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29 September 2016

Russian Railways on track for Eurorouble after dollar success


Russian Railways will attempt to revive the Eurorouble format on Friday following a hugely successful dollar market return the previous day.

  • By Virginia Furness
  • 29 Sep 2016

Demand for the BB+/BBB- rated borrower’s first international outing since February 2014 topped $4bn on Thursday, allowing leads to tighten pricing by more than 50bp.

Initial price thoughts for the $500m no-grow four year bond were released at 4% area. That was rapidly refined to guidance of 3.75% area as books approached $3bn, which was subsequently tightened again to 3.5% plus or minus 5bp.

The deal priced at the tight end of the range, making for a negative new issue of 10bp relative to Russian Railways’ outstanding April 2022s, according to bankers on the deal.

Andrey Solovyev, global head of DCM at bookrunner VTB Capital, attributed the size of the book to a combination of the limited size of the issue and strong appetite for Russian sovereign paper.

“There was a lot of unsatisfied demand from international investors after last week's Russian sovereign tap and Russian Railways is viewed by many as a proxy for the ministry of finance,” he said. “The recent positive news around oil also helped both the rouble and overall appetite for Russian risk.”

More than 220 investors participated in the Reg S transaction, which was led by JP Morgan along with VTB Capital and came on the back of a two-day European roadshow that finished on Wednesday.

Distribution was broad, with US offshore accounts taking 26%, UK investors 24%, continental Europe 19% and Asia 12%.

Russian domestic investors were also well-represented, accounting for 17% of final allocations. Bankers on the deal implied that they would have preferred to place more paper internationally but had to honour a promise to provide generous allocations to investors participating in a linked buy-back offer.

The tender — for Russian Railways’ outstanding $1.5bn April 2017s and Sfr675m February 2018s — was launched on September 19 and expired on Wednesday. The results were due for release on Friday.

“We made the allocation promise in order to incentivise the holders of the 2017s to bring paper,” said a banker on the deal. “Russians owned a huge chunk of that deal so we couldn’t ignore them in the new issue.”

Russian investors are also expected to turn out in force for Friday’s planned Eurorouble deal, which will be the first in the format since 2013.

Bankers on the deal were also hopeful of strong demand from outside Russia. “International accounts have increasingly been trying to get exposure to roubles recently,” said one. “We have seen them very actively buying Russian sovereign local currency bonds.”

He noted that the proportion of domestic Russian government bonds owned by non-residents has jumped to 40% in the past few months.

The Eurorouble deal will again be led by JP Morgan and VTB Capital, with Sberbank CIB also on the mandate.

Syndicate officials said that a successful transaction could tempt a clutch of other Russian borrowers to test the format. 

“If we manage to print this deal, it will open the door to the global capital markets for Russian companies without hard currency flows, who want to avoid a currency mismatch in their international borrowings,” said one.

He admitted, however, that the deal could prove challenging. “Eurorouble will definitely be uncharted waters,” he said. “It hasn’t been tried for more than three years due to the instability in the rouble. Now, however, the currency has stabilised and we are very interested to see if it is possible to print.”

Russian Railways' last Eurorouble outing was in October 2012, when the borrower tapped its April 2019s for Rb12.5bn. A dollar tap of its April 2022s in the same month was also the issuer’s last outing in that currency.

Russian Railways has not issued an international bond in any currency or format since the annexation of Crimea in 2014 and the imposition of Western sanctions on Russia. 

Corporate Communications VTB Capital