Yield Hunters Squeeze Spread in Czech Railways Record Bond Sale

  • New seven-year debt priced 180 basis points above mid-swaps
  • Investors order more than 1 billion euros of carrier’s notes

Czech Railways AS sold its biggest-ever Eurobond to refinance older debt at a lower cost after the unprofitable state-run carrier was upgraded by Moody’s Investors Service this month.

The company, locally known as Ceske Drahy, priced 400 million euros ($451 million) of seven-year notes to yield 2.03 percent, or 180 basis points above the mid-swap rate on Wednesday, according to a person familiar with the matter. The spread had tightened several times during the day from an initial guidance of 200-210 basis points while investors ordered more than 1 billion euros of the securities, said the person, who asked not to be identified.

Prague-based Czech Railways, which has 300 million euros of debt coming due next month, is tapping bondholders at a time economic stimulus by the European Central Bank has pushed down borrowing costs in euros to record lows. Moody’s lifted the company’s credit rating one level to Baa2, two steps above junk, with a stable outlook on May 9, citing improvements to the operational performance and leverage.

The passenger and freight operator swung to a net loss of 1.38 billion koruna ($57 million) in 2015 from net income of 156 million koruna a year earlier because of rising costs, including a court-ordered payment of about 700 million koruna to Skoda Transportation AS, the Czech Railways website shows. Still, Moody’s said last week it expects the company’s debt burden and operating profitability to stabilize and the new Eurobond to improve the liquidity profile.

The carrier’s euro-denominated notes maturing in July 2019 traded at a yield of 1.24 percent as of 3:26 p.m. in Prague, 132 basis points above similar-maturity Czech sovereign Eurobonds. The rate on the rail company’s bonds touched an all-time low of 1.13 percent last month, compared with around 3.8 percent when the security started trading four years ago.

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