Bank of America Corp. found a side door into a loan for a Russian bank last month to avoid publicity as tensions escalated in the Ukraine, according to four people with knowledge of the matter.
When the financing for Credit Bank of Moscow was announced in a March 27 statement, Bank of America wasn’t among the 17 lenders listed. The U.S. lender pulled out of the group before the deal was completed and rejoined after the announcement when the borrower increased the loan under a so-called accordion feature, said the people, who asked not to be identified because the information is private.
BofA’s actions underscore the predicament facing international lenders as they weigh the political and financial risks of maintaining relationships with Russian clients. The business generated more than $563 million in fees for foreign investment banks last year, according to data compiled by research firm Freeman & Co.
“It’s a dilemma for U.S. banks and it does put them in a hard place,” said Brian Gendreau, a finance professor at the University of Florida in Gainesville who also works as a market strategist for Los Angeles-based Cetera Financial Group Inc., which has about $100 billion in assets under administration. “Whether policy makers like it or not, Russia is fairly well integrated into the financial system.”
Alexandra Parry, a London-based spokeswoman for Bank of America, declined to comment on its participation in the loan. Nikita Likov, a spokesman for Credit Bank of Moscow, declined to comment on the facility.
BofA, the largest U.S. bank by assets after JPMorgan Chase & Co., had $5.2 billion of net exposure to Russia as of March 31, a decrease of $1.5 billion from the end of 2013, according to its first quarter earnings report. The firm’s risk was concentrated in oil and gas companies and commercial banks, according to the filing. Citigroup Inc. also reduced its Russian assets during the same period, down to $9.4 billion from $10.3 billion, according to a quarterly filing today.
“Russian intervention in the Ukraine during the first quarter of 2014 significantly increased geopolitical tensions in Central and Eastern Europe,” BofA said in a filing yesterday. “The situation remains fluid with potential for further escalation.”
Russian companies have agreed to almost $4 billion of loans with international lenders since President Vladimir Putin sent troops into the Crimea region in March, prompting U.S. and European sanctions and jet fighter patrols over the Baltic states.
Credit Bank of Moscow, a privately owned bank founded in 1992 and bought by Roman Avdeev two years later, raised almost $400 million and has the option to increase the loan to as much as $500 million, according to data compiled by Bloomberg. The lender exercised that right, Bloomberg data show, allowing BofA to join the group.
Frankfurt-based Commerzbank AG and ING Groep NV in Amsterdam coordinated the deal, which included New York-based firms Citigroup and Morgan Stanley among the original lenders.
Banks use the loan market to cement relationships with borrowers and help them win lucrative business such as advisory roles for acquisitions and share or bond sales. Credit Bank of Moscow said in March it’s considering an initial public offering in Moscow or London.
The bank also shunned publicity when it agreed to lend to Moscow-based Metalloinvest Holding Co., the iron ore business owned by Russia’s richest man Alisher Usmanov.
BofA joined the Metalloinvest deal at a junior level using what’s known as a global transfer certificate and asked for its name not to be disclosed, according to two people with knowledge of the matter, who asked not to be identified because the information is private. In this syndication process, existing banks on the deal transfer a portion of their own commitments to a new lender, according to the Loan Market Association’s website.
Deutsche Bank AG, based in Frankfurt, ING and Paris-based Societe Generale SA coordinated Metalloinvest’s loan, according to a March 31 statement. BofA wasn’t mentioned in the release.
A spokesman for Metalloinvest, who asked not to be identified citing company policy, declined to comment on the lenders in its loan facility. BofA’s Parry declined to comment on the deal.
“Based on current information, we intend to remain long-term players in Russia and Ukraine as these are defining moments for clients,” Adrian Simpson, U.K. head of corporate communications at ING, said by e-mail. The Dutch bank was the second-biggest arranger of syndicated loans to Russian companies in 2013 and is the top arranger this year, according to data compiled by Bloomberg.
Since the annexation of the Crimean peninsula in March at least six Russian borrowers have completed loans involving international banks, according to data compiled by Bloomberg. Phone company VimpelCom Ltd. obtained a $1.65 billion credit line, which can be increased to as much as $1.8 billion, while OAO GMK Norilsk Nickel, the world’s largest producer of the metal, agreed to borrow $750 million from international banks.
While banks are still extending credit to some Russian firms, foreign lending to the region has fallen as a result of the crisis. Companies have obtained $5.8 billion of dollar syndicated loans this year, compared with $22 billion in the same period of 2013, according to data compiled by Bloomberg.
The turmoil has increased the probability that Russia’s economy will enter a recession in the next 12 months to 50 percent, according to a survey of economists this week. The country may only expand 0.2 percent this year, Antonio Spilimbergo, the IMF’s mission chief for Russia, said April 30.
No public international bonds have been arranged since March, data compiled by Bloomberg show. The ruble is down 8.3 percent against the dollar this year, the second-worst among 24 emerging-market currencies tracked by Bloomberg.
Russian borrowing costs have increased, with the yield on government bonds maturing in February 2027 climbing 131 basis points since March 1 to 9.67 percent at 6 p.m. in Moscow.
“Russia might become a less attractive place to do business in,” said Thorsten Beck, professor of banking and finance at Cass Business School in London. “We will most likely see somewhat of a withdrawal of international banks from the markets.”
The White House has urged U.S. businesses to spurn Putin by skipping the annual St. Petersburg International Economic Forum later this month, saying their attendance would send an “inappropriate message.”
Citigroup’s Chief Executive Officer Michael Corbat had already withdrawn from the conference, opting to send lieutenants in his place, the company said last week. Goldman Sachs Group Inc.’s CEO Lloyd C. Blankfein, probably won’t attend, according to a person briefed on the matter, who asked for anonymity because the New York-based firm hasn’t made a final decision.
The unrest in eastern Ukraine has worsened this week as armed separatists seized buildings in more than 10 cities in eastern Ukraine. The U.S. and Europe accuse Russia of stoking turmoil in the country, and expanded sanctions against people and banks linked to Putin’s inner circles. The country’s largest banks and companies have avoided U.S. sanctions so far.
Investment banking fees to non-Russian firms increased to $563 million last year from $522 million in 2012, according to Freeman & Co. Banks earned $183 million from syndicated loan fees, the New York-based company estimates.
Russian companies raised about $50 billion of loans denominated in dollars last year compared with $40 billion the previous year, Bloomberg data show. Other firms that have discussed raising funds include Sibur Holding OJSC, OAO Novolipetsk Steel and the export unit of Russia’s nuclear company Rosatom Corp known as Tenex.
“I would expect the U.S. banks will start feeling squeamish about their businesses in Russia,” Cetera’s Gendreau said.