VTB Capital: Putin's favourite bank ?

Financial News

September 22, 2009

By Jason Corcoran in Moscow

Russian markets bounce back after rollercoaster ride of a year 28 Sep 2009
VTB Capital can expect to be informally crowned Russia’s investment banking state champion by Prime Minister Vladimir Putin at its inaugural investor forum starting tomorrow in Moscow. It will be the first time the Russian leader has appeared at a brokerage event, underlining the rise of VTB Capital, which has become pivotal in managing the state’s interests since its launch a little over a year ago. Its parent, VTB Bank, is 77% owned by the Russian Government.

More than 300 international investors are scheduled to attend the “Russia Calling” forum, which is expected to feature a three-line whip of the Kremlin’s top brass and the country’s leading industrialists. Deputy Prime Minister Igor Sechin and Finance Minister Alexei Kudrin are scheduled to attend, along with oligarchs such as Oleg Deripaska.

In an interview with Financial News, global chief executive of VTB Capital Yuri Soloviev said Putin had demonstrated an active interest in the business. He said: “The Prime Minister has a domestic-focused portfolio, and so his perspective is an important component to any discussion of the Russian economy. Prime Minister Putin has confirmed his participation in the event and it will be the first time that he will have addressed and taken a role in such an investment forum.”

VTB Capital does not have the market dominance of an energy state champion such as Gazprom but it has made enough impact for sceptics to sit up and take notice.

The business was officially launched last September amid the collapse of Lehman Brothers, the US-Government backed bailout of insurer AIG and the destruction of confidence in global banking. Its parent had committed in the first half of last year to spend $500m (€341m) over three years in building the investment banking business. At the time of its launch, the heads of Moscow’s largest brokerages were privately scornful that a Kremlin-sponsored investment bank could prosper in a highly competitive market.

However, the global credit crisis has since wreaked havoc on the Russian investment banking landscape, forcing market leaders Renaissance Capital and Troika Dialog to cede sizeable stakes to stay afloat, while KIT Finance and other banks have been effectively nationalised. Meanwhile, state-controlled financial institutions such as VTB, Sberbank and Gazprombank have come to the fore as lifeboats for cash-strapped oligarchs and indebted corporates.

Soloviev accepted the importance of his operation’s relationship with the state and its luck in escaping the brunt of the financial crisis. He said: “We were quite fortunate that we managed to stay away from the most turbulent time of the crisis because we were rehiring, rebuilding, managing the whole franchise. So we didn’t go into an abyss together with other market participants just because we had to provide liquidity.”

Kremlin connections are vital and VTB Capital has secured business from its parent and other state entities during the economic crisis. Bankers have been seconded for long periods by the parent to lead restructurings, under which companies agree to sell non-core assets or pledge their holdings as collateral for securitised loans.

State-run diamond monopoly Alrosa last month disclosed it would sell two oil and gas assets to VTB, its main creditor, for $620m (€420m). In a complex deal, VTB Capital is advising Alrosa and is also expected to resell the asset on behalf of its parent for a considerable profit.

Bankers from VTB Capital and other VTB subsidiaries have also been involved in restructuring clients in Russia’s heavily indebted real estate sector. VTB Bank has acquired a controlling stake in Sistema-Hals, the real estate subsidiary of Russian industrial group Sistema, for a mere $2m. A year ago, it had a market capitalisation of $1.7bn.

Soloviev said: “The team was extremely busy working for VTB as our biggest client. With the market down by 70%, there was a huge portfolio of loans against the shares and we were immediately put to work on a number of those.”

VTB’s bankers expect to play a key role in a wave of privatisations when the state lenders put seized assets back on to the public market, as a reward for rolling debt owed to its parent.

With the international credit markets shut for most Russian issuers this year, VTB took advantage to dominate the rouble bond market. According to data provider Cbonds, it arranged 15 issues in the first half of the year and is the second-biggest arranger this year of Eurobonds in Russia and the Commonwealth of Independent States, according to Thomson Reuters. VTB Capital also benefited from its parent’s balance sheet in areas including derivatives trading, credit and foreign exchange.

Soloviev said: “Almost anyone can issue a Eurobond, but what differentiates us from local competitors is our ability to offload that from the balance sheet and sell it on.”

Soloviev is keen for the business to stand on its own two feet and points to several secondary public offerings, where companies issue more stock following their initial public offering, and convertible bond mandates won independently from the state.

VTB recently headed a syndicate in which steelmaker Evraz raised $900m in a combination of convertible bonds and equity. It also co-arranged with Merrill Lynch a $265m convertible bond issue for Russian oil producer Alliance Oil in June and is slated to arrange a $300m secondary public offering for supermarket chain Magnit this year. However, government connections will continue to bring in business and Soloviev is confident VTB will play a big role when Russia issues $15bn in sovereign Eurobonds next year.

Critics suggest VTB will struggle to win mergers and acquisitions mandates in the non-state market although Soloviev maintains its bankers have had success but declined to comment further.

Soloviev’s next big challenge is to reorganise VTB’s asset management activities, which are split into three divisions for public funds, venture capital and infrastructure and real estate. VTB Asset Management was launched several years before the investment bank and has yet to make much impact.

A consortium led by VTB’s infrastructure team won a competitive tender to revamp St Petersburg’s Pulkovo Airport in what is set to be Russia’s first big public-private partnership. Soloviev acknowledged VTB’s relationship with the finance ministry, the transport ministry and the regional St Petersburg government in charge of the project.

VTB has set up joint ventures, including a private equity partnership with Deutsche Bank to invest in prime real estate in Russia’s cities.

The private equity team also made its first noteworthy deal this month, by joining US buyout firm TPG to buy a 35% stake in grocer Lenta.