RTS plans raft of new derivatives - Incisive Media

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exchangesOn your marks...Russia has launched a small- to mid-cap segment to help fledglings get aleg-up as Anja Kuznetsova from START tells David WalkerQuestions of small- and mid-sizedcompanies entering the stockmarket had not been seriously considereduntil recently in Russia.Possibilities suggested by the specialistswere aimed towards largeand, less often, mid-sized firms.The requirements of listing inRussia, imposed by stock exchangeson firms in accordance with Russia’slegislation, remained too high.As a result, companies and evenindustries lost the opportunity toattract investment via the mechanismsof the organised stockmarket. However, in 2006 thischanged. The Federal FinancialMarkets Service (FFMS) set aboutdeveloping the mid/small cap sectorsof the stock market, payingspecial attention to creating afavourable environment for small,fast-growing companies.Russia’s regulator prepared andimplemented measures aimed atstimulating small- and mid-sizedfirms to attract financing throughRussia’s stock market. In 2007, RTSSTART will be created, a segmentof T+0 RTS market which willallow companies in various sectorsto come to market.According to OJSC RTS chiefexecutive officer Anna Kuznetsova,who is in charge of the RTS STARTproject: “RTS START, like Aim, iscreated to offer the opportunity tosmall fast-growing companies toenter the organised stock market toattract investment.”RTS START, she says, allowssmall and mid-sized companies:n to successfully make a start tosecurities trading;n to attract investments from thestock market via an IPO; andn to organise a secondary stockmarket.The success of the investmentstrategies chosen by the companieson RTS START is providedby Authorized Finance Consultants(AFC), and by market-makers.Unlike Aim, START is not aseparate trading ground, rather itis a segment of the “unified tradingground of RTS,” she adds.Work on ‘project RTS START’began in Spring 2006 and STARTwas launched on 29 January. Companiescan be included on RTSSTART if their capitalisation doesnot exceed RUR3bn (about $100m).Russian legislation allowstrading in foreign currency as well.Investors in Russian IPOs havebroadened in nature, Kuznetsovaadds, to include foreign and Russianspecialised funds, portfolioinvestors and natural persons andinternational funds investing insmall-cap companies.In 2007, there are between fourand 10 listings expected on RTSSTART with a value of between$5m-$50m, for the total considerationof $250m.Kuznetsova adds in this regardthat, while foreign listings havebeen a successful option for smallcapRussian firms for the last fiveyears, the trend worldwide is forfirms to list first on their localexchange, typically where investorswill know them – and hopefullyalso value them – better, a trendthat also exists in Russia.Besides, the cost of ‘IPOing’ on thelocal markets is considerably lower.Companies which look for theirsecurities to be admitted to tradingon RTS START are supposed tomeet the requirements in the Rulesof Admittance to RTS trading,which are based on Federal lawsand by-laws of FFMS of Russia.Thus, only the securities thatmeet the following requirementscan be included into RTS START:n the prospectus has undergonestate registration;n results of the securities issue(additional issue) have been officiallyregistered, or a notificationabout the issue of the securities(additional issue) has been made tothe FFMS of Russia;n The company-issuer follows allthe regulations of the legislationon the securities, “normativeacts” of the FFMSof Russia, including theone about informationdisclosure on the stockmarket;n The company iscompliant with theexchange’s requirements,which areobligatory for RTSSTART inclusion.It is also expected:n That the applicanthas sent an application,signed by the companyissuerand AFC aboutthe securities’ inclusion inRTS START addressed tothe exchange’s CEO;n While included in RTSSTART the capitalisation ofthe above-mentionedsecurities shouldnot exce edRUR3000m.n When corporatebonds areincluded intoRTS START,the volumeof the issuedsecurities that are included intoRTS START should not exceedRUR500m.n AFC has presented to theexchange a report containinginformation on the financial stateof the issuer and risk factors, abrief description of the industrythe company functions in, anassessment of the fair price forthe securities included on START,and also additional informationrequired by AFC.n A issuer has presented a copyof the contract with the AFC forthe period its securities are on RTSSTART (with one exception);n A contract has been concludedon performing the market-maker’sobligations for not less than sixmonths from the first trading day.comparison between russia’s START market and london’s aim marketCharacteristics Aim London RTS STARTRole of state bodies and exchange No part in process, decision on admission