What questions remain for privatization of “Rosneft”

Sensational deal to sell 19.5% of Rosneft shares tandem foreign investors (in recent weeks, the baseline was the redemption of the shares of Rosneft, and Glencore’s participation no one could assume) still leaves more questions than answers. Although President Vladimir Putin triumphantly announced the completion of the transaction, Glencore after a couple of hours said that the deal is not yet closed — are the last approval. Putin and the head of “Rosneft” Igor Sechin at a meeting in the Kremlin called the transaction amount of €10.5 billion, and the statement of Glencore are talking about €10.2 billion remain Unclear, neither the structure of the transaction, in which Professor of Finance, University of Houston Craig Pirrong expects to see the embedded derivative or a hidden third party or financial role of sovereign wealth Fund of Qatar (QIA). The Fund has not commented on the deal — requests sent to three addresses the Qatari investment authority (QIA), left on Thursday evening without an answer.

As buyers are going to Finance the deal?

Glencore in the release of December 7, announced that will invest in the deal only €300 million of its own capital (equity). The financial news service, Dealbook, the New York Times interprets this as a contribution in the form of Glencore shares, not cash (press service Glencore did not respond to a request). The expert on commodity markets Craig Pirrong from the University of Houston suggests in his blog that the Qatari Fund will also only contribute €300 million of its own funds, because their share in the consortium will be equal (although the analysts of “Renaissance Capital” believe that the QIA will make more money than Glencore, they wrote in the review). The rest will be financed by a Bank loan, said Glencore.

If the partners will invest only €300 million of its own funds, then debt financing for the purchase of a package of “Rosneft” will amount to almost €10 billion In this case, leverage in the transaction will be 17.5 to 1, writes Pirrong and wondering: “What the Bank will take such a risk?”

“In the near future will be full disclosure [of information] of the transaction. There will be accurate figures, including the assessment of equity investors,” said a source close to one of the parties to the transaction.

Who will give the buyers a loan?

A source in “Rosneft” and a source in banking circles said that China will Finance the deal the Italian Bank Intesa Sanpaolo advised government on the privatization of “Rosneft”. Wrote about the same thing Bloomberg and Reuters, citing its sources. Against the background of problems in the banking sector, Italy’s Intesa looks confident other local banks. But if Intesa will share the risk on such a large loan with someone else, this loan will constitute 20% of equity and almost a quarter of its market capitalization — “it’s crazy,” he Pirrong.

Intesa, if this Bank will act as the lender, “potentially takes on the largest risk in this deal”, according to analysts at Renaissance capital Ildar Davletshin and Eugene Stroyev. In conversation with Davletshin said that the Italian Bank risks beyond measure, lending to such a large transaction if it is not secured by the shares of “Rosneft” in the pledge, or other financial guarantees. The press service of Intesa did not respond to a request .

How will protected the creditor Bank?

The creditor Bank will be deprived of the rights to the loan to Glencore, the message of the trader (non-recourse to Glencore — non-recourse loan). It is unclear whether the act borrower Glencore (but the terms of the loan will be to assume the impossibility of repossession of company assets), or joint structure, Glencore and QIA. Davletshin from “Renaissance Capital” believes that the loan will take Glencore, as the Qatari Fund is able to pay his half of the consortium entirely at the expense of own funds and even guarantee to a Bank for Glencore.

“Loan repayment depends on revenues from dividends on Rosneft shares. In the fall of oil prices, profit and cash flow of the company can fall or her debt could grow to such an extent that even the high price of hydrocarbons does not guarantee the payment of dividends. And in the event of default of the consortium or problems with the payment of dividends on Rosneft shares the Bank has no right even to get a share in the consortium or in part, of Glencore. So he could hardly take on such risks, if not secured Finance are guaranteed with external parties,” says Davletshin.

