Terrence Edwards in Ulaanbaatar -
Mongolia has another bond offering in the works after its $1.5bn debut “Chinggis” bond offering three years ago achieved surprisingly low yields for the time. There are doubts the mineral-rich country can repeat such a feat now that its honeymoon with investors is well and truly over.
Mongolia plans to issue about $1bn in debt with the expressed intention of refinancing the $500mn issue of five-year bonds sold at a yield of 4.125% and $1bn issue of 10-year bonds sold at 5.125%. However, the country's credit rating has taken a knock since those bonds were issued in 2012.
Moody's Investors Service in May downgraded its outlook on Mongolia’s ‘B1’ rating from negative to stable because of a worsening in the external debt position over recent years, a sharp fall in foreign exchange reserves, and a dangerous acceleration in credit growth since 2013. “The issuer (Mongolia) has become increasingly susceptible to event risks,” Moody's said in a statement.
The omens also aren’t good for the new issue after a $500mn debt offering from the Trade and Development Bank of Mongolia (TDB), 85% sovereign guaranteed, was given a lukewarm reception by frontier bond investors. “They checked the fine print for English law and cross-default clauses despite the 500-plus basis point yield pickup over US Treasuries, as all three credit rating agencies have Mongolia on watch for a potential downgrade, and reckless fiscal and monetary policies could again compel an International Monetary Fund (IMF) rescue,” says Gary Kleiman of Kleiman International.
The 9.375% yield was seen as a missed opportunity because it was well above where the sovereign bond was trading at. Had TDB waited a week, when a long-awaited expansion project for the Oyu Tolgoi copper mine worth $6bn was finally agreed, it might have saved a bundle.
From boom to bust
Mongolia’s first sovereign offering in 2012 was dubbed the Chinggis bond in reference to the 13th Century warrior known in the West as Genghis Khan, who on horseback conquered the beginnings of what would eventually become one of history's largest empires. Just as Genghis Khan once took the world by storm, so too did modern-day Mongolia with its world-topping growth of 17.5% in 2011 and 2012, thanks to the potential of its multi-billion-dollar deposits of coal and copper.
But Mongolia's use of those borrowed funds, which were enormous given the small size of the economy, has attracted some criticism, because the investments lacked direct returns. Hundreds of millions went into road construction, including a nationwide road network that the government said would lay the foundation for stable economic growth. More than $500mn was meant to finance construction of crucial rail links with China to increase the volume of exports of coal and other commodities, but that work is behind schedule and will require additional financing.
Fiscal problems stemming from a soft commodities market and disputes with investors have also made the country a less attractive investment. Foreign reserves have dwindled along with declining investment, and a 34% depreciation of the local currency against the dollar since the end of 2012 has made the debt all the more expensive to service.
Investors' love affair with the country had actually begun to sour about six months before the Chingiss bond, when Aluminum Corp of China (Chalco) attempted to purchase a controlling stake in the Mongolian coal miner SouthGobi Resources. It was an election year and Mongolians, ever wary of handing over control of natural resources to the country’s enormous neighbour to the south, pushed lawmakers into hastily passing legislation that made the deal impossible, as well as most other investments into the mining sector.
The unpopular law was scrapped a year later, but by then Mongolia had become embroiled in a dispute with global miner Rio Tinto over the gaint Oyu Tolgoi copper mine that lasted up until May.
The upcoming bond offering will be used to refinance existing debt. The government argues that now is the right time to capitalize on investors' changed attitudes toward Mongolia following the landmark agreement to move forward with the Oyu Tolgoi expansion project. "International investors are keen to buy bonds of Mongolia," reads the government’s May 29 statement.
Yet the upcoming 2016 parliamentary elections could also be a factor in the decision. Mindful that it was the last election that set the stage for the hastily passed law that killed off foreign investment, it's likely that Prime Minister Chimed Saikhanbileg wants the debt taken care of before campaigning begins.
Of course, there's also the possibility that the election could lead to Saikhanbileg's Democratic Party losing power. Even if the Democrats do win, a power struggle in the party could also see a rival push Saikhanbileg out of office. Although the prime minister has won plaudits with investors for his stance on pushing through deals in the mining sector, he has failed to consolidate his position within his own party, let alone the government. Parliament Speaker Zandaakhuu Enkhbold has emerged as a competitor in the party by deliberately blocking a $4bn deal negotiated under Saikhanbiileg's watch for the Tavan Tolgoi coal mine.
Although the future of the Mongolian economy is far less bleak than it was some months ago, the chances of another bond being snapped up so eagerly by global investors is unlikely right now. But with elections scheduled for 2016 and 2017, now might be as good as it will get for some time.
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