Debt Capital Markets for Russian Borrowers

Henk Paardekooper, Country Executive

Russia-Netherlands Economic Forum

November 7-8, 2005

Amsterdam, Hilton Amsterdam

2

Russian outlook

Russian economic performance is strong and seems sustained: GDP growth in the 5% - 7% range, the

Government runs a budget surplus as well as a current account surplus, foreign exchange reserves are

rising and external debt is falling.

Fitch is the first rating agency who upgraded Russia to BBB and Moody’s has indicated it could follow

shortly

The economic outlook is favourable based on the assumption that there will not be a sharp fall in the oil

price.

In the longer term, economic stability will depend on the pace of economic reforms to boost the non-oil

economy.

Political stability has increased, improving policy making capability significantly.

Business remains concerned about reform in legislation, uncertain property rights, red tape, corruption,

the risk of rising Government interference in business and economy and the unstructured banking sector.

However, current investors in Russia are predominantly positive about their returns on investment and

most of them are increasing their operations.

The vast potential of Russia (size of the market, growth rates, high quality and competitive labour force)

should be better promoted!

3

Source: ABN AMRO

Rating obtained

Available for smaller issuers

Few major players

Some selective names

Evolution of the borrowing cycle in Russia

Small bilateral loans

Debut internationalbonds

Credit Linked Notes

Syndicatedloan facility

EMTN Program

Structured Bonds

Equity/IPO’s

1 Russian bond market trends

5

Market trends in emerging markets

Positive economic fundamentals in Emerging Markets

High inflows into EM funds over last two years

Source: Emerging Portfolio

New flows into dedicated EM funds

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

*

US

D b

ln

-1.1

-0.6

-0.1

0.4

0.9

1.4

1.91Q

01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

6

Russian bond market trends

Bond issuance volumes in Russia

International Russian bond issuance has grown dramatically

High volume and diversity of issuance expected to continue

0

5,000

10,000

15,000

2002 2003 2004 2005 (YTD)Issu

anc

e V

olum

e, U

SD

mln

0510152025303540

Num

ber

of

dea

ls

Issuance Volume Number of deals

Source: Dealogic Bondware as of 30.08.2005

7

Russian credit spreads remain at historically low levels driven by Russia’s stronger fundamentals

Russian bond market trends

Narrowing credit spreads

Source: ABN AMRO as of 30.08.2005

0

200

400

600

800

1,000

1,200

01/ 01/ 2002 01/ 01/ 2004

EMBI+ spread Russia spread 2002 2005

Russia RussiaS&P BB+ BBB-

Moody's Ba2 Baa3Fitch BB- BBB

2002 20042003 2005

Spr

ead

8

Spr

ead

Source: ABN AMRO as of 30.08.2005

Russian bond market trends

Spread development of Russian corporates

0

100

200

300

400

500

600

700

01/ 01/ 2004

VTB 6.875% '08

MTS 9.75% '08

GAZPROM 9.625% '13

Jul-05Jan-04 Jul-04 Jan-05

9

Energy and Banking sectors dominate but new names have been well received

Russian bond market trends

Issuance by industry type 2002-2004

34%

5%

5%38%

12%

6%

Finance

Metal & Steel

Mining

Oil & Gas

Telecommunications

Other

Source: Dealogic Bondware

10

Longer maturities reflect depth of market

Average size: 300 - 400 million USD

In terms of currency, the majority of issues are in USD

Source: Dealogic Bondware as of 30.08.2005

Russian bond market trends

Average issue size and maturity

0

200

400

600

2002 2003 2004 2005

Ave

rag

e Is

sue

Siz

e, U

SD

mln

2

3

4

5

6

7

Ave

rag

e M

atur

ity

Average issue size Average Maturity

800

EURO US Dollar

Issuance by currency

11

Investors can now participate in a wide credit spectrum

Russian bond market trends

Expansion of a bank and corporate yield curve

Russia Corporate Comparables (Yield basis)

Source: ABN AMRO as of 14.10.2005

4.500

4.750

5.000

5.250

5.500

5.750

6.000

6.250

6.500

6.750

7.000

7.250

7.500

7.750

8.000

8.250

8.500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Mod Dur

Yie

ld %

Sovereign Banks OG Industrial Telco Log. (Sovereign)

12

International bond markets vs local capital markets

International capital markets Local capital markets

Issuers First tier or few selected second tier issuers. Regional and municipal governments are still not allowed to borrow.

