Issuance of Eurobonds

Bank credit and Eurobond markets Horizon: Russia's premier financial advisor on Eurobond issues Horizon: Russia's premier advisor on Eurobond issues OAO Gazprom

For most Russian companies, Eurobonds represent a fundamental new instrument for raising financing resources.

Eurobonds are debt securities issued in a currency other than the issuer's national currency. Eurobonds are marketed by a syndicate of underwriters (foreign investment banks) and are placed among foreign investors for whom the currency of the issue is also, as a rule, a foreign currency. In accordance with the existing practice, Eurobonds are listed in the Luxemburg and Irish Stock Exchanges. However, most of the transactions with these instruments occur in the secondary market.

Bank credit and Eurobond markets

Bank credit market

• limited capacity
• tied credits
• source to provide short-term liquidity

Advantages of raising financing by way of a Eurobond issue

• Considerable market capacity
• diversifying sources of borrowings
• source for long-term investment resources
• access to a broad investor base
• establishing a credit history (the yield curve of the company's debt instruments)

Indicative modalities of the inaugural issue

Yield targets

Eurobonds of the Russian Federation

Eurobonds of the Regions

Corporate Eurobonds

With respect to an inaugural issue, investors expect the yields of corporate bonds to be at a level close to the yields of the Russian Federation Eurobonds with similar maturities plus a certain margin. The amount of margin includes a premium for the corporate risk that is higher than the sovereign risk and a discount for the inaugural issue.

Horizon: Russia's premier Financial Advisor on Eurobond issues

Tasks and actions

Acting as Financial Advisor, Horizon represents the interests of the issuer striving to ensure the most beneficial conditions for the client. In this capacity Horizon undertakes the following actions:

• Conducts negotiations with
  • Investment banks and their consultants
  • International ratings agencies and stock exchanges
  • The issuer's foreign legal council
• Takes part in the preparation of the following documents
• Offering Circular
• Legal documentation for the transaction
• Provides recommendations to the issuer regarding the most optimal conditions for the issue
• Arranges due diligence for the company
• Prepares investor presentation materials for the company's management roadshow

An entry into the Eurobond market requires disclosure of a considerable amount of information about the company's operations as well as IFRS financial reports for the last three years, audited by an international audit company.

In total, preparation of a Eurobond issue can take a period of 4 to 6 months.

Issuer costs

The issuer's costs and expenses can amount to about 1.5-2.5 percent of the size of the bond issue.

Program implementation benefits

• Gaining access to the international financial markets and a broad foreign investor base
• Obtaining needed medium-term financial resources at optimal prices
• Enhancing the company's debt instrument market capacity through increased liquidity

Horizon: Russia's premier Financial Advisor on Eurobond issues

In 2004, Horizon acted as Financial Advisor to OAO Gazprom on Eurobond borrowings.

In April 2002, Gazprom launched its inaugural issue. The transaction made it possible for the company to raise USD 500,000,000.00 in the international market. In the opinion of experts and analysts, the successful placement of Gazprom's Eurobonds had a positive impact on the borrowings of other Russian issuers: it provided a new yield benchmark that companies could strive for as they were preparing to access the market in 2002. Gazprom's 5-year Eurobonds were placed at face value with a 9.125% annual yield which at that time was only 90 basis points higher than the yields of the Russian sovereign Eurobonds with comparable maturities. After the 1998 crisis, no Russian issuer was able to borrow so much money at such a low yield level.

In November 2002, Gazprom successfully placed a 7-year Eurobond issue despite a highly difficult market environment. The placement of Eurobonds made it possible for Gazprom to generate proceeds in the international market in the amount of USD 500,000,000.00. Gazprom's Eurobonds were place at face value with a 10.5% annual yield and provided investors with a call option after 3 years of circulation. The institutional investment community welcomed the successful transaction. Experts pointed out that the modalities of the deal were quite acceptable for Gazprom in the context of the unfavorable market environment resulting from the Brazilian crisis. Almost 60 percent of the issue was placed with the managers of investment funds, 20 percent went to investment banks, including Russian banks, with the remaining instruments allocated to private investors.

However, the demand for Gazprom's 7-year Eurobonds was not fully satisfied as reflected, among other things, in the fact that after the placement their price in the secondary market went up by 70 basis points. In light of this, an additional tranche of Eurobonds in the amount of USD 200,000,000.00 was issued at a price higher that face value (100.625% to face value) which made it possible to reduce the yield of this transaction to 10.371% annually. The placement of the additional trance was determined by a high demand both from current and new investors who submitted their orders acting on their own cue. The total combined yield of the October issue went down to 10.463 percent.

Thus, in 2002, Horizon, as Gazprom's Financial Consultant, provided assistance to the company in generating funds in the international markets in the amount of USD 1.2 billion. The latest update of Horizon's activities in the Eurobond market can be found in the Events section.