Hot on the heels of Kazakhstan’s debut Falcon bonds in April, Mongolia is the most recent Central Asian republic to issue offshore debt in its national currency and in doing so has created the first Nomad bonds.
Their name harking back to the nomadic lifestyle on the Mongolian steppe, the Asian Development Bank has sold a MNT21 billion ($7.5 million) five-year bond at 10.1%.
Denominated in tugrik, but settled in US dollars, the paper was underwritten by ING Bank and sold to an (unnamed) European asset manager.
“This is a milestone transaction for ADB’s local currency operations,” said ADB treasurer Pierre Van Peteghem.
“The ability to raise competitively priced term funding in Mongolian tugrik at this time is a major achievement with tangible benefits in terms of currency risk mitigation for ADB’s borrower,” he added.
Bankers away from the deal agree that the bond has been priced fairly.
The deal is significant first and foremost because of what it means for the country's capital markets.
Mongolia's equity markets remain moribund after the government recently scrapped its $3 billion initial public offering plans for flagship coal mining company Erdenes Tavan Tolgoi.
As for the debt markets, there has been no issue of Mongolian domestic government bonds since September 2017. More to the point, they typically only have maturities of up to three years which makes the ADB’s paper a significant benchmark.
Offshore too, the performance of Mongolian paper has not set the world alight. The only deal to get away last year was Mongolian Mining, which returned to the G3 markets with a $440 million five-year senior unsecured bond issue in April 2019. It was the first successful refinancing for a debt restructured company outside China and FinanceAsia’s country deal award winner for Mongolia last year.
Two other attempts fell flat on their faces. In May 2019, conglomerate Tavan Bogd pulled its debut US$150m Reg S/144a deal after pricing had been set at 12% by bookrunners Credit Suisse and Morgan Stanley.
The reason remains murky. Officially it was because of unfavourable market conditions. Unofficially, bankers say that there were difficulties with allocations.
And then later that month, Trade and Development Bank of Mongolia pulled its own three-year Reg S dollar bond deal after final pricing (but not the size) had been set by ING at 9.125%.
This time the reason was clearer. Chairman Erdenebileg Doljin had been detained by the authorities in connection with the financing of a copper mine in the country.
HERD MENTALITY
Proceeds from the Nomad bond will be used to help local dairy chain Milko expand operations.
“Investing in agricultural value chains can yield solid economic and development impacts,” said ADB country director Pavit Ramachandran, explaining that the funding is part of a progarmme called the Gender Inclusive Dairy Value Chain Project.
This will help Milko, part of the Teso food group, develop its raw milk sourcing and processing capacity. About half of the company’s raw milk comes directly from smallholder milk suppliers and herders. Direct sourcing, says the ADB, brings extra income to both herders and communities, while also providing Milko with a sustainable and reliable source of raw material.
“This project is good news for rural households, as one-third of Mongolia’s population lives in rural areas and their livelihoods oftentimes depend on animal husbandry and milk production,” said Ramachandran.
The ADB will help Milko to develop and implement a plan to increase the share of women directly and economically benefitting from Milko’s procurement of raw milk and to increase the share of payments to women for the product.
WAITING FOR ELECTIONS
The new bond for Mongolia is a rare bit of good economic news for the land-locked country which continues to face down the Covid-19 pandemic. It was one of the first countries to close its international borders in March to limit the effects of the coronavirus.
To date, only 215 people in the country have been diagnosed with the coronavirus and no fatalities have been recorded.
The lockdown might have been effective, but it has dealt a blow to the economy.
“Mongolia enjoyed a solid economic recovery in the past three years, but the Covid-19 outbreak presents a significant challenge,” said Ramachandran.
The Asian Development Bank estimates that economic growth will drop to 2.1%, down from 5.1% last year.
In early May, Moody’s affirmed Mongolia’s B3 rating but changed its outlook to negative while at the end of the month, Fitch affirmed the country at B with a stable outlook.
“The impact of the [Covid-19] shock will be largely temporary, with the economy rebounding strongly and government debt/GDP starting to decline again in 2021,” it said.
The strong response to Covid-19 is likely to play well with voters who today, 24 June, will elect a new parliament.
After its landslide victory in 2016 – it won 65 of 76 seats – the Mongolian People’s Party (MPP) is expected to maintain control of the State Great Khural.
