The debut Swiss franc bond from Russian Railways, which was launched on Tuesday, has been eagerly awaited by investors and syndicate bankers. Aside from being a new name in the currency, it gives a handy gauge of just how keen Swiss institutional investors really are on emerging market paper.
Some Zurich bankers had been expecting a four or five year deal that would sweep up demand from retail investors and grab a token level of participation from insurance companies. But Russian Railways and its advisers had something a little more interesting in mind.
The issue has been structured as a dual trancher. The main tranche is a five year deal aimed at private bank accounts — the investors that everyone always expects to buy Russian debt in Swiss francs. More out of the ordinary, however, is the smaller secondary tranche: an eight year note that looks to be specifically targeted at institutional investors.
Admittedly, that eight year tranche is drawing less interest than the five year, although the price has been set at the tight end of guidance (see below for pricing update). But the mere fact that a CEE name is trying to woo institutional investors shows just how much things have changed.
If you were asked to name obvious buyers of CEE paper, Swiss institutionals wouldn’t spring to mind. But, for the moment at least, Swiss institutional investors and emerging market debt are a match made in heaven.
The Swiss franc market is an extremely low yield environment and institutional investors need to get used to that fact. Buying only the safest, lowest yielding paper isn’t an option for those investors who need to hit targets for their clients. And investors have had plenty of time to get comfortable with the concept of buying Eastern European debt: issuance from the region over the last few years has increased from just Sfr384m in 2006 to Sfr3.96bn last year. While the bulk of this went to retail investors, deals from Russian Agricultural Bank and Gazprombank last summer surprised with 40% and 30% participation from institutional investors.
The main stumbling block to issuance is a volatile basis swap into US dollars, making achieving the right pricing levels a challenge. However, bankers are sanguine that the upbeat mood in other markets should push the swap towards a more favourable level.
With the paltry yields on offer in Swiss francs — and the scarcity of deals — issuers shouldn’t need to pay up to tempt investors.
But most importantly, they need to take off the blinkers and remember that the Swiss franc market is more than just private banks. If issuers are willing to throw the institutional funds a bone, they could do very well out of it indeed.
Post-pricing update (January 30): The eight year tranche was sized at Sfr150m, despite a suggestion from one bookrunner during the bookbuild that it might have been smaller. The five year tranche was sized at Sfr525m.