Guest post: Russian banks can profit from west European bank deleveraging

By Atanas Bostandjiev of VTB Capital
This week’s announcement that a consortium led by VTB Capital, the investment banking arm of VTB Group, has completed the acquisition of Vivacom, one of Bulgaria’s leading telecoms operators, is a clear sign of the opportunity frontier markets still offer investors.

The €130m equity injection used to partially repay the Vivacom debt in exchange for a majority stake of in the restructured company, is an important development for the Bulgarian telecoms market and wider region. The transaction should enable Vivacom to benefit from a reduction in total leverage from approximately €1.7bn to €588 million through debt repayment, equity conversion and debt write off.

Vivacom has faced significant financial hurdles in recent years. Recapitalisation of its balance sheet and reinvigorating the company could turn this high-potential business into a winner once again.

In years gone by this deal would have been exactly the type of transaction major global banks would be behind. But for most west European banks the emerging markets are a peripheral business now. For them, if it’s not working in a particular year, they will quickly turn up or down the dial. But to make a success of investments in this region you need a long-term strategy backed up by a deep market understanding.

These banks have pursued a policy of rapid deleveraging. Whether they are being forced to shore up their balance sheets for regulatory reasons or have simply lost their appetite for these economies, is unclear. As they retreat from the market to focus on challenges closer to home, Russian companies are increasingly taking advantage of the opportunities the CEE region offers.

It is not a new phenomenon: deleveraging has been a concern since the onset of the financial crisis in 2008, when European and North American banks cut lending in and around their home markets. Credit supply shrank drastically, bringing developed-world economies to a juddering halt.

For CEE countries, membership of the EU promised access to a market of 500 million people and associated new growth opportunities. But proximity and integration has also brought austerity and debt closer too.

But despite these challenges, I believe the CEE still presents excellent growth and investment opportunities. Bulgaria stands out.

Earlier this month, the European Commission raised this year’s economic growth forecast for the country to 0.8 per cent from a 0.5 per cent estimate in March and to 1.4 per cent for 2013. The economy grew 1.7 per cent last year. Posting encouraging growth figures in the face of the current economic climate is a strong indicator of the resilience of the country’s economy.

As a member of the EU, Bulgaria has access to a vast market. Its geographic position also places it in a strong position to tap into the economies further East such as Russia and the Middle East.

The lowest cost of doing business in the EU add to its attractiveness. Bulgaria is 66th in the World Bank’s “Ease of doing business” rating, putting it ahead of almost all other CEE countries.

Balkan countries traditionally have close historical and economic connections to Russia. Investment flows more easily both ways. The telecoms sector especially is well placed for growth. Research published by Business Monitor International forecasts that the country’s mobile penetration rate will reach 173.8 per cent by 2016 and the major operators are set to benefit from that growth, especially as 3G networks come on stream.

While West European banks turn their back on the CEE and implement rapid deleveraging strategies, this is only leaving the door open for institutions like ours to capitalise on opportunities others are no longer in a position to pursue.

Atanas Bostandjiev is the UK and international ceo of VTB Capital

Related reading:
Investing in Central & Eastern Europe 2012, FT Special Reports
Bulgaria: stable but sluggish, beyondbrics
Fitch warns on Turkcell bid for Vivacom, FT