Ukraine Railway gets a $500mn Eurobond away on second attempt

Ukraine Railway gets a $500mn Eurobond away on second attempt
Ukraine Railway tried to issue a Eurobond in September 2018 but the market was unreceptive. This time round the market welcomed the $500mn offer
By bne IntelliNews July 2, 2019

Ukrzaliznytsia (Ukrainian Railway) followed the government into the international debt capital market with a $500mn Eurobond issued to high demand on June 2.

This was the second time the state-owned rail monopoly tried to get a Eurobond away that it intends to use to modernise its services. Ukrzaliznytsia issued a five-year note with a yield of 8.25%, Interfax Ukraine reported, citing market participants.

"More than 175 investors from the UK, continental Europe, the United States and Asia presented their offers to purchase the securities. Consequently, the demand was five times higher than the offer and reached $2.5bn," Yevhen Kravtsov, the chairman of the company's board, said on Facebook.

Kravtsov said that the fixed rate is more than 1.5 percentage points lower than the coupon on the existing issue of 2013.

The placement was organised by JP Morgan and local investment bank Dragon Capital. The road show in the UK and continental Europe started on June 26 and Ministry of Finance officials reported they were met with enthusiasm.

Ukrainian Railway became the first corporate Ukrainian issuer to follow the government’s transaction two weeks ago.

The government issued a €1bn seven-year Eurobond on June 14 that yielded 6.75% – below the 7% the bond was expected to cost before the issue – that was the first euro-denominated Eurobond issue in seven years. All Ukraine’s sovereign bonds have rallied recently with the spreads on the benchmark US treasury bills tightening by some 100 basis points this year, say analysts.

“Follows hugely successful sovereign issue in euros a few weeks back. Since issuance that bond has rallied over 6.5 points, and the whole Ukraine sovereign curve has tightened well over 100bps,” Tim Ash, senior sovereign strategist at BlueBay Asset Management, said in a note. “Mid-May Ukraine 10Y in dollars was trading at 9.5%, and its now down at 7.7%, a massive reduction in Ukraine's cost of borrowing overseas - some of this is the broader risk-on market rally, but only around 50bps of this, the rest is I think appreciation finally of the Ukraine story (better ratios now than peers), optimism over the Zelenskiy presidency, et al.” 

International bond traders are hot for Ukrainian fixed income at the moment. In the five weeks since the Ukrainian domestic fixed income market was hooked up to the global financial system after it joined Clearstream, non-residents have invested over $2bn into hryvnia-denominated bonds and already own more than 7% of the outstanding bills, up from next to nothing a year ago.

The enthusiasm for Ukrainian debt will make the government’s life a lot easier as it faces a debt mountain of redemptions this year.

Ukraine’s ability to repay its obligation still depends on receiving the remaining two tranches of International Monetary Fund (IMF) money this year, which is not expected to resume until the autumn after the July general election to elect a new parliament is passed. However, the new administration of Ukrainian President Volodymyr Zelenskiy has said that it wants to open negotiations with the country’s main donor to return to the longer-term Extended Fund Facility (EFF) that runs over several years from the Stand-By Arrangement (SBA) it currently has.

Relations with the IMF soured under former President Petro Poroshenko thanks to foot dragging on reforms, especially the anti-corruption actions the fund insisted on, and Ukraine was downgraded from an EFF to an SBA as a result. At the same time Ukraine only drew down about half of the $17.5bn allotted to it under the EFF. The hope is that under Zelenskiy the government will be more responsible and responsive to the IMF’s demands and the budget will receive all the money promised to it as part of an extended EFF.

Ukrzaliznytsia tried to float a Eurobond last year shortly after a sovereign issue, but withdrew the offer due to the poor reception it received from investors. This time round things have gone a lot more smoothly. The bond was initially offered with a guidance on the yield of between 8.5% and 8.625%, according to Bloomberg sources, but finally priced at 25bp below the end of the indicative range.

Ukrzaliznytsia will use the funds to refinance a $150mn September amortisation payment on its 9.875% earlier dollar bond, which is in technical default. The rest of the money could be spent on the company’s UAH1 trillion ($36bn) modernisation programme.

The success of the Ukrzaliznytsia  bond may open the door for other corporate issuers to come to market, say analysts. Ukraine’s state-owned oil and gas company Naftogaz is also poised to sell Eurobonds and will start a roadshow this month.