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Uralkali shows the way through Russian loan minefield

29.09.2014
Dan Alderson / GlobalCapital (UK)

It has been a tough year for Russian borrowers  and could get even more challenging. But Uralkali has shown strength in the loan market and appears well positioned, having ridden out the worst of the potash price crash following its break-up of the Belarusian Potash Company cartel. Dan Alderson reports.

In June, with tensions mounting between Russia and the West, Uralkali managed to sign a $450m five year unsecured loan with banks. This was a debut unsecured club deal for the firm and bucked the trend of lenders pushing Russian borrowers to add strict pre-export finance (PXF) documentation or borrow at shorter tenors.

Uralkalis developed relationships with international banks was the decisive factor in getting the June deal done, according to chief financial officer Viktor Belyakov.

The company has a long track record of arranging syndicated loans and our strong credit history enabled us to structure and finalise this transaction on favourable terms, he says.

Uralkalis move to unsecured financing harked back to the progress the Russian loan market made at the end of 2013, before the Russia/Ukraine crisis. With no pricing difference between the unsecured and PXF financing that banks were willing to provide to high grade borrowers, unsecured financing became a more attractive way of raising funds, says Belyakov. It is also Uralkalis strategy to increase the portion of unsecured loans in its portfolio, he says.

But with many banks sitting on the sidelines of Russias loan market since the US and European Union began imposing sanctions in March, loans bankers began pushing for new deals to include tighter documentation to protect lenders from more sanctions.

Despite Uralkalis success, these mounting difficulties for Russian borrowers were evident, Belyakov concedes.

The main challenge we faced when negotiating this deal was the decreased number of players in the international loan market who were interested in taking on new business in Russia, he says. For example, if you look at our $1bn PXF in 2013, there were 14 banks involved. The number of banks participating in our $450m deal is substantially lower. Taking into consideration the realities of the current market, we decided to focus on the main banks with which we have good relations.

Just five banks  Commerzbank, ING, Nordea, Societe Generale, Rosbank and UniCredit  provided the financing, with RBS notably dropping out as a mandated lead arranger from what was initially launched as a $500m PXF in February.

But Uralkali paid a 175bp margin on the deal, which one banker close to the transaction recalls as one of the cheapest Russian loans in the market this year. And its five year tenor flew in the face of warnings that same week from capital markets bankers that Russian borrowers would find it tough to sign tenors of more than one or two years.

This result put the effective interest rate for Uralkalis whole credit portfolio at 3.6% at the end of June and its net debt at $3.9bn.

In August, however, Uralkali went closer to home to strengthen its credit portfolio further, signing a 10 year unsecured credit line agreement with Russias Promsvyazbank worth $250m.

But while its subsequent Promsvyazbank credit line gives Uralkali extra cushion, bankers say going to a local lender illustrates the waning optimism Russian borrowers have about future international funding. Rosneft and Lukoil also recently got first-time loans from Promsvyazbank after sanctions impeded their access to international lenders, but such deals probably mean much higher costs.

Its not ideal but Russian borrowers have to be adaptable with the market the way it is, says one London-based loans banker. Its better to lock in local funding at higher rates than risk failing with an international deal, which could hurt you next time you want to borrow.

With its financing agreements made, however, such concerns are unlikely to trouble Uralkali  especially given the more fundamental improvements it has seen in its underlying business this year.

Global potash sales recovered both in price and volume in the first half of the year, after sluggish buying in the second half of 2013. Sales rose 15% year-on-year to 33m tonnes, meaning full-year demand may exceed the 57m tonnes seen in 2011. That would set a new record, with increases expected in all major regions.

Potash prices tumbled last July after Uralkali unexpectedly broke up the Belarus cartel (domestic prices are down year-on-year from $257/mt to $156 and international down from $316 to $220). But while this has hit its profitability, prices have been heading higher from their low point.

Despite rumours that the cartel could reform, Uralkali has denied any talks have taken place. But the firm is more optimistic about its standing in the debt market. Uralkali will maintain its presence on the international loan market in the future, says Belyakov. We are a first-rate borrower with investment grade ratings. We continue to develop relationships with international banks and expect to enter into further deals on favourable terms in the coming years.

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