A combination of domestic and external factors, such as Chinese overheating, European financial downshifting and market volatility, have caused a series of Russian companies to either cancel or rethink their planned IPOs.
“The external environment heavily affected the dynamics of the Russian stock market, as the volatility is huge,” said Yaroslav Lissovolik, chief economist for Deutsche Bank in Moscow.
Russian sugar manufacturer Rusagro, which had declared its domestic IPO on MICEX and RTS just a month ago, said it cancelled the placement due to volatility. This setback came a few days after Oleg Deripaska’s Strikeforce Mining and Resources, a world leader in molybdenum alloys, cancelled its IPO for the same reason. The companies expected to raise about $600 million ($400 million and $200 million, respectively) to finance their expansion goals.
“As global market instability increased, it had been very difficult for Russian top managers to assess what the market will be when they were moving towards pricing of an offer,” said Roger Monson, chief strategist at Unicredit in London. Doubts emerged from sellers and buyers alike, as Russians now have little confidence that their stock will be in high demand, while investors require higher risk premiums, Monson said.
One relatively successful IPO was held by Russkoye More Group, a Russian sea products manufacturer, right before the May stock market nosedive.
Although the placement was conducted at the low end of the spread – about $6 per share, it attracted $90 million.
“Just half a year ago the RM bonds were perceived as junk paper and had been trading at a 50 per cent premium, which indicated the company had serious debt problems,” said Alexei Kurasov, head of corporate finance at Finam.
The price of $6 per share means the market valued the company at $725 million, “while the ratio for junk companies should have (theoretically) brought the RM capitalisation down to about $400 million,” said Kurasov.Russian domestic factors, such as lack of corporate transparency, must be taken into consideration to measure the RM offering, said Monson, of Unicredit.
“Some Russian companies find global markets attractive, but the level of disclosure required is higher than they are comfortable with,” Monson said. “Regulations for listing and transparency requirements in London are higher than they were and higher than they are now in Shanghai and Hong Kong.”
This dilemma, of whether to switch their listings to less demanding Chinese stock markets, is now taxing Russian companies.
“A listing [in China] for any company is more likely to have more visibility … for business development,” said Monson,
But listing in China could be a double-edged sward. “Failure in China will lead to lower world prices for commodities, and Russia will be affected,” said Alexei Minayev, head of research at Rue, Man and Gore. “We have to admit that conditions for raising funds externally aren’t the best now, and the main source of investment for industrial companies will be their own profit.”
Monson, of Unicredit, noted that some companies, including such giants as Mechel and Rusal, have serious problems with corporative debt.
“While some, especially oil companies, are very liquid and conditions [to borrow] are a lot easier in Russia now than they were eight months ago, still they are not comfortable,” he said.