Capitals went into themselves – Newspaper Kommersant No. 171 (7372) of 09/16/2022

The business of investment banks, which collapsed along with the financial market after the introduction of anti-Russian sanctions in response to military operations in Ukraine, is starting to recover. The income from placement of corporate bonds was the first to return. The IPO and SPO market remains practically zero, but the players expect a gradual recovery in this segment as well, as well as a redistribution in their favor of the income of foreign competitors who left Russia.

From crisis to crisis

After a successful 2020-2021, Russian investment bankers were optimistic about the outlook for 2022 both in terms of deal numbers and fees. According to Refinitiv, in 2021 alone, the total reward from transactions with Russian issuers amounted to almost $434 million, the highest since 2013. Over the past three years, investment bankers have earned $1.28 billion, of which more than $0.5 billion came from VTB, Gazprombank (GPB) and Sberbank. Private banks and brokers, for example, Tinkoff, Finam, BCS, Freedom Finance, MKB and others, also actively developed this area.

The last days of February, with the outbreak of hostilities in Ukraine, radically changed the landscape of the Russian stock market, including investment banking services. Even sharper and tougher than in 2014, the external capital market turned out to be completely closed to Russian companies. For the first time, the largest banks fell under the sanctions. Under blocking – Sberbank, VTB, Alfa-Bank, Sovcombank, under limited – GPB, MKB.

At the same time, foreign (primarily American and European) investment banks, as well as other market participants, the “Big Three” of global rating agencies and the “Big Four” of auditors, curtailed relations with Russian banks and issuers. According to Sergei Airapetov, a partner at Aspring Capital investment bank, the changes have meant that “not a single Western investment bank can work with a Russian client, including those incorporated abroad.”

“Russian investment banks are trying to establish work with banking structures and other financial institutions from friendly jurisdictions,” says Denis Leonov, head of the debt capital markets department at BCS Global Markets. But access to the Asian markets is difficult due to the lack of the necessary infrastructure and interdepository relations. Therefore, the search for “friendly” banks can take a long time. “Hard currency restrictions are also a significant obstacle. A strong impetus for the development of the segment would be the placement of sovereign bonds of the Russian Federation, but such an event is still unlikely,” adds Mikhail Avtukhov, head of corporate investment business at Sovcombank.

Limited Edition Promotions

The most affected area of ​​the investment banking business was the equity capital market (ECM), which in the past two years brought in the most revenues: according to Refinitiv, $181 million in 2020 (the highest since 2011). In 2021, earnings fell to $157 million, but this is also quite a lot, the second result in ten years. Moreover, if until last year SPOs and accelerated share placements were mainly carried out, then in 2021 the role of IPOs has grown. At the end of the year, there were eight placements for $3.8 billion, the highest since 2011. In 2022, bankers were counting on at least a repeat of the result, and under an optimistic scenario, up to 30 IPOs and SPOs for more than $10 billion, the maximum volume since 2007 ($34.2 billion). Bankers could earn at least $200 million.

Market sentiment worsened back in January amid growing geopolitical tensions, and ECM was put to rest in the spring, after a series of sanctions and the collapse of the Russian market (the Moscow Exchange index lost almost 30% in the first quarter). Russian assets have become toxic to foreign investors, who played a key role in the IPO. “Issuers are accustomed to the fact that most of the demand was formed by large Western funds, this made it possible to carry out larger transactions,” says Evgeny Sokolsky, head of investment banking at BCS Global Markets. The same market factors cooled interest in investing in shares among local investors as well. Plus, many of their assets were blocked on NSD’s Euroclear accounts.

There have been periods of downtime before. So, in 2018, only three transactions for $0.3 billion took place, but already in 2019, the figure increased by more than an order of magnitude. Revival in the market is expected this time as well, although only in the future of several years. “In the third quarter, cautious talks began on preparations for an IPO in 2023 and transactions in 2024-2025,” said Alexei Kurasov, Head of Corporate Finance at FG Finam. Director of SPK Group Evgeny Penkin expects the first IPO in autumn. Yevgeny Sokolsky talks about deals worth $50-200 million.

