On a crude volume judgement alone it would be easy to conclude that the global credit crisis has bypassed Russia entirely. According to Thomson Financial, in the first three months of the year, Russian firms signed loans worth more than US$18bn making the country the third largest market in Europe. Although this figure is lower than the year prior it is impressive given the collapse in the bond market and general fall in global lending.
The apparent resilience of volumes disguises a market that has changed dramatically in tone from a year previously. Most dramatically, with the weight of supply pushing down on capital constrained bank balance sheets, pricing has in many cases doubled. Moreover, when paying a higher price, Russian borrowers can no longer rely on a liquid market which meant last year that even the largest request for financing was filled with ease.
Despite these difficulties our panel at IFR’s first Russia and CIS loan market roundtable were optimistic. Given the swingeing effects of the global credit crisis that the market has been able to absorb the volumes it has this year is a testament to the resistance and flexibility of the loan product. This does not mean that pricing has plateaued. Buoyed by consistently high commodity prices, Russian corporates are now looking outside of their country’s borders for growth opportunities, which are by and large debt financed. This means demand in the loan market is unlikely to slow over the coming year and pricing will continue to reflect this surfeit of supply.
Our panel agreed that increased pricing is also being accompanied by a renewed assertiveness from banks that loan commitments, which are still priced below the traded products, must be accompanied by firm promises of ancillary business. Lending is by nature a relationship business and banks are no longer prepared to accept vague promises of “jam tomorrow”. Balance sheets are constrained and if a borrower wants access to capital they now have to pay for it and be able to offer meaningful side business opportunities. The days when lending banks were happy to put up large capital commitments and watch lucrative side business go to their investment banking brethren are now over.
For borrowers the new environment may seem harsh, but they are fortunate that they can still access capital. The loan market is open and providing large scale funds, while conditions in the other capital markets are treacherous at best. And while today’s difficulties may seem unfair to many who face higher costs without a perceptible change in their credit quality, a renewed focus on credit and return is likely to put the market on a more sustainable footing than the carefree and frothy days of the credit boom.