Available for first, second and third tier borrowers. The majority of borrowers are blue chips with RUR cash flows or large exporters. Issuers - corporate, governments, municipals

Investors European, US, Asian investors. Larger investor audience available.

Local investors, off shore investors with access to local bond market through foreign banks

Currency Any. The majority of deals - USD, EUR denominated. RUR

Minimum Issue Size USD 100 mln EUR 1 mln

Average Issue Size (USD equiv.) USD 300 mln USD 55 mln

Liquidity High Depends on specific issuer

Maturity Range 6 months - 30 Years 1 to 15 years

Listing/Trading Luxembourg or London Moscow, Saint Petersburg

Amount of documentation High High

Time needed prior to launch Generally 4-6 weeks for documentation 3-4 months for first tier borrowers

Cost Fees include rating fees, legal fees, trustee/paying agents/listing agents

Smaller fees, no rating requirements

Total bond market volume USD 40,678.991 bln (since 2000 to date; excl aries) USD 13 bln (since 2000 to date)

13

Prospects in the International Markets vs Local Bond Markets

There are distinct advantages to Russian companies available in the international bond markets, including:

– Relatively lower yields and longer tenors than the Rouble bond market and the international Credit Linked Note (CLN) market

– Deeper and more sophisticated investor pool

– Diversification away from higher cost and shorter dated Russian loan and bond markets

– Larger amounts, and longer tenors, can be raised on a per issuer basis

– Enables expansion of investor awareness thereby potentially enhancing future stock market valuation

– Greater secondary market liquidity, thereby enabling stronger secondary market performance reflecting improving company or market fundamentals

14

Main Requirements to Pursue an International Bond

Key Requirements for Russian companies to access the international bond markets, including:

– Two Year historical IFRS audited financial statements

– Listing on an international stock exchange (typically Luxembourg, London or Dublin)

– Establishment of a Special Purpose Company in a double taxation jurisdiction to reduce Russian Witholding Tax on interest payments

– Stock exchange compliant disclosure on company business description, transparancy in shareholder structure and corporate governance

– Offering Circular containing Company Description, Terms & Conditions, Investor

Restrictions, and various associated legal documents

– 3-5 day international investor roadshow to various Asian, European and US

investors

15

Eurobond versus Syndicated Loan

Company already known in the banking sector;

Amortizing structure;

Eurobond Capacity to raise large amount for long term;

Diversification of international investor base;

International awareness and publicity;

Usually standard eurobond covenants;

Highly standardized documentation;

Better liquidity - pricing

Pros Cons

Syndicated

Loan

Higher cost of funds; Inflexible with regards to

repayment; Satisfactory rating;

Limited maturity; Restrictive covenants;

2 Russian syndicated loan market trends

17

Bank market capacity for Russia credits has developed significantly

Source: Dealogic Loanware as of 30.08.2005

Loans by volume, 2002- 2005 (USD m)

Russian loan market trends

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,00012,00013,000

2002 2003 2004 2005

Issu

anc

e V

olum

e

0

20

40

60

80

100

120

140

Num

ber

of

dea

ls

Volume, USD m Number of transaction

14,00015,000

18

Russian loan market trends

Traditional Oil & Gas dominance with growing telecom, banking and metals and mining volumes The international market for regional and municipal borrowers is still not accessible

21.7%

41.5%

17.5%

8.0%

4.1%7.2%

Financial Institutions

Oil and Gas

Metals and Mining

Telecom

Transportation

Other

Transactions by industry, 2005

Source: Dealogic Loanware as of 30.08.2005

19

Bank liquidity demonstrated by growing size and falling margins

Reduction in margin is driven by:

