Russian commodities producers from OAO Lukoil to OAO Rosneft (ROSN) are feeling the squeeze from international sanctions as foreign banks cut lending to the lowest level since 2009.
Syndicated loans for Russian raw-material companies fell 82 percent in the first six months of 2014 from a year earlier to a five-year low of $3.5 billion, data compiled by Bloomberg show. The slump outpaced the 2 percent decline in global commodity borrowing to $344.2 billion.
Even as record-low interest rates allow European and U.S. companies to borrow more cheaply, HSBC Holdings Plc and other foreign banks have pulled back from certain deals in Russia since the European Union and U.S. imposed sanctions on allies of President Vladimir Putin, whom they accuse of spreading violence in neighboring Ukraine. Russian corporate borrowers have $191 billion in international debt payments coming due this year, or about 9.6 percent of the nation’s economic output.
“As soon as the events unfolded, the markets pulled back,” David Basra, head of financing for Europe, Middle East and Africa at Citigroup Inc. in London, said in a telephone interview June 30. “It may not be that you worried about the ability to repay the debt from cash flows, but if there are sanctions in place, in that environment, you just don’t want to go there.”
The EU and U.S. imposed sanctions after blaming Russia for instigating unrest in eastern Ukraine following its annexation of Crimea. The U.S. is working on the next round of economic penalties linked to technology in the oil and natural-gas industries, and the 28 EU states agreed on July 7 that they may expand the list of Russians facing sanctions as soon today.
Energy, metals and mineral exports account for about a third of Russian budget revenue, data from the Finance Ministry and the country’s customs service show.
HSBC and Lloyds Banking Group Plc pulled out of a loan last month backing an oil-supply deal between London-based BP (BP/) Plc and Moscow-based Rosneft, whose chief executive officer, Igor Sechin, is on the sanctions list even though the company isn’t. The EU is considering cuts to new project funding for Russia made by the European Bank for Reconstruction and Development and the European Investment Bank, two EU government officials said July 3. Russia received 1.8 billion euros ($2.45 billion) of investments from EBRD last year.
Across all industries in Russia, companies raised a combined $6.7 billion of syndicated loans in the first half, down from $26.1 billion a year earlier, data compiled by Bloomberg show. International bond sales by Russian companies plunged to $3.4 billion in the second quarter from $15.9 billion a year earlier, the data show.
There are signs lending may pick up. Yields on Russia’s April 2020 bonds are back to the pre-crisis levels after rising to the highest since October 2011 in April. Some Russian companies have come back to international markets, with OAO Gazprombank and OAO Sberbank selling euro-denominated bonds last month.
U.S. banks are less likely than European lenders to do deals in Russia, said Lizette van Haaren, head of loan syndicate at ABN Amro Bank NV. Bank of America Corp. joined two loans to Russian companies using methods that avoided publicity, people with knowledge of the loans said in May.
“The turning point of going back to normal is not reached yet,” Daniel Seregin, ABN Amro’s head of energy commodities for Commonwealth of the Independent States and West Africa, said by telephone from Amsterdam. “There was clearly progress made and the vibe is much more positive today despite the ongoing tensions. A few months of no bad news out of Ukraine will allow people to go back to business as usual.”
Commodity lending in Russia is dropping just as slumping prices force some of the world’s energy and mineral producers to halt expansion projects. Iron ore, the biggest revenue earner for top miners BHP Billiton Ltd. (BHP) and Rio Tinto Group, slipped into a bear market this year, and the Bloomberg Commodities Index of 22 raw materials is down 45 percent from its record in 2008. The index was little changed at 132.4134 at 11:09 a.m. in London. Citigroup Inc. says the supercycle in raw materials, which rallied for most of the past decade, has ended.
Loans to the world’s natural-resources companies fell from $351 billion in the first six months of 2013, data compiled by Bloomberg show. Last year included Glencore Plc (GLEN)’s $17.3 billion of revolving credit facilities, the largest loan ever for a commodity trader, and $14.2 billion raised by Rosneft. Compared with 2012, global loans are up 19 percent.
Across all industries, global lending rose 0.2 percent to $1.83 trillion, the data show. The figures compiled July 3 reflect transactions involving more than one bank and include credit lines, project or term loans and trade finance.
Many industries are taking advantage of low rates to refinance loans not due to mature for as long as 25 months away, Citigroup’s Basra said. The average interest banks charged for loans to commodity companies was 302 basis points, or 3.02 percentage points, more than benchmark lending rates in the first half, compared with 305 basis points in the same period a year earlier and 316 basis points in 2012, according to data compiled by Bloomberg.
Glencore chose to refinance its record loans after just a year to cut interest costs by as much as 30 basis points than the facilities it replaced. The company raised $15.3 billion in loans last month paying interest of 50 basis points, or 0.5 percentage point, more than benchmark rates for the one-year loan and 60 basis points on the five-year financing.
BHP got a $6 billion credit line in May and GDF Suez SA, France’s largest natural-gas distributor, obtained 5 billion euros in loans ($6.83 billion) in April. Mercuria Energy Group Ltd. borrowed $2.65 billion last month for general purposes and to help integration of JPMorgan’s commodities unit the company agreed to buy.
Raising loans or selling bonds is tough for Russian companies amid concern about sanctions, Leonid Fedun, Lukoil’s billionaire shareholder, said in an interview in Moscow last month. Russia’s largest private-sector oil company delayed the sale of $1.5 billion of bonds, plans to cut spending and is building a $30 billion cash pot to protect against disruptions in capital markets.
While Rosneft, Russia’s largest oil producer, was able to raise at least $1.5 billion in a pre-payment deal last month to supply crude oil and fuel to BP, it abandoned plans to seek a lower interest rate on the loan and cut its size from a targeted $5 billion in April.
OAO Uralkali (URKA), the biggest potash producer, is paying 175 basis points above the Libor on its $450 million loan raised in June. Metalloinvest Holding Co., the Russian iron-ore producer owned by billionaire Alisher Usmanov, got a $1.2 billion loan in March amid the Crimea crisis, and fertilizer maker OAO Acron raised $400 million in April.
Russian companies began the year seeking to extend the duration of loans and to cut debt costs, said ABN Amro’s Seregin. Instead, loans dried up while companies in other countries were able to cut costs as much as 30 percent, he said.
“Things changed since the tensions in Ukraine and annexation of Crimea,” Seregin said in a telephone interview July 7. “The market came to a standstill, and a number of deals were either postponed or canceled. There was limited to no activity for the last few months.”
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