Russia would like to tap the international capital markets for funds by issuing new bonds. Investment banks jockeying to manage the sale, though, have been warned off by the authorities in the U.S. and Europe because Russia is still subject to economic sanctions. This raises an interesting question: What if Russia, or any borrower, just bypassed the middlemen and sold its securities directly to investors?
Governments and companies still sell international bonds the same way they have since the 1963 deal worth $15 million for the Italian highways authority Autostrade, which many people regard as the first true Eurobond issue: A borrower needing money hires a gang of investment banks to handle the fundraising; that syndicate handles the paperwork, finds investors willing to buy the debt, and underwrites the issue ensuring that the borrower gets its money even if the sale falters.
The model is almost identical to how young companies list on an exchange in an initial public offering. But there’s a key difference: Investors can already find out everything they need to know (or at least anything Russia will allow them to know) in publicly available information. They can see how its existing securities are valued and traded in the market. Unlike a new, unknown company selling shares for the first time, there’s no added value in having a syndicate banker explain Russia’s finances as part of the sales pitch.
Russia hasn’t offered international debt since 2013, and Deputy Finance Minister Maxim Oreshkin said last week that money managers are clamoring for fresh securities:
The story here is that it’s actually investors asking us to do an issue because Russia wasn’t issuing for several years. Russian risk is doing really well in the past years and those funds on the sidelines are underperforming the benchmarks. They were coming and asking us to issue a new debt, to do a new supply on the market.
Oreshkin cited the example of Argentina, which last month raised $70 billion in bids for its first new bond sale in 15 years, raising $16.5 billion. A Russian bond, he said, would be “even easier than to place the Argentinian Eurobond.”
There’s every reason to think that a new bond from a country that still enjoys an investment grade rating from at least one of the three major rating agencies would meet huge demand in this yield-starved world. So if Oreshkin is right, what does he need a syndicate of banks for? Why not go directly to the global investor community for money?