Azerbaijan raised $1.2bn in a heavily over-subscribed debut Eurobond issue on March 10, shrugging off worries over the crisis in Ukraine.
Baku saw strong demand totaling over $4bn for the 10-year bond, according to sources quoted by the Financial Times. That saw it tighten pricing from initial guidance of low to mid 200 basis points over US Treasuries to set a final yield of 5%. The Ukriane crisis had seen the yield on the 10-year Treasury hit 2.82% on March 7, its highest in six weeks
By way of contrast, CIS bonds continued to struggle as the military standoff in Crimea persists. Russian yields moved out 5-15bp, Ukrainian sovereign debt slipped 70bp in price, and Kazakh semi-sovereign debt fell in price on average by 40bp, reports VTB Capital.
There were suggestions as Azeri officials met with investors last week that the timing of the issue could depend on movement towards a resolution of the crisis in Ukraine. However, it appears that the market focused on Azerbaijan's role as an alternative European energy supplier.
The risk of interruptions to Russian energy supplies through Ukraine, and frustration in the West over the limits that that European dependence imparts on sanctions, has the EU looking to accelerate efforts to pin down alternative suppliers. Azerbaijan is a major oil producer and a key strategic export opening.
The giant Shah Deniz gas field announced late last year that it will send 10bn cubic metres of gas to Europe by 2019. It will be first significant pipeline connection bypassing Russia to be given the green light under Brussels' Southern Corridor initiative.
Azerbaijan is currently rated at the lowest investment grade by both Fitch and Standard & Poor's. In October, Fitch affirmed Azerbaijan's long-term foreign and local currency IDRs and its senior unsecured bonds at 'BBB-'. The rating agency cited stabilising oil production and a sovereign balance sheet that is "one of the strongest among rated sovereigns".
Standard & Poor's affirmed Azerbaijan's ratings at 'BBB-/A-3' with stable outlook in January, saying that the country "maintains strong net general government and external asset positions."
Baku's debut Eurobond seeks to harness that improving sentiment. The main motivation for the issue was to set a benchmark for corporate borrowers. The State Oil Company of the Azerbaijan Republic (SOCAR) successfully placed two Eurobond issues, raising $500m in 2012 and $1bn in 2013, and has signalled it may return to the international market in 2014 with an issue of up to $3bn..
Meanwhile, the country's largest bank - International Bank of the Azerbaijan - is considering a $500m issue. The bank's chairman Jahangir Hajiyev, said in November that a potential 5-7 year issue is "linked with increase of [IBA's] capital." The bank plans to increase its capital by AZN500m ($460m) within the next four years. Pasha Bank has also indicated it may issue a Eurobond, according to Trend.
The Azeri issue also sees Baku join others in the region in tapping international markets. Old foe Armenia raised $700m from the sale of its Eurobond debut in September - dubbed a "Kardashian" bond - which priced to yield 6.25%.
Kazakhstan, anther oil-rich former Soviet country, has also announced plans for a Eurobond this year. Finance Minister Bakhyt Sultanov said Astana hopes to raise $1bn via its first sovereign Eurobond for more than 13 years, after plans to borrow in 2013 were put on hold.
Georgia was the first country from Central Asia and the Caucasus to issue a sovereign Eurobond, raising $500m in 2008. This was followed by another $500m issue in 2011, as well as corporate Eurobonds from Georgian Railways and Georgian Oil and Gas Corporation.
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