Czech Sewage Utility Taps Hunt for Yield in Koruna Offering

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Water and sewage utility SmVaK AS sold the biggest Czech local-currency corporate bond in a year, taking advantage of lower borrowing costs to refinance debt.

The company co-owned by Mitsui & Co. priced 5.4 billion koruna ($223 million) of seven-year debt to yield 2.67 percent, said a person familiar with the offering, who asked not to be named as the details are private. SmVaK paid more than 5 percent to raise 2 billion koruna in 2005, when it last sold bonds.

Severomoravske Vodovody a Kanalizace Ostrava, as the issuer is also known, tapped demand for higher-yielding assets from Czech investors squeezed by record-low interest rates. Central banks worldwide have kept borrowing costs low to spur economic growth.

“The deal shows that cash-rich Czech investors are really desperate for yield,” Lutz Roehmeyer, who oversees about $1.1 billion of emerging-market debt at Landesbank Berlin Investment GmbH and who bid for the bonds, said by e-mail. “I only sought a small piece for diversification as it’s quite expensive.”

The rate on seven-year government koruna-denominated notes has dropped 2.86 percentage points in the past five year to 0.58 percent. Yields on 10-year Eurobonds by CEZ AS, the nation’s largest utility, were 2.03 percent.

SmVaK, based in the eastern Czech city of Ostrava, will use the proceeds to refinance its 2 billion koruna of bonds maturing in November and to distribute as much as 3.35 billion koruna to shareholders via a dividend and capital reduction, according to the sale prospectus. Komercni Banka AS, ING Groep NV and SMBC Nikko have been joint lead managers for the sale.

‘Chief Constraint’

Fitch Rating assigned a preliminary BBB- rating, the lowest investment grade and five steps below the sovereign. While SmVaK is enjoying a monopoly status, future regulation and declining water consumption may dent revenue, it said in a statement July 2. The refinancing plan is “aggressive” and the resulting increased indebtedness is “a chief constraint” on the credit assessment, Fitch said.

The debt sale was the largest koruna-denominated corporate issuance since gas-pipeline operator Net4Gas a year ago paid 2.38 percent to raise 7 billion koruna of notes due July 2021, according to data compiled by Bloomberg. The note has a BBB rating by Fitch, one step above SmVaK.

SmVAK is owned 99 percent by Aqualia Czech SL, which is controlled 49 percent by Mitsui. Spain’s Fomento de Construcciones & Contratas SA controls the remaining majority stake in Aqualia Czech.

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