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Comment by Andrey Solovyev, Global Head of DCM at VTB Capital, for GlobalCapital

14 September 2017
Russian Railways makes stop at Swiss market

The Swiss bond market welcomed Russian Railways back to the market after a five year absence this week.
The Ba1/BB+/BBB- rated borrower mandated Credit Suisse, JP Morgan and VTB Capital to arrange meetings in Geneva and Zurich on Wednesday, intending to refinance an outstanding bond.

“Russian Railways is careful not to raise its foreign currency exposure,” said Andrey Solovyev, global head of DCM at VTB Capital. “So, it capped the size at Sfr450m ($466.2m), which they would have to pay for the maturing bond in February 2018.”

Russian Railways' last entry into the Swiss franc bond market was five years ago, printing a Sf6r75m ($711.2m) dual tranche deal. But Swiss buyers know the Russian firm well. Both roadshows were very well attended and one banker on the deal said he had never seen so many people crammed in a room at 8am.

“Russian Railways is the best proxy for Russian govvies,” said the banker. “So we had some leverage in terms of pricing and maturity.” Swiss lenders, a notoriously conservative bunch, are particularly drawn to infrastructure credits, with foreign borrowers from Kazakhstan, Korea and Russia raising funds in the past few years.

A six year maturity made the most sense for Russian Railways' debt maturity profile, the banker added.

On Thursday morning, Zurich time, the leads soft sounded an October 2023 benchmark bond — the order book was opened with a guidance range of 2.1%-2.35%, which was subsequently tightened to 2.1%-2.25%.
The leads assured buyers that the bond would price within the initial range.

“Swiss investors want as little uncertainty as possible,” said Solovyev. “Some put pricing limits on the books, but most knew it would price at the tight end.”

The October 2023 bonds were sold with an indicative spread of 224.3bp over mid-swaps, for a final size of Sfr450m, to yield 2.1%.

“We actually offered a negative new issue premium,” said one banker on the deal. “Russian Railways' outstanding 2021 bonds were quoted at 188bp, and if you add 30bp for each year along the curve, you reach a fair value of around 280bp over mid-swaps.”

Roughly two-thirds of the bonds were bought by private banks and retail buyers, and the rest was shared by asset managers and pension funds.

“We saw fair value at 2.15%-2.17%, so we are pleased with the 2.1% outcome,” said Solovyev. It is rare to see Russian credits enter the Swiss market. The cross-currency basis swap makes the Swiss market less competitive against euros and Russian rouble.

“The lack of Russian issuance in the Swiss market recently is down to supply, rather than demand,” said a banker away from the deal. 

But unlike most Russian credits, Russian Railways will not swap back into roubles, as it has Swiss franc funding needs. Train tariffs, by convention, are set in Swiss francs.

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