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22 September 2016

Russian Railways resurrects rouble Eurobonds


Russian Railways (RZD) is weighing up the first rouble Eurobond for several years as low global yields boost support for rouble denominated debt.

Russian Railways is looking to reduce its short term foreign currency liabilities by using the proceeds of a new dollar and international rouble deal to buy back its $1.5bn bonds due 2017 and Sfr525m bonds due 2018.

Rouble Eurobond issuances are relatively rare. Credit Bank of Moscow issued one in November 2014. AHML, VimpelCom, Novatek and AlfaBank issued a combined Rb51bn ($7.9bn) in 2013.

The bulk of the deal is expected to be made up by the dollar issue, but issuing in rouble format makes sense for RZD as the majority of its operating profits are denominated in roubles.

In the past, offshore rouble deals have printed inside onshore levels, making it an attractive prospect for issuers. But bankers away from the deal question the level of demand it will attract beyond local investors and Swiss banks with Russian backing.

“The message about this was worded very carefully,” said Andrey Solovyev, global head of DCM at VTB Capital. “We’re exploring the issue but it’s still early days for rouble Eurobonds to come back. Someone has to issue the first one though.”

Solovyev said that there has been an increase in the number of international investors playing actively in local sovereign bonds, and he expects that there will be demand for Russian Railways, which is “as close a sovereign proxy as you could get,” according to another DCM banker.

“Investors seem to be getting comfortable with the fact that the rouble has found its floor and will stabilise in a certain range,” he said. “It provides high carry compared to the majority of EM assets so is attractive as an investment.”

Easy to play

Unlike domestic rouble bonds, international rouble bonds are governed by English law and are Euroclearable. This makes them more attractive to investors.

“Euroclearable bonds are a lot easier,” said an EMEA credit analyst based in London. “The local market is dominated by local accounts but issuing in Eurobond format makes it simpler. But I don’t think it’s going to become a common instrument. The benefit of a Eurobond is normally the FX, and the longer term funding you can achieve.”

Investor appetite translates into preferential pricing too, according to Solovyev.

“They’re preferable to local rouble bonds,” he said. “Because of the English law they trade and can price tighter. In the past, there was a 50bp to 1% differential between onshore and offshore costs.”

Oasis in a yield desert

In the past Rouble Eurobonds have come to the fore when dollar bond spreads have been tight so it is no surprise to see the product tested again.

“There were several issues before the crisis, and at their peak they were bought by institutional investors when there was very little juice left in dollar bonds,” said Ranko Milic, head of CEEMEA DCM at UBS.

With global returns so low, the hunt for yield will drive local currency funds to look at the issue, according to an EM syndicate banker.

“Investors have played domestically in Russia so it is no surprise there is appetite,” he said.

Any more?

Solovyev said that issuing in Eurorouble format is an attractive prospect for many Russian companies which have exposure to rouble and are trying to avoid FX risk. “It makes sense for quasi sovereigns, transport companies, infrastructure and energy providers,” he said.

UBS’ Milic said that investors would only buy quasi-sovereign Russian rouble Eurobonds, which limits how widespread issuance could become.

“Generally speaking investors tended to buy only stateowned companies in rouble,” he said.

“The reason is that you either play a macro or a micro picture. If you like where Russia is going, you would play rouble, or you play idiosyncratic risk by buying international bonds issued by a private company. But you wouldn’t want to play both so there aren’t many private companies that would issue in Rouble abroad.”

With many unknowns facing Russia, bankers will be watching the trade with interest, but Milic says it is the right time to test the market.

“Given oil has stabilised and we’re seeing positive developments on the macro front and hitting a moment where people don’t think the rouble will depreciate further from here,” said Milic. “It’s right to test, but we need to see what people say.”

Corporate Communications VTB Capital