Russian Railways woke the slumbering Eurorouble market after a two-year dormancy when the state-owned company steamed into the international primary with a seven-year rouble offering.
The company got huge support for a US$500m four-year trade on Thursday and followed that impressive result with a successful Eurorouble transaction.
"The company opted to do a smaller deal in US dollars, to leave demand on the table for roubles," said Andrey Solovyev, head of debt capital markets at VTB Capital.
"The US dollar deal was unbelievably tight. And [then] when we went to market, we saw there was unsatisfied demand from international investors who were willing to buy roubles."
Russian Railways started bookbuilding a potential Rbs15bn-Rbs20bn deal at 9.5% area. Guidance was set at 9.25% (+/-5%), to price in range, before printing a Rbs15bn (US$237.5m) trade at 9.2%.
The company achieved similar financing costs with a Eurorouble trade as it would have done with a domestic offering, according to Uralsib analysts, who saw a premium of around 70bp-75bp to the government's OFZ curve.
"The seven year OFZ yield is around 8.25%," said Olga Sterina, analyst at Uralsib. "A seven-year [Russian Railways] domestic bond could have been placed at a yield of around 9%-9.1%, so more or less at the same level as the Euroroubles."
However, the pools of investors are very different. Domestic investors prefer shorter-dated maturities, while Euroroubles provide international investors with the protection of English law and standard Eurobond covenants.
Order books reached Rbs50bn. Russia investors took 52% of the allocation while 48% went to international accounts, of which the UK took 30%, Continental Europe 16% and Switzerland 2%.
By investor type, 63% went to banks and private banks, and 47% to asset managers and funds.
Euroroubles became popular in 2012-13 as investors saw them as a means to get positive carry on the FX side as well as a nice pick-up in absolute yields.
For issuers, the structure allowed them to raise funds at cheaper rates than onshore, while achieving longer tenors and a deeper pool of investors. Russian Railways was as regular an issuer in the Eurorouble market as any entity.
But following Russia's annexation of Crimea, subsequent sanctions and wobbles in the oil market, Euroroubles fell out of favour. A Credit Bank of Moscow deal was the only one in recent times.
"There were a handful of issuers in Euroroubles but that window closed because the rouble plunged. But now the rouble has found some ground and stabilised." said Solovyev.
"International investors hold 30% of OFZs, which reflects their confidence in the Russian currency. And it's very important for Russian infrastructure, energy and transportation companies to see it is possible to issue in roubles in international markets."
The Eurorouble trade followed the more conventional US dollar deal that was priced at a yield of 3.45%. That compared with initial price thoughts of 4% area, which were revised to 3.75% area.
"A 55bp tightening was significant," said a banker away from the deal. "We knew there was going to be very strong interest in the name, given it can go into the EMBI index."
Russian Railways opted not to increase the size from its target of US$500m despite demand that grew to more than US$2.8bn. Instead, the company targeted tighter pricing, which it achieved even with an off-the-run maturity.
"[The tenor] fits best in their debt schedule and they want to keep a lid on borrowing expenses," said a banker close to the deal.
The maturity could also be explained by Russian Railways' recent tender offer, a banker away from the deal speculated.
The company is set to use the proceeds of the deal to fund a tender of its US$1.5bn of 5.739% 2017s and SFr525m of 2.177% 2018s.
Railway companies in Europe require Swiss francs for their international operations.
"I don't know the exact economic rationale," said the banker away from the deal. "But presumably they think there is some sort of arbitrage in replacing the Swiss franc 2018s with US dollars, and then swapping back.
"There is a disconnect between Swiss francs and US dollars. It is cheaper to print in dollars and swap, rather than print Swiss francs directly."
Solovyev, however, denied this was the rationale behind the deal.
The company is rated BB+ by Standard & Poor's and BBB- by Fitch, though S&P's rating on the Eurorouble notes is expected to be BBB-.
The Fitch investment-grade rating on the company is largely due to the support it gets from the state. Last year, for example, it received subsidies of about Rbs63bn and direct equity injections of Rbs71bn to fund its key infrastructure projects.
"It's the closest thing to sovereign risk there is, because they are never going to get privatised," said the banker away from the deal.
JP Morgan and VTB Capital were the bookrunners on the dollar tranche.