Look east: Russia continues to play

With the ongoing difficulties in the Western European buyout market showing no sign of an upturn, bankers are increasingly looking to the emerging markets of Eastern Europe and especially Russia to provide much needed new business.

Last week VTB Bank Europe’s acquisition & leveraged finance team announced it had funded RussAgroProm’s buyout of the baby foods assets of Russian food group Nutritek. The debt totals US$230m, of which US$200m will fund the acquisition, with the remainder used for capex purposes. VTB will fund the facility and may offer out the debt in a secondary transaction next year.

Despite the effective closure of the Western European market, the attractive deal economics in Russia means the market should show significant growth over the next year. Indeed, Eastern and Central Europe have long been cited as potential rich sources of buyout supply with Russia’s relative economic size meaning the country should provide the lion’s share of opportunities.

“In terms of opportunities Russia almost has too many potential buyout targets,” said Konstantin Ryzkhov, head of acquisition finance at VTB. “So far most activity has been in the consumer goods and service sectors. Although these sectors remain the most attractive, energy and heavy industry sectors are under-developed and under-capitalised and so will provide opportunities.”

Goldman Sachs, UniCredit (CA-BA) and VTB are still out in the market with the US$290m senior debt package supporting Lion Capital’s buyout of fruit juice maker Nidan Soki. Meanwhile TPG is believed to be looking to acquire billboard group News Outdoor from News International, as well as coveting a majority stake in Seventh Continent, a supermarket chain.

These deals show private equity’s growing appetite for the country, and this demand will be compounded by the number of high net worth individuals in Russia who are increasingly looking to invest on PE lines.

But while Russia has plenty of suitable targets, Nidan Soki is the only Russian buyout loan to have attempted an international syndication. Indeed, of the 20 or so transactions that VTB has completed in the buyout space for a total of around US$4bn, most have been completed on either a club or bilateral basis.

“Up to now we have been comfortable completing deals on a bilateral or club basis,” said VTB’s Ryzkhov. “We are now ready to take the market to the next step and will look to bring in other banks – both local and international – as well as other investors such as hedge funds.” In addition, as the debt markets develop, deal sizes will increase from the present US$100m to US$500m range.

Moreover, Ryzkhov believes that the superior returns on offer mean the market has the potential to ride out the current storm. “The slowdown will have an impact on the Russian market in terms of rising cost of funds, but this does not mean that the speed of leveraged market’s development should slow. This is because Russia offers a good risk/reward ratio when compared to Western Europe.”

The relative infancy of the Russian market means it is not saddled with an inventory of unsold deals as Western Europe is, while debt structures are also relatively conservative and free of the investor unfriendly clauses such as cov-lite that contributed to the wider close-down.