– improved Sovereign rating– strong commodities prices– tough competition between banks

Loan Pricing trends

Russian loan market trends

Source: Dealogic Loanware as of 30.08.05

1 yearUSD 270 m

1 yearUSD 275 m

3 yearUSD 450 m

5 year SecUSD 500 m

5 year SecUSD 500 m 5 year Sec

USD 800 m5 year SecUSD 450 m

6 year SecUSD 1,100 m

6 year SecUSD 1,100 m

0

100

200

300

400

1H03 2H03 1H04 2H04 1Q05

Mar

gin

to L

ibor

VTB Rosneft Gazprom

3 Landmark transactions

21

23%

40%

35%

2%

Banks 23% Private Banks 40% Fund Managers35% Others 2%

27%

31%

42%

US 27% Asia 31% Europe 42%

Russian Standard Bank (Ba2/B+), US$500m 7.50% due October 2010

Issuer: Russian Standard Finance S.A.

Issuer Rating: B+/Ba2

Settlem ent Date: 07 October 2005

Issue Size: US$ 500mln

Coupon: 7.500%

Maturity: 07 October 2010

Spread: 5 Yr UST + 336bps

Form at: Reg S/144A

Transaction Details Distribution by Region

Distribution by Investor Type

ABN AMRO acted as a bookrunner for Russian

Standard Banks (“RSB’s”) second bond issue off its

US$1.5bln EMTN Programme on the 30th September

2005. This US$500mln 5 year eurobond was the largest

bond issue for RSB to date and also marks the largest

and longest dated bond issue for a private sector bank

from Russia.

After a focused and condensed two team international

roadshow visiting financial centers in Asia, Europe

and the US (organised by ABN AMRO), the orderbook

drew a final size of US$2.3bln (oversubscription of

>4.5x) with 209 accounts receiving allocations. The

strong book allowed RSB to increase the size of the

issue from US$300mln to US$500mln and to decrease

the pricing from an initial price guidance of 7 5/8% -

7/8% to 7.5%.

The new issue achieved a very broad geographical

distribution, Europe receiving 42%, Asia 31% and US

27%. Banks received 23%, Fund Managers 35%,

Private Banks 40% and others 2%.

The bond was accepted very well in the secondary

markets and traded up slightly at the day of issuance.

The issue established RSB as one of the most

frequent and sophisticated bond issuers out of

Russia.

22

12%

5%

12%

31%

25%

7%

8%

UK 31% Eastern Europe 25%

Asia 12% Switzerland 8%

Germ any 7% Greece 5%

Other 12%

Industry & Construction Bank (Ba1/B+), Lower Tier II, US$400m 6.20% due Sept. 2015 callable Oct. 2010

Issuer: Industry & Construction Bank

Issuer Rating: B+/Ba1

Settlem ent Date: 29 September 2005

Issue Size: US$ 400mln

Coupon: 6.200%

Maturity: 29 September 2015

Callable: October 1, 2010

Step-Up: 5 Yr UST + 150bps

Transaction Details Distribution by Region

Distribution by Investor Type

Following the successful debut bond issue for ICB in July

2005, ABN AMRO acted as a Joint Bookrunner for ICB’s

US$400mln Lower Tier II (“LTII”) subordinated LPN’s in

September 2005.

ICB’s LTII issue marks the third hybrid capital deal out of

Russia.

– Vneshtorgbank (US$750mln, 10NC5, Coupon: 6.315%)

– Sberbank (US$1,000mln, 10NC5, Coupon: 6.23%)

– ICB (US$400mln, 10NC5, Coupon: 6.20%)

With the success of the inaugural senior issue in mind,

investors immediately started to show interest in this

subordinated deal. Supported by a two day roadshow in

London, the book reached approx. US$850mln

(oversubscription of more than 2x).

