Guy Norton in Karaganda, Kazakhstan -
Kazakhstan is poised to be the source of a growing number of Eurobond mandates in the coming weeks as a combination of bank, corporate and government-related borrowers all seek to take advantage of improving investor sentiment towards the country and lock in funding at evermore attractive levels.
The capital-raising spree is being spurred by the improved perception of Kazakh risk, with credit-default swap (CDS) spreads plunging from a peak of 1,650 basis points (bps) in February 2009 when the country devalued its currency by 18% and nationalised a number of heavily indebted banks to around 160 bps by late October, according to data provider CMA DataVision.
The improvement has been driven by growing signs of economic recovery in Kazakhstan, with strengthening global demand for commodities, especially from neighbouring China, helping to propel the natural resource-rich country's economy to register GDP growth of 7.9% in the first eight months of the year. Alikhan Smailov, head of Kazakhstan's Statistical Agency, believes that the country is on track to record full-year GDP growth of 7.4-7.6%. The positive growth outlook is helping to bolster demand for Kazakh assets and open up new funding avenues for would-be borrowers as a result.
Among the deals in the pipeline is a $750m, seven-year Eurobond from Kazakhstan's largest lender, Kazkommertsbank. The bank has mandated JP Morgan and UBS to lead manage the planned debt offering, which would provide the first major test of appetite for banking sector risk from Kazakhstan since the completion of more than $20bn-plus of debt restructurings at a troika of Kazakh banks - Alliance, BTA and Temirbank – which left Eurobond buyers nursing heavy losses.
Almaty-based investment bank Visor Capital welcomed news of the planned offering, noting: "We expect positive bond and share price impact, as we believe the potential Eurobond issue could allow Kazkommertsbank to improve its funding and liquidity position."
It's not only market leaders such as Kazkommertsbank that have been eying up the international debt markets. In mid-October Kazakh oil minor Zhaikmunai placed $450m of 10.5% notes due 2015 in a private placement via Citibank, ING and JP Morgan. The positive market sentiment towards Kazakhstan allowed the leads to up the deal from an initially planned target size of $400m and to tighten pricing from an initial range of 10.75-11%. "The improved market conditions allowed us to successfully extend the maturity profile of our debt at attractive terms and to refinance our $382m secured syndicated loan," says Jan-Ru Muller, Zhaikmunai's chief financial officer. "In addition, this further increases our flexibility and at the same time strengthens our financial position. The strong demand for the bond provides further evidence that a broad range of investors recognize the long-term strength of Zhaikmunai and the progress it has made in recent months."
Zhaikmunai came to market in the wake of a blow-out transaction from national railway firm Kazakhstan Temir Zholy (KZT), which at the end of September added to the steady flow of government-related Eurobond issuance from the Central Asian state this year, with the launch of a highly popular $700m, 10-year Eurobond which provided further confirmation of Kazakhstan's growing popularity with investors. KZT's offering followed in the wake of earlier well-received deals from uranium producer Kazatomprom and oil and gas outfit KMG.
KTZ's latest Eurobond was its first since May 2006 when it issued a $450m, 6.5% deal that matures in May 2011 and a $350, 7% deal due in 2016. Given the lack of sovereign issuance – Kazakhstan has not issued international debt since April 2000 and has no Eurobonds outstanding – and the positive economic story underpinning the deal, KTZ's quasi-sovereign offering met with overwhelming demand. It attracted over $8.2bn worth of bids from a broad cross-section of investors from continental Europe (39%), the US (33%), the UK (22%) and Asia (6%). This enabled lead managers Barclays, HSBC and RBS to price the deal with a headline coupon of 6.375%, well inside initial price talk of 6.5%-6.625%. "The KTZ transaction was positioned around the strength of the macroeconomic situation in the country, and the importance of KTZ within the economy. As investors got a better understanding of the strength of Kazakhstan through the road show, we saw substantial demand as well as a re-pricing of the whole Kazakh risk curve," says Simen Munter, chief executive officer of HSBC Kazakhstan. "As such this deal not only succeeded in meeting KTZ's funding requirement, but it also resulted in other issuers being able to access the market at lower levels."
An additional attraction of the KTZ offering was that at $700m it is eligible for inclusion in the widely followed JP Morgan Emerging Markets Bond Index Global, which requires issues to have minimum face value of $500m. The issue also received a fillip from the fact that in the run-up to launch, Standard & Poor's revised the outlook on KTZ's sub-investment grade 'BB+' rating from stable to positive. "The outlook revision reflects our view of the positive operational and financial evolution of the KTZ group, although the ratings remain constrained in the short term by the group's reliance on lower-rated banks holding most of its cash position," says Standard & Poor's credit analyst Vincent Allilaire.
Moody's Investors Service, which assigned the deal an investment grade 'Baa3' rating with a stable outlook, also expressed concerns about the risks associated with the weak local banking sector in Kazakhstan, where the KTZ group has to place its temporary free cash. But it noted that in the future KTZ intends to place part of its cash reserves with the local subsidiaries of stronger foreign banks. Ekaterina Botvinova, a Moody's analyst in Moscow, says that while the rating is underpinned by KTZ's 100% government ownership and its strategic economic importance it is constrained by the company's large capital expenditure programme. "The continuous capex plans of KTZ, even if reduced, will require the company to continue to have access to external funding. The risk of a growing leverage remains aggravated by KTZ's exposure to foreign currency risk as most of its debt remains denominated in foreign currency."
KZT is the latest in a number of rail companies to tap the Eurobond markets for funding this year. In April, Russian Railways issued $1.5bn worth of seven-year bonds paying at 5.739% year, while in July, Georgian Railway placed $250m of five-year paper paying 10% a year. Meanwhile, Polish regional rail operator Koleje Mazowieckie has hired Standard Bank to run the books on a €100m or so bond offering later this year.
Finally, another Kazakh state-owned organisation, Development Bank of Kazakhstan, is looking to issue at least $500m of Eurobonds to finance the country's industrial development programme.
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