Guy Norton in Zagreb
March 26, 2012
Given Mongolia had the world's fastest growing economy in 2011, it was only going to be a matter of time before the country sought to leverage its position as the latest global financial hotspot in order to raise funds on the international bond markets and underpin its go-to investment status.
And that was just what has happened in recent days as both Mongolian Mining Corporation (MMC) and the Development Bank of Mongolia (DBM) tapped fixed-income investors with benchmark-sized issues. Thanks to the buzz around the Central Asian state, both issuers were easily able to hit their desired bond size targets and also price the bonds at cheaper levels than initially hoped for.
On March 23, MMC became the first Mongolian corporate to access the international bond markets with a benchmark-sized $600m, five-year issue that's callable after three years. Bank Of America Merrill Lynch, ING and JP Morgan were bookrunners in the deal, which featured an 8.875% coupon, at the tight end of the pre-launch marketing range of 8.875-9.00% and well inside the initial price talk of a 9.50% yield.
In total, the landmark offering attracted over $4.5bn worth of orders from over 330 accounts. Some 56% of the bonds were sold in the US, with 22% each in Asia and Europe. Fund managers bought 75% of the bonds, commercial banks 11%, and insurance companies, private banks and types of accounts came in for 14% of the deal. Thanks to the size of the issue, it will be included in all the major emerging market bond indices, which require that transactions need to be for a minimum amount of $500m to qualify for inclusion.
According to Moody's Investor Services, which assigned a 'B1' rating to the bonds, MMC is well placed to benefit from the strong outlook for Mongolian coal exports. The company currently operates two mines in the Gobi Desert in Mongolia and it exports its entire production to industrial end-users in China.
The proceeds will be used to fund MMC's infrastructure improvement and development plans, including its Ukhaa Khudag-Gashuun Sukhait (UHG-GS) railway project, as well as for working capital and other general corporate purposes, including exploration costs and debt refinancing. Given its ambitious expansion plans — MMC is planning capital expenditure spending of $940m in 2012-13 — and outstanding debt of $425m, MMC has been an active fundraiser of late, recently raising a $300m syndicated loan via Standard Bank to help refinance maturing debt.
The euphoric reception of MMC's pioneering corporate issue mirrored the frenzied buying that surrounded the $580m, 5.75%, March 2017 bond issued by the Development Bank of Mongolia on March 14, which effectively represented the first ever sovereign bond from Mongolia.
State-guaranteed DBM, established in 2010, is a government-controlled development bank that sees itself as a poster child for the Mongolian economy, which grew by 17.3% in real terms in 2011. That rampant growth was fuelled by its position of a prime supplier of basic commodities to China, which enabled it to attract a record $3.8bn in foreign direct investment (FDI) in 2011. Last year, the country's exports reached an record high of $4.8bn – up some 64% on the previous year – thanks largely to the fact it became the largest supplier of coking coal to China, now the second largest global economy.
DBM was marketed as a key player in Mongolia's emergence from economic zero to hero, with the policy institution viewed as a prime driver in the country's efforts to drive forward its industrial and social infrastructure development, which is forecast to cost at least $25bn in the current decade. This will involve the construction of at least 100,000 affordable apartments plus the building of new rail, road and energy projects. As such, DBM was an appropriate choice of issuer to make the first major splashdown in the international bond arena. Previously the only offshore debt issuance from the country had come from the country's third largest commercial lender, Trade and Development Bank of Mongolia, which had launched two small issues in recent years.
According to Dosbergen Musaev, chief economist at investment bank Eurasia Capital: "The sheer size of infrastructure funding needs in Mongolia means that the Development Bank of Mongolia will need to tap international debt markets in the near future again and become a frequent issuer." Eurasia Capital believes that DBM will likely issue transactions in Chinese yuan, Japanese yen and Sinagapore dollars on the horizon in the next couple of years.
Meanwhile, Eurasia Capital expects that the success of DBM's sovereign issue, which was 10-times oversubscribed with total orders of over $6bn, will encourage a raft of bank, corporate and municipal issuers to follow its lead and tap the international bond market, thus cementing Mongolia's emergence from obscure bit player in the frontier markets sphere to an increasingly mainstream actor in emerging market terms. Musaev also believes that foreign investors are also likely to look more favourably on local bond issues in Mongolia now that there is offshore benchmark issuance "We expect to see a positive spillover effect on domestic bond market."