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. Last Updated: 07/27/2016

Stolichny Floats $100M Offer

Investors are set to begin trading Friday the first tranche of $100 million in notes offered by Stolichny Savings Bank and France's Banque Indosuez, the second international bond offering by a Russian bank.


The bond issue will allow Stolichny to borrow money at favorable international interest rates and reloan the funds at higher interest rates in Russia, under a three-year Stolichny investment program aimed at building industry in Russia's regions.


"We are in the process of distribution, the bonds are starting tomorrow, and we already have orders from investors," said Elizabeth Hansen, manager of Indosuez Capital Eastern Europe in London.


The first $25 million tranche was released Wednesday, the day the agreement was signed, and a second installment of the same size is likely to be on the market in the next week, according to Indosuez. Both have maturities of about 90 days.


Indosuez, as lead underwriter, "bought" the deal, meaning it agreed to buy the bonds in full and then distribute them to investors. It did the same last December, when it managed a similar offering for Rossiisky Kredit, the first international bond offering by a Russian bank.


Because of that experience, the bank was confident it could generate investor interest in Stolichny's notes, Hansen said.


"We already knew the potential market of this kind of paper, the potential attractiveness of this kind of market," she said.


"Presently, especially before the elections, you have very little choice of investments in Russia ... little opportunity for investors to buy paper issued by companies or banks."


For Stolichny, the deal means obtaining long-term funds -- which is nearly impossible on the domestic market -- and getting acquainted with international financial markets.


"We can attract money under much better conditions than we could on the Russian market, it's difficult to finance long-term investment here," said Sergei Meshcheryakov, a spokesman for Stolichny. "And we want to gain experience with these financial instruments on Western markets."


The first installment of the notes will have an annualized yield of 8.5 percent and the second yields 14 percent, Hansen said. They will be sold at a discount to face value.


The benchmark annual refinancing rate in Russia set by the Central Bank is 120 percent, although in practice domestic banks rarely make long-term loans.


Meshcheryakov did not say at what interest rate Stolichny would loan the funds to Russian enterprises.


The bonds issued by Indosuez will be backed by corresponding promissory notes offered by Stolichny, which are themselves guaranteed by Finance Ministry (MinFin) bonds. The recently issued sixth and seventh MinFin tranches will back the first two installments of the new notes, Series A and Series B, Hansen said.


The bonds will have a maturity of between 30 days and one year and will be clearable through Euroclear and Cedel. Because the deal is not structured to comply with U.S. Securities and Exchange Commission rule 144A, U.S. investors may not directly purchase the notes, she said.


Stolichny will likely issue a third tranche with the remaining $50 million, a bank spokeswoman said.


Indosuez was one of the first foreign institutions to trade MinFins and began its corporate finance activities in Russia with the Rossiisky Kredit bond offer.