Mongolia raises $800mn on bond issue yielding 5.625%

Mongolia raises $800mn on bond issue yielding 5.625%
Frontier market bond investors have shown faith in plans to bring the good times back to Ulaanbaatar.
By Kanat Shaku in Almaty October 27, 2017

The Mongolian government raised $800mn from an offshore dollar bond issue on October 26, Xinhua news agency reported. The five and a half year bond was priced at 5.625% as the order book exceeded $5.5bn, FinanceAsia reported.  

The bond offering was originally expected to raise $650mn with a projected yield of around 6.125%, as announced by joint bookrunners Credit Suisse, Deutsche Bank and JP Morgan. The terms of the new issuance are in stark contrast to Mongolia’s $500mn five-year note issued in March 2016, for which it was forced to pay 10.875%. It was the highest yield on a sovereign bond since 2011 at the time.

Mongolia’s government has also announced plans to buy back $500mn of its dollar and yuan-denominated bonds due in 2018, which means the country will have no major foreign debt maturities due until 2021.

Part of the proceeds from the new bond issuance will be used to back a tender offer for the aforementioned bonds. The rest will be spent on increasing the country’s foreign currency reserves, according to Xinhua.

The raised capital will come as welcome assistance for the country as Mongolia is recovering from its economic crisis in 2016 caused by a commodity prices slump.

The issuance will mark the second time in 2017 that Mongolia has visited the offshore dollar bond market - the country raised $600mn from an 8.75% seven-year “Khuraldai bond” sale in March. Junk-rated bonds issued by sovereigns have been performing well on credit markets this year with Mongolian bonds securing double-digit returns to investors.

Credit Suisse, Deutsche Bank and J.P. Morgan will be the joint lead managers and bookrunners for both the bond buyback tender offer and the planned bond sale.

Despite warnings from credit agencies about the vulnerability of “frontier markets” to rising global interests rates, investors have shown a willingness to fund governments with lower credit ratings borrowing in foreign currencies this year.

A boom in FDI helped Mongolia rack up astronomical GDP growth of 17.5% back in 2011. Since then, the economy has been on a downwards trajectory - it grew by only 1% in 2016, down from the 2.3% seen in 2015.

Mongolia’s economy grew by 5.3% y/y in the first half of 2017. The recovery was largely down to soaring coal exports driven by newfound demand for Mongolian coal in China - which can no longer buy North Korean coal due to sanctions - as well as the $5.5bn bailout agreement led by the International Monetary Fund (IMF).

Under the bailout deal, Mongolia now finds itself receiving support from a number of sources including the IMF, the World Bank, the Asian Development Bank and the International Investment Bank.

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