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. Last Updated: 07/27/2016

Banks Rush to Lend to Rosneft

State-owned oil producer Rosneft is negotiating a $7.3 billion loan, the biggest ever in the country, with Morgan Stanley and five other banks, lenders involved in the talks said.

Lenders including ABN AMRO and JPMorgan Chase will also manage an initial public offering next year that will repay the loan, said the bankers, who declined to be identified. Rosneft needs the money to finance its purchase last month of a stake in Gazprom.

President Vladimir Putin's push to increase government control of the energy industry has made Rosneft Russia's No. 2 oil exporter.

The IPO may rank among the 10 largest ever, according to data compiled by Bloomberg.

"All the big banks want to get a piece of the pie. They all smell money," said Egbert Nijmeijer, who helps manage 2.5 billion euros ($3 billion) of emerging-market stocks, including Gazprom, at Robeco Group in Rotterdam. "You want to do deals and invest in companies that are on the right side of the Kremlin. The Rosneft IPO is definitely a deal we'll look at."

Rosneft chief financial officer Sergei Alexeyev declined to comment on "speculation."

The banks met with Rosneft officials Tuesday to negotiate the initial public offering, the lenders said.

Many global banks have huge amounts of excess capital and are keen to lend to Russia, which is flush with cash from record oil prices and is enjoying strong public finances.

But any loan would carry legal risks for the lender banks by putting them in the position of helping the dismemberment of stricken oil firm Yukos.

The company filed lawsuits in Russia and elsewhere after its main asset, Yuganskneftegaz, was bought by Rosneft following a sale forced by the state in December.

"This is a very complicated deal, and the whole structure is still being nailed down," one banker said.

By lending to Rosneftegaz, the banks would effectively be lending to the Russian government, which has an investment-grade sovereign rating.

That would help them to circumvent the legal and financial problems entangling Rosneft, Russia's most leveraged company.

Rosneft bought a 10.7 percent stake in Gazprom, the world's No. 1 natural gas producer, to increase government ownership to a majority. The Russian government set up a special holding company, Rosneftegaz, to make the purchase and to hold all of Rosneft's stock. The loan will be for Rosneftegaz.

Rosneft snapped up the Gazprom stake six months after paying $9.3 billion to buy Yugansk.

Spending money on acquisitions helped boost Rosneft's debt more than fivefold to $22.7 billion last year, the company said earlier this month.

The extra debt resulted in the company breaching loan covenants, so banks can demand early repayment if waivers are not granted, Standard & Poor's said in May, when it cut Rosneft's credit ratings to B-, six steps below investment grade.

"Western investors want to see that companies have the backing of the administration," said George Nianias, chief executive of Denholm Hall, which advises the Finance Ministry on its debt-management program. "That potentially makes the Rosneft IPO a hot deal."

A final decision on the deal may come this week, said the bankers. Barclays, BNP Paribas and Dresdner Kleinwort Wasserstein are also among the banks negotiating the financing.

The proposed loan is more than three times the size of any other borrowing by a Russian company, according to data compiled by Bloomberg.

(Bloomberg, Reuters)