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Trade and Development Bank of Mongolia (TDBM) sold a $500 million five-year note on Tuesday evening, the country’s first dollar offering in three years.
Rated B2/B+ by Moody’s and Standard & Poor’s respectively, the Reg S/144A bond priced at the lower end of the final price guidance at 9.375%. It is also 37.5 basis points tighter than the initial guidance area of 9.75%, according to a term sheet seen by FinanceAsia.
Guaranteed by the government of Mongolia, the offering received an order book in excess of $2.3 billion from over 230 accounts, indicating strong appetite for the notes despite ongoing challenges within the Mongolian economy. This is especially true for US investors, who took up half the notes while the remainder was split between European and Asian accounts.
A source close to the deal said that secondary levels are performing extremely well, noting that Asian accounts missed out on the transaction and are keen to add on positions. On Wednesday morning, the bond had traded up to a cash price of 102.75 from par.
“The US accounts really led the process,” said the source. “There was large support from sovereign funds out of the US and Europe, which enabled the deal [price] to tighten by a meaningful amount.”
Asset managers purchased 90% of TDBM’s paper, followed by banks with 5% and private banks and others with 5%.
Based on where the commodities cycle is, holding debt instruments from Mongolia-based borrowers may be a big risk given that the frontier market — endowed with immense mineral wealth — is highly reliant on the commodities sector.
Mongolia’s growth suffered in 2014 from the slowdown in coal exports to China and in foreign direct investment due to uncertainty over the nation’s regulatory framework and fall in coal prices. Thermal coal, for example, is languishing at six-year lows of about $63 a tonne – down from $150 a tonne in 2011.
Moreover, exploitation of the Oyu Tolgoi mine — home to one of the world's largest reserves of copper and gold — began in the middle of 2013 but London-based multinational mining corporation Rio Tinto and the government remain at odds over the project’s second phase. Scheduled to become fully operational in 2020, output from Oyu Tolgoi could represent 30% of Mongolia's GDP credit analysts said.
As a result, the International Monetary Fund (IMF) predicts that the growth of Mongolia’s economy is likely to decline to 4% from 2014’s 7.8%.
Nonetheless, the frontier market still offers opportunities. Prime Minister Saikhanbileg Chimed, in a nationally televised address on April 5, outlined his plans to revive the economy, including the resolution of a dispute with Rio Tinto concerning the $6.6 billion Oyu Tolgoi copper mine.
This spurred the yield on sovereign notes due January 2018 to drop 175bp to 5.47% on April 14, according to data compiled by Bloomberg. That’s the lowest yield since June 2013, after rising to an all-time high of 9.79% on January 21. The yield is now hovering around 5.98% on May 13.
Comparables
The nearest comparables for TDBM’s offering includes its own and the sovereign’s outstanding bonds maturing in 2017 and 2019 respectively that were trading at a yield of 7.5% and 5.6% prior to announcement of the deal, according to a separate source on the deal.
Given that TDBM’s existing bond is a two-year offering, fair value for the latest note would be around the 9% area after taking into account the extension of the duration curve plus credit curve, added the source.
Proceeds of TDBM’s bond will be used to refinance its outstanding $330 million note maturing in September as well as for general corporate purposes.
The last Mongolian issuer to raise a dollar bond over the size of $500 million was the sovereign, which raised a $1.5 billion dual-tranche note in November 2012.
Based in Ulaanbaatar, TDBM is the largest bank in Mongolia by assets. At 31 December 2014, the institution's consolidated assets totaled MNT5.4 trillion ($2.9 billion).
Bank of America Merrill Lynch, ING and Deutsche Bank were the joint book runners of the transaction, which is part of the borrower’s $500 million global medium-term note programme.