Pirrong argues that because the message Glencore on bezregistracii loan implies that the loan will be secured 19.5% of Rosneft shares. But the stock price could fall, and the Bank had to find a way to reduce this risk. Perhaps sindisiwe Bank loan, sharing the risk with other banks. Either the participants in the transaction could enter derivative instrument type swap total return (total return swap, TRS), said Pirrong. “I don’t believe that any Bank will lend on such a scale, relying only on the collateral of shares of “Rosneft”. Must still be some part of the transaction, which is not yet disclosed,” — says the expert.

As proceeds from the transaction will be transferred to the budget?

Waiting for the budget to mid-December, about 700 billion rubles from the privatization of Rosneft, said Thursday the Minister of Finance Anton Siluanov. The problem is that the exchange of more than €10 billion rubles for the purposes of the budget can lead to painful consequences for the market — a sharp strengthening of the ruble and a jump in volatility. Putin instructed Rosneft, the Ministry of Finance and the Central Bank to provide secure scheme of conversion of foreign currency receipts from transactions in rubles. Conversion will not happen overnight, “all this will be done gradually,” he said .

Shortly before the announcement of the deal with Glencore and Qatar, “Rosneft” has placed bonds for 600 billion rubles, which at the time was seen as a prelude to redemption by the company of its own shares. The Reuters source in the Russian government claims that the issue was organized as a fallback in case the negotiations with Glencore and QIA fail.

“Renaissance Capital” believes that 600 billion rubles from the placement of bonds of “Rosneft” can be used to transfer in the budget, and €10.5 billion from Glencore and Qatar will leave at “Rosneftegaz”. In this case, it will be able to avoid consequences for the ruble exchange rate. Sberbank CIB analysts propose another method to avoid the painful conversion — “Rosneft” can use foreign exchange earnings from the transactions with Glencore and QIA to pay for other, previously announced the purchase of the Indian assets of Essar Oil.

Davletshin from Renaissance capital does not exclude that Rosneft or Rosneftegaz could put funds intended for lending to Glencore or the Glencore consortium and QIA, on the Deposit of the lending Bank, that Bank would guarantee protection against credit risks.

For the payment of dividends to the budget “Rosneft” also can use a large amount of liquidity accumulated on the accounts of “Rosneftegaz”, the analyst of Raiffeisenbank Denis Poryvai. According to him, “Rosneftegaz” in the accounts is about 544 billion. the Rest of the company will be able to get through the conclusion of swap transactions with several banks.

Later on Wednesday immediately after the announcement of the transaction, CB representative said that Rosneft was holding consultations with the Bank of Russia on the development of such behaviour and tactics during the currency conversion, which can help avoid short-term volatility spikes in the currency market. A source familiar with preparations for this transaction, notes that the parties seek to divide the ruble and foreign currency flows. In particular, “Rosneft” there is a need to use foreign currency for payments on foreign debt, investment projects, and “Rosneftegaz” is sufficient rouble funds to pay the budget.

Whether or not it breached U.S. sanctions and the EU?

“Rosneft” is under the sectoral sanctions the EU and US limiting her access to financing and technologies, and it was considered an obstacle to the participation of Western investors in the privatization of the company. “The sanctions have nothing to do with this transaction”, — says a source close to one of its sides, commenting on the complex structure of the transaction. According to him, it is only a “question of the structure of the transaction”. Us sanctions generally prohibit transactions with shares of “Rosneft”, the European limit the purchase of new shares, but not available.

However, on Thursday, the special envoy of the US state Department for international energy Affairs Amos Hochstein told Bloomberg TV that the us government “look at the deal [for the privatization of “Rosneft”] and its effects [terms of sanctions]”. In his opinion, the EU should also explore this deal for compliance with the sanctions regime.

The representative of the U.S. Treasury declined to comment on the issue of sanctions in relation to the Rosneft deal. A representative of the EU Council said that it is a matter for the national authorities — in this case Switzerland, as Glencore was there (Switzerland is not in EU, but, generally supports pan-European sanctions regime).

With the participation of Oleg Makarov