Initial price guidance was set at 6.375% area on the 20th of

September, then revised downwards to 6.25% area on the

21st September and later that day moved to 6.20-6.25%. The

deal eventually priced at 6.20% on the 22nd of September,

making this the lowest coupon LTII deal out of Russia so

far.

Geographic distribution was UK 31%, Eastern Europe 25%,

Asia 12%, Switzerland 8%, Germany 7%, Greece 5% and

other 12%. By type of accounts, Banks 48%, Fund Managers

took 41%, Retail 8% and other 3%.

ABN AMRO was responsible for the documentation of this

bond issue and assisted ICB in its dialogue with the Central

Bank to receive Tier II capital approval.

23

Gazprom Intl. SA (BBB-/BBB-), USD 1.25bln, 7.201%, due 2020

Issuer: Gazprom Intl. SA

Rating: BBB-/BBB-

Issue Date: July 23, 2004

Issue Size: USD 1.25bln

Coupon: 7.201%

Maturity: February 1, 2020

Spread: UST 2012+299bps

Distribution by RegionTransaction Details

Distribution by Type

The transaction was the first ever future flow receivables-

backed international bond issue from the Former Soviet

Union. This allowed Gazprom to raise funds at almost

150bps savings to the secondary trading levels of its

unsecured bond curve. The offering marked Russia’s first ever issue with two

investment grade ratings, and was marketed to an

entirely new investor base of investment grade investors,

previously unable to buy Russian securities. With an

order book approaching USD 6.0bln across over 300

separate international investors, the transaction was

priced through initial price guidance and upsized to

achieve a transaction size of USD 1.25bln. The bond

attracted a wide audience of investors from Europe, the

US and Asia. The issue was priced at 299bps over UST Feb 2012

(equiv. to bond average life of 7.4yrs) producing

Gazprom’s all time lowest spread to date. The innovative

nature of the structure drove many first time buyers to

the Russian Federation and to Gazprom, specifically. The stable secondary trading performance after launch

exhibited ABN AMRO’s strong market making capacity.

ABN AMRO’s strong distribution network enabled

Gazprom to ever diversify its investor base across

Europe, the US and Asia.

24

Gazprom (Baa3/BB/BB-), EUR 1 bln, 5.875%, due 2015

On May 20, ABN AMRO acted as Joint Bookrunner for the highly

successful benchmark EUR1billion 5.875% 2015 bond offering for OJSC

Gazprom. The transaction has been structured as Loan Participation

Notes issued by Gaz Capital under Gazprom’s existing US$5bn EMTN

Program.

At the outset of the premarketing, Gazprom defined a particular

borrowing requirement of EUR1bn equivalent, with a stated desire to

establish a EUR benchmark. Given the volatile market conditions at the

time, the Joint Bookrunners advised Gazprom to pursue a dual tranche

EUR 10year and US$ 10year offering with the objective to reach the

defined borrowing requirement. Initial price guidance was defined at

6.0% area and 7.00% area, respectively.

When it became clear that there would be sufficiently large investor

appetite in either currency to meet Gazprom’s defined borrowing

requirement, Gazprom elected to pursue a EUR only offering.

The total EUR orderbook drew a final size of EUR4.28bn across over 275

international investors and allowed Gazprom to revise price guidance

from 6.00% area to a range of 5.75 to 6.00%. In the end, Gazprom was

able to price at 5.875% in the middle of the revised range. At the final

pricing the orderbook consisted of a total of EUR3.75bn in total orders

and allocations were made to 225 investors.

Gazprom’s EUR1bn benchmark offering was the first Russian EUR

offering in 2005, and nearly matches the US$1.425bn of total Russian

eurobond supply to date in 2005.

The new issue achieved a very broad geographical distribution, with

particularly strong diversification into new accounts from Europe, US,

and Asia.

Issuer: Gaz Capital

Rating: Baa3/BB/BB-

Issue Date: May 20, 2005

Issue Size: Eur 1 bln

Coupon: 5.875%

Maturity: June 1, 2015

Spread: DBR 2015+255bps

Distribution by RegionTransaction Details

Distribution by Type