taken by authorised consultant Play an active rolePreliminary scrutiny of documents for admission to trading byexecutive office (UKLA for UK, FCSM for Russia)Not required if not specified beforehandNot requiredPreliminary scrutiny of documents for admission to trading by SE Not required RequiredMinimum free float Requirements not fixed From ‘no limitations’ to 10%Minimum capitalisation Requirements not fixed From ‘no limitations’ to 1.5bnMinimum life of company Requirements not fixed From ‘no limitation’ to 3 yearsPreparation of admission documents (eg prospectus) State registration not required State registration requiredInternational financial reporting Less than three years according to GB, or company-issued standards No limitationsDisclosure of material information No legal requirement for list, form and terms of disclosure Legally-fixed list of signatory information and factsPriorities when disclosing info Equal access of all to information disclosed Obliged to disclose info first on exchange, then as newsControl over companies’ info NOMAD Authorised Finance Consultant (AFC)Source: RTS
market overviewForeigners eye up corporate RussiaRussia is in rude health. Very rude health indeed. And with an undervalued stock market and macrogoodness, that can only mean one thing – or two, actually: M&A. David Walker speaks with GlobalTrader and Standard & Poor’s to gauge their opinion on Russia’s market...While Russian resources firms arebulging at the seams with oil andcommodity profits, Fleur Gremmen,head of Global Trader, notes foreigncompanies are eyeing up Russiancompanies as potential mergerand acquisition targets.oily profitsGremmen notes Russia’s story hasbeen a Crude one, however, themethod the government uses to calculatehow much tax it takes fromoil producers means their outlookcan change as tax is taken then theoil price or demand shifts.“Right now, there’s a definite holdin oil and gas, so there is a hold onoil. The Scandinavian energy companiesare looking to buy diversifiedassets in Russia, for example,and the main sector is utilities,”she says. “These companies do notpay taxes based on the oil price,but they do get margins based onoil coming through their system,”Gremmen notes.However, Russia’s economy andcorporate landscape extends wellbeyond oil and gas, other commodityextractors and utilities, she notes.“There has been an influx ofmoney into Russia and that usedto be from oil and gas, but now itis a more diversified picture withthe consumer sector, supermarketchains, consumer goods and power,”she says.Gremmen notes, for those fundmanagers who may be eyeing upthe event-driven opportunities, therecan be a lag in investing because ofhaving to pay on Day One yet onlygetting delivery on Day Three,although ADRs and GDRs are availablein the gas and oil sectors.derivative accessGlobal Trader can offer derivativesbasedaccess to Russia’s marketswith OTC instruments on the RTSindex among the products it offersto international investors.She notes for those looking totrade into the Russian story onleverage, “Russia is a very expensiveplace to execute because creditrarely exists, and where it does, itis very expensive. If you want toborrow funds to trade then you’relooking at 12%-18%.”Margin requirements will bebased on liquidity and volatility ofthe stock you’re targeting and comesout “realistically at not lower than20%, and not higher than 40%,”Gremmen says. As Global Traderextends far beyond Russia in itsinstrument offerings, Gremmennotes a portfolio using their servicescan easily be involved in arbitragetrades, for example, betweenRussia and China or South Africa,for example.Gremmen adds, in contrast toprime brokers who may insist a fundhave $100m assets before they willdeal with them, Global Trader canoffer services to high-net-worth individuals,with $100,000 for example.natural reticenceNaturally, fund investors may be alittle reticent immediately to commitif they believe the emerging markets’slide is not yet over. On 9 March, theMoscow Times descibed as a “hæmorrhage”the Russian stock market’slosing 10% in just three days.Yet, while the flows from investmentfunds may have slowed in thelast month as jitters in Shanghai cutinvestors’ risk appetite quickly, it isnot clear this reticence should detercorporate buyers looking at underlyingfundamentals – and possiblyalso seeing balance sheets as evenmore alluring given cheaper stockmarket capitalisations after riskcapital has run for the safe havensof fixed income, or at least developedmarkets.thumbs up!Standard & Poor’s is one agencythat has given a generally thumbsupsignal to Russia, at least on themacro and sovereign side, recently.The macro factors weighing inRussia’s favour are not hard to identify.In Standard & Poor’s reporton The Russian Federation on 11January, the ratings agency notes:“The external liquidity of Russiacontinues to improve rapidly as commodityprices remain high.”The agency