Eurobond Issues of Russian Companies The Case of

Eurobond Issues of Russian Companies The Case of Lukoil FetisenkovaA

Why do Russian companies use Eurobonds? For most Russian companies, Eurobonds represent a fundamental new instrument for raising financing resources Eurobonds are issued by corporations or international organizations who are interested in receiving monetary funds for the long period (7-40 years) Eurobonds are free of withholding tax

Eurobonds of Russian Federation and Corporate Eurobonds Eurobonds of the Russian Federation (sovereign Eurobonds) A debt instrument associated with the lowest level of risk and the widest range of maturities (from 2003 to 2030). Its yields reflects the level of risk of investing in the Russian Federation. Corporate Eurobonds With respect to an inaugural issue, investors expect the yields of corporate bonds to be at a level close to the yields of the Russian Federation Eurobonds with similar maturities plus a certain margin. The amount of margin includes a premium for the corporate risk that is higher than the sovereign risk and a discount for the inaugural issue.

Bank credit vs. Eurobond markets Advantages of raising financing by way of a Eurobond issue Considerable market capacity Diversifying sources of borrowings Source for long-term investment resources Access to a broad investor base Establishing a credit history (the yield curve of the company's debt instruments) Bank credit market Limited capacity Tied credits Source to provide short-term liquidity

OAO LUKOIL integrated oil company based in Russia. core activities :exploration, production, refining and marketing of oil and gas, chemicals the second largest private oil company worldwide by reserves: around 1.3% of global oil reserves and 2.3% of global oil production. operations in Russia, Eastern and Western Europe, CIS, and the US. marketing network in 19 countries also engaged in other businesses, including banking, finance and other related activities.

TNK-BP Limited oil company based in Russia jointly owned by British Petroleum (BP) and by a group of Russian investors (AAR) core activities are in three main segments: exploration and production; refining, marketing and distribution; and oil field services. total proved reserves currently include 1.0 billion tons of oil equivalent operations in Russia and Ukraine. also manufactures and markets lubricants.

Basic Financial Data 2008

Specific Features Sources: http://www.cbonds.info/rus/emissions/emission.phtml/params/id/7392, http://www.cbonds.info/rus/emissions/emission.phtml/params/id/7098

Purposes - Refinancing Lukoil: “In June 2007 the Group carried out its first-ever placement of unsecured Eurobonds with value of $1 billion. The bonds are divided into two tranches with maturities of 10 and 15 years. <…> Cash raised was all used for settlement of the syndicated credit, which LUKOIL took in October 2005 for purchase of Nelson Resources Limited. The Eurobond issue enabled LUKOIL to diversify the structure of its debt portfolio by source and currency as well as lengthening average maturity of the portfolio by 5 years.” Source: 2007 Annual Report TNK-BP: “On 19 March 2007 TNK-BP placed its second Eurobond issue comprising of 5 and 10-year tranches in the total amount of $1.3 billion. The proceeds were used to repay $1.2 billion of short-term debt. As a result, average life of TNK-BP’s debt portfolio rose to over 4 years increasing share of long-term debt to around 80%.” Source: http://www.tnk-bp.com/investors/eurobonds/

Bond Valuation & Current Yield Bond valuation r = Composite bond rate, 20yr BBB = 0,0312 C = 3,3125 N =17 M = 100 V = 102,51 Current yield = coupon / price 6,625 / 60 = 11,04%

Yield to Maturity Method : calculation and error V = 60 C = 3,3125 N = 17 M = 100 YTM = 7,55%

Price Dynamics Source: http://www.ariva.de/chart/index.m?secu=100216354

The Main Determinants of Price And Yield Inversely related to market interest rates Risk - the greater the risk the higher the yield, or for a given yield, the lower the bond's price Tax attribute - the interest on some bonds is tax exempt and these bonds will have a lower yield Time to maturity - as the life span of a bond increases, so does its yield

Yield to Maturity Dynamics