There was much debate last week as to whether Russian Railways’ gamble to wait had paid off. Leads Barclays, Citi, JP Morgan and VTB Capital argued that the contraction in rates over the last month provided a better overall yield result than could have been achieved a month ago or in the intervening period.
But bankers away from the deal insisted that the fall in underlying rates was driven by a flight to quality driven by the escalating crisis in Ukraine and as such there was also a resulting spike in spreads that annihilated any rates improvement, which needed to be taken into account when looking at the final yield result.
Regardless of who was right, the strategy was a very risky one. Every EM banker worth his salt has been telling issuers since the start of last year that sooner is better for borrowing in bond markets. EM issuers have more control over the spreads they pay than the direction of underlying rates and the latter are only expected to go in one direction — up.
If there was a benefit to having waited, Russian Railways’ bankers should acknowledge their luck in pulling off that strategy, rather than calling it a sensible, planned move. Calling it skill erodes the message of urgency to beat rates or focus on spreads that bankers are otherwise trying to hammer home to their clients.
Riding a rates move that was a flight to quality prompted by tumultuous activity in the borrower’s home country was a risky business. Each time the Bund ticked upwards, there was mounting argument for spreads to push wider. Standard & Poor’s, which currently rates Russia at BBB, has said it is monitoring the developments with regards to Ukraine closely and the country's CDS sold off 30bp on Monday, for example.
The new Russian Railways bond was down two points by the end of the day on Monday, which leads said vindicated their strategy. Others are less sure — it is every issuer’s right to pick the moment it sees as best, but they argue the safest moment to secure favourable pricing was a month ago while the best pricing moment could still be to come if the crisis subsides.
Claiming to have made the right call on rates might sound like the banks' crystal balls were all in good working order, and why wouldn't they talk up their own handiwork in front of their client?
But the reality is that EM borrowers could be making an expensive mistake if they think they should follow a group of people who think they can predict the future of rates rather than deal with clear and present credit danger.