Debts are more alive than all the living

In the second key segment of the IB market, debt (DCM), the recovery started earlier. With the outbreak of hostilities, it closed as quickly as the ECM. “Back in February, many foreign companies began postponing Russian events and cutting off contacts,” notes Mikhail Avtukhov. However, downtime on the domestic DCM lasted only two months, and in May it began to revive. In August, the total volume of placements reached 460 billion rubles, which is the fourth result in the entire history of the market in the Russian Federation. The recovery was facilitated, among other things, by the steps of the Central Bank to reduce the key rate, which by August returned to the level of the end of 2021.

But the market has seriously changed. First, the main activity is shown by the first echelon companies, which used to prefer to borrow abroad. Secondly, the yuan reigned supreme in the yuan market, which has raised its head in the last two months. Four large issuers – Rusal, Polyus, Metalloinvest, Rosneft – placed six issues for 25 billion CNY (more than 220 billion rubles). Significant were the first deals on the placement of bonds replacing Eurobonds blocked in Euroclear, which were carried out by PIK-Corporation, Sovcombank, Gazprom Capital.

Experts do not wait for the opening of the external borrowing market until the current crisis is completely over and the military conflict is de-escalated. But we are sure that this will not interfere with the development of internal DCM. “Many large companies are approaching refinancing terms, while borrowing rates have gone below the inflation rate and look attractive,” explains Pavel Vintin, director of investment banking services at Rosbank. According to Aleksey Kupriyanov, head of the Corporate Investment Business block at Sinara IB, the situation is most favorable for companies with a high credit rating that borrow almost on pre-crisis conditions: “For companies with a low rating, spreads and commissions are higher than in 2021, but bond yields are generally declining, so we expect growth in placements in the BBB+ segment and below.”

The key deterrents are the lack of long-term money from local investors, geopolitical risks, strategic uncertainty about the outlook for the economy and increased credit risks, especially in affected industries, Pavel Vintin believes. But the volume of the local market is sufficient to completely replace the external ones. “Residents keep more than $200 billion denominated in different currencies,” notes Mikhail Avtukhov.

Import substitution of owners

But there is also an IB direction that flourished during the crisis: this is the segment of mergers and acquisitions (M&A). According to AK&M estimates, in the first half of the year their volume reached $18.1 billion, up 5.6% year-on-year. “During periods of crisis, sellers become more accommodating,” Evgeny Sokolsky notes. But the current revival is directly related to the withdrawal of Western companies from the Russian Federation and the redistribution of assets among Russian businessmen, many of whom fell under sanctions, the sale of assets by those who leave the country. The main sellers, Maxim Filippov, a partner in the Investment and Capital Markets Department at Kept, are foreigners: “By the end of the year, 100–200 foreign subsidiaries may be sold. This will more or less fully compensate for the drop in the number of purely Russian transactions.”

An important driver for the growth of transactions was also the isolation of large capitals. According to Sergei Airapetov, there are dozens of buyers in Russia with tens and hundreds of billions of rubles to be distributed within the country. As Maxim Filippov notes, transactions are carried out according to an accelerated schedule and almost all are closed.

But not all banks can earn on this sale. Thus, credit institutions that have fallen under sanctions are cut off from transactions for the sale of assets of foreign companies. “Investment banks that are part of financial institutions that are on the SDN list work with Russian clients who have fewer or no operations abroad,” says Evgeny Penkin. However, a Kommersant source in the market claims that in the case of large transactions from 20 billion rubles. “foreigners can sometimes turn a blind eye to the financing of the transaction by banks from the SDN list.”

Partially falling incomes of Russian investment banks also compensate for the absence of foreign competitors who have left the market. “Only Russian players are now participating in the redistribution of the market, and non-sanctioned institutions have a certain advantage,” Evgeny Sokolsky notes. In 2021, JPMorgan Chase alone earned about $33 million in remuneration from consulting Russian business, and in general, foreign banks from the top 10 earned $141 million. Now their potential income, albeit in a smaller amount, will be distributed among local players.

Vitaly Gaidaev