The state railway administration (Ukrzaliznytsia) has decided to enter the Eurobond market after lengthy preparations. According to Bloomberg, the carrier will issue five-year, dollar-denominated securities with a yield rate of about 9%. The amount that it aims to raise has not been made public.
"Initially, Ukrzaliznytsia planned to raise between USD 750 million and USD 1 billion. However, it may turn out that the low benchmark yield will result in reduction of this amount," Serhii Furs, a specialist at the department of sale of debt securities at Dragon Capital, told the Center for Transport Strategies.
According to him, the lead managers for placement of the bonds will be Barclays Bank, Morgan Stanley, and Sberbank CIB, and an order book is already open. The terms of placement of the bonds provide for the possibility of early sale (a put option) at 101% of the nominal value if the state loses control of 100% of the company.
It should be recalled that Ukrzaliznytsia has been planning to issue Eurobonds for quite a long time. Information about these intentions began to emerge at the end of 2011 and announcement of a search for organizers of placement of the bonds appeared in the in the Bulletin of Public Procurements at the beginning of 2012. In particular, the Donetsk railway planned to issue securities for USD 225 million, the Pivdennyi railway for USD 250 million, the Odesa railway for USD 125 million, the Prydniprovskyi railway for USD 175 million, and the Lviv railway for USD 75 million. However, the issuance of the securities was delayed due to unfavorable conditions on the capital markets and the sizes of the required amounts.
The need to invest in modernization of infrastructure and renewal of rolling stock is forcing the transporters to raise funds because their own funds allow them to invest only one-third of the required amount, which is estimated at UAH 27 billion per year. At the same time, the level of depreciation of equipment has reached critical levels, and Ukrzaliznytsia needs to upgrade its fleets of railcars and locomotives. To this end, in late 2011, Ukrzaliznytsia signed a contract for supply 230 2ES4K direct-current freight locomotives and 70 2ES5K alternating-current freight locomotives in the period of 2012-2016. The deal, which is worth about UAH 16 billion, was to be financed by Vneshekonombank (Russia).
However, Ukrzaliznytsia was unable to reach agreement with financial institutions and therefore decided to upgrade its fleet by rolling stock. But there were also many obstacles along this path. In particular, not every lessor or bank from which it will seek to raise funds for financing the transaction is capable of handling such a contract volume. Consequently, the sources of funding could only be large state-owned banks in Russia. Besides, leasing schemes automatically made the cost of leasing locomotives higher than the cost of purchasing them.
Experts believe that a Eurobond issue is the most profitable way to raise funds.
"A bond issue is the optimum borrowing mechanism for Ukrzaliznytsia at the moment. Before that, it held talks with banks, which were either unable to provide the needed amount credit to it or demanded sufficiently high interest rates. I also want to add that placement of Eurobonds is a common method of borrowing funds that is also in demand among railway companies: the Russian Railways, Globaltrans, and Braynsvik Rail,” said Dmytro Yahello, an analyst at the Center for Transport Strategies.
The interest rate is likely to be 9.5% instead of the declared 9%.
He also believes that Ukrzaliznytsia has the opportunity to raise a much larger amount through Eurobonds than through a bank loan. Moreover, according to the expert, these securities are a cheaper source of funds than the credit and leasing mechanisms.
Experts suggest that the situation on the market favors entry onto the securities markets. "The situation on the market continues to be favorable to borrowing. Optimism continues to dominate on the markets, which increases the appetite for risk," said Serhii Fursa. He also believes that the more likely interest rate is 9.5% instead of the stated 9%. "This rate is too low, and the more realistic benchmark is 9.5%," said the expert.
Andrii Shkliar, the head of the analytical department at the Center for Transport Strategies, noted that Ukrzaliznytsia is a public entity. Therefore, according to him, the approximate benchmarks for the cost of raising funds through Eurobonds could be the current yield rates of the state-owned banks Oschadbank and Ukreximbank (in the range of 9.00-9.25%), as well as the Finance Ministry’s foreign-currency bonds, which are trading at yield rates above 7% per annum.
"Thus, the current premium on the yield rates of government bonds for public companies is in the range of 2-2.25%, and it may reach 2.5% in the case of Ukrzaliznytsia because it is debuting on the market,” the expert said.