writes, furthermore,that the foreign exchange reservesheld by the Russia Central Bank,including the government’s (ca$90bn) Stabilisation Fund havereached $300bn in 2006.”What will this buy exactly?Almost 10 months of Russia’scurrent account payments and anamount equivalent to 4.5 times Russia’sshort-term debt. “At the sametime (as amassing this amount),astute fiscal management hasimpressed the government’s balancesheet. General governmentdebt will be below 10% of GDP in2007, “less than one third the ‘BBB’median ratio,” the report adds.When assets are taken intoaccount, Russia became a net creditorin 2006. On the current-accountfront, Standard & Poor’s notes,Russia has posted surpluses equal toabout 10% of GDP since 2003. “TheRussian authorities have managedthese inflows responsibly throughthe establishment of the StabilisationFund with a view to containingreal exchange-rate appreciation andtherefore any associated detrimentaleffects on competitiveness,” Standard& Poor’s says.corporate rude healthSo if the picture is so rosy for thegovernment sector, what of the corporates?“The business environmentis poor compared with those of Russia’speers,” says Standard & Poor’s.“Unpredictably, policy enforcementand regulatory actions depressdomestic and foreign direct investment,”Standard & Poor’s says.“Progress in restructuring naturalmonopolies is slow, the administrativeburden and perceived corruptionare high.” However, those companiesinvolved in domestic sales could realisticallyexpect a healthy outlook asRussia’s GDP per capita will surpassthe ‘BBB’ median in 2008, up frombeing less than two thirds the mediain 2004. The average Russian is nowwealthier than the average SouthAfrican, Malaysian and Mexican.With such good news, what arethe clouds on Russia’s horizon?It has, in Standard & Poor’s says,“political, legal and economic institutionsthat remain weak…risingcontingent liabilities associatedwith increasing financial intermediationand the rising debt ofState-controlled companies…(and)an economy that is vulnerable toshocks given its heavy dependenceon the natural resources sector,where large capital investmentsneed to be undertaken to boost productionvolumes.”S&P warns: “The more distantfuture may be characterised by lessbuoyant conditions. Russia’s nationalinvestment ratio is among the lowestin its peer group, trailing the medianby more than 5% of GDP, “a gapthat keeps widening,” Standard& Poor’s cautions. “This may wellundermine capacity in the future,all the more so as a disproportionateshare of investment is dedicated tothe booming real estate market.”Emerging markets hedge funds (source: eurekahedge)Emerging markets Open/Closed HQ 3m 12m Rk 36m* Max Hi water Vol Pos(%) (%) d’down mark MthsRussian Opportunities Fund Ltd O Russia 56.94 102 1 72.17 -87.68 0.00 38.46 8Quorum Fund O Bahamas 27.84 59.38 2 54.55 -27.27 0.00 19.40 9Firebird Republics Fund C US 20.19 59.01 3 55.01 -73.20 0.00 17.45 10Diamond Age Russia Fund Limited O Russia 16.85 36.95 4 - -6.56 0.00 13.59 10Russian Prosperity Fund - Cls A O Sweden 19.56 36.52 5 54.06 -90.26 -0.97 26.29 8Firebird Avrora Fund Ltd O US 18.61 36.05 6 43.55 -9.05 0.00 16.75 9Russian Prosperity Fund - Cls B C Sweden 16.99 34.10 7 49.27 -89.55 -0.84 22.39 8Russian Prosperity Fund - Cls C O Sweden 16.85 33.16 8 52.65 -27.02 -0.88 22.48 8Ashmore Russian Equity Fund O UK 9.89 32.85 9 37.59 -26.59 -2.11 19.09 9Firebird New Russia Fund C US 11.52 32.34 10 46.47 -81.79 -0.22 17.29 9UFG Russia Select O Russia 13.60 31.15 11 43.57 -18.39 -1.08 15.65 9UFG Russia Select LP O Russia 13.57 29.93 12 42.30 -18.20 -1.17 15.76 9Spectrum Russian Growth Fund O Russia 14.36 26.92 13 - -9.04 -1.16 17.96 8RAB Emerging Mkts Opps Fd – Cls A E O UK 11.63 26.62 14 - -0.52 0.00 7.26 9Horizon Growth Fund NV O Argentina 9.92 26.30 15 7.62 -49.81 0.00 10.23 9Pharos Gas Investment Fund Ltd O Russia -0.61 24.75 16 - -30.41 -14.03 43.37 7Credit Suisse Absolute Fund Ltd O Brazil 9.38 23.62 17 - -7.17 0.00 9.39 9Spectrum Russia Absolute Return Fd Ltd O Russia 9.24 23.50 18 22.53 -9.06 -0.47 9.31 9Morley Central European L/S Eqty Fd - $ O UK 7.21 23.42 19 - -1.70 0.00 8.11 9Strategic East European Fund O Monaco 14.83 21.00 20 14.87 -17.90 0.00 15.21 8Polunin Capital Ptnrs Em Mkts Active Fd O UK 13.27 19.17 21 20.91 -25.46 0.00 17.24 8Pharos Russia Fund O Russia 16.19 18.61 22 41.20 -85.01 -1.17 23.87 8Denholm Hall Russia Arb Fd - Cls B O UK 3.37 17.42 23 20.39 0.00 0.00 2.19 12Tiedemann Global Em Mkts LP/Ltd C US 11.01 16.65 24 10.71 -36.40 0.00 6.97 8Denholm Hall Russia Arb Fd - Cls A O UK 5.07 16.47 25 18.62 0.00 0.00 3.32 12Sector Average 8.61 13.81 113♠ 23.07 -18.25 -1.16 10.83 8.12*12 months to 31 Jan, data to 23 Feb 2007. For full rider, see page 55, March 2007 edition of Hedge Funds Review.
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RTS plans raft of new derivatives - Incisive Media

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