Despite scattered apprehensions about the structure, Russia's first future flows securitization was a genuine blowout, sending dealmakers a strong sign that investors are ready for more ABS from the country. Upsized by US$250 million to US$1.25 billion, Gazprom's export-backed paper yielded 7.201% and the book was four times oversubscribed, according to a source close to the deal. Pricing reportedly came 10 basis points outside the Russian curve. That stunned observers who had predicted a steeper discount, given the oceanic liquidity of Russian paper.

The transaction had a legal final maturity of 16 years and an average life of 7.4 years. Morgan Stanley, Merrill Lynch and ABN AMRO were joint bookrunners.

As in any transaction, there were naysayers. One investor found the "whole negative pledge thing from the World Bank" a bit unsettling, but still bought in.

The pledge "requires that any security granted to a creditor over public assets' for external, foreign-denominated debt should equally and rateably secure the principal of the World Bank debt," according to Fitch. The deal is designed around the pledge, according to sources. What's more, in the opinion of Fitch Ratings, the pledge is unlikely to apply to Gazprom, since the state currently has only a minority stake in the oil producer and Russia would have to default on World Bank debt before the multilateral would go after other assets. Still, sources said that the government could eventually boost its stake in Gazprom, and some argue it already has de facto majority interest in the company, thanks to treasury holdings by Gazprom subsidiaries.

Another concern - which set Gazprom apart from the typical future flow bond - was that payments from the two designated obligors do not accumulate in the collection account. Instead they flow through to Gazprom. The company then makes a loan payment to the trustee, that, in turn, pays investors, according to a source familiar with the deal. Only in a retention event does the account begin to trap the flows. A retention event includes a drop in the debt service coverage ratio to below 1.4 times, among other triggers.

Both Standard & Poor's and Fitch addressed these and other issues and found the risks consistent with a triple-B minus rating, three notches above S&P's corporate rating and two notches above Fitch's.

While the structure may have given investors accustomed to more straightforward future flow deals cause for hesitation, pricing was actually markedly tight versus comparable paper out of Brazil and other emerging markets. Its gargantuan size makes the difference even more significant. "We wanted Gazprom, but we wanted it with structural enhancements," said one investor.

With Gazprom having struck a rich vein, the buzz is turning to other Russian corporates. It appears the only concrete deal in the works is a credit card-backed transaction by a local bank, but peer energy producers like Sibneft, Lukoil, Tatneft and TNK-BP, among others, are seen as prime candidates as well. Operating in farther-flung industries, Russian Railroads and Aeroflot might also find ABS to their liking, one source said.

Meanwhile, Morgan Stanley is reportedly structuring a deal for Vietnam Oil and Gas Corporation (Petrovietnam), adding a notch to its future flows belt, which includes transactions for Petroleos de Venezuela (see p.24 for related news), Petroleos Mexicanos (Pemex) and Argentina's YPF, apart from Gazprom. The bank inadvertently made noise in Latin American ABS circles, in late 2002 and early 2003 by executing two highly furtive deals for YPF for a total of roughly US$520 million.

Vietnam produces 340,000 barrels a day of crude oil and 555 million cubic feet a day of natural gas, according to Petrovietnam's Web site. The company is charged by mandate with developing all the country's oil and gas fields.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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