and Bosnia are understood to be
considering issuing bonds.
The investor community has decided to look at risk
again, including sovereign credits from central and eastern
Europe, says Marks. Sovereign bonds are the first
sign of recovery for the region, at least as far as the markets
concerned. Their funding requirements are obvious. The next
step after the sovereigns will be the top corporates
utilities probably who will be able to launch deals but
at a generous spread.
But while the bond market is showing signs of a resurgence,
the central European loan market is expected to remain quiet
for the foreseeable future balance sheets will remain
tight not only because banks are trying to defend and improve
their capital but also because there is a lack of ancillary
business on offer.
Whereas in Russia the big corporates might be able to offer
three or four separate product lines on the back of a
syndicated loan, bankers say many companies in central Europe
cannot offer much else apart from fees and the margin on the
Patrick Butler, RZB board member responsible for investment
banking, treasury and global markets, says the negative
sentiment on central and eastern Europe is ill-deserved.
The picture is not nearly as black as people are
painting it. The main problem is not irresponsible borrowers or
over-stretched lenders but the level of short-dated
indebtedness that the region has coming up. Its a
refinancing issue, he says.
He makes the point that the loan market while much
reduced remains open. Every bank is more cautious
than they were this is true all over the world. But what
is not true is that there has been a complete shut down of the
credit markets for central and eastern Europe.
Those whose central and eastern European businesses were
something of an add-on are reviewing their options, and some
are exiting the business completely. But those banks still in a
position to lend will still do so, he says, adding, For
banks like us, central Europe is in our genetic code and we
will remain committed to the market.