Mongolian bonds take giant steppe
BY DANIEL STANTON
BONDS Record corporate issue comes as country pushes ahead with capital market reforms
Erdenes Tavan Tolgoi has issued Mongolia’s biggest onshore corporate bond and plans to target foreign investors for its next offering.
The state-controlled coal mine in April issued Tug600bn-equivalent (US$210m) of two-year bonds denominated in Mongolian tugriks and US dollars, with the local currency bonds making up 60% of the offering.
The deal closed around 10% oversubscribed, even though subscription had to be wrapped up by April 9, ahead of a national lockdown beginning the following day to curb the transmission of Covid-19.
This is the first time that a state-owned company has sold bonds to the public, and Erdenes TT plans to sell a further Tug1.4trn of bonds in two phases by the end of this year. Proceeds will be used to finance projects including a power plant, coal processing plant, and a railway, marking the first time corporate bonds have funded infrastructure projects.
“It's a good start for the Mongolian bond market,” said Achit-Erdene Darambazar, president and CEO of Mongolia International Capital Corp, which was supporting underwriter alongside lead underwriter BDSec. “I think there will be more issuers.”
In recent years, there have been few corporate public bond offerings, and even fewer government securities issues. From 2001–2020, 15 companies raised a total of Tug30.6bn from 17 public bond offerings, according to the Financial Regulatory Commission’s 2020 annual report. The largest publicly offered corporate bond before this deal was dairy producer Suu’s Tug6bn issue in June 2017.
The Securities Market Law makes no distinction between selling debt or equity securities, which means that any company wishing to make a public offering of bonds must, in addition to obtaining regulatory approvals, publish an audited financial report, legal opinion, and asset valuation report.
“These requirements intended for public companies during IPOs add to the cost and time required for publicly offering debt instruments in the Mongolian market,” wrote the Asian Development Bank in a report published in February.
This onerous process has led some companies to instead sell debt instruments through private placements, which are unregulated. Retail investors are the main buyers of private placements, which tend to have tenors of 3–18 months and are secured either by collateral or a guarantee from a third party.
There is no record of how many private placement bonds are outstanding.
No liquid benchmarks
The Mongolian government has not issued new bonds since 2017, when it entered a three-year International Monetary Fund programme. That means there are no up-to-date liquid government securities to serve as pricing benchmarks for new corporate issues.
Deposit rates at local banks were used as a reference for the Erdenes TT deal, with a one-year fixed deposit paying around 2% in US dollars or 8%–9% in tugrik. Pricing for the two-year dollar tranche landed at 6.8%, from a range of 6.3%–6.8%, and the two-year tugrik tranche priced at 10%.
Retail investors tend to dominate public bond offerings, but the short 11-day offering period meant that commercial banks, some of which already had credit lines, took a larger than usual share of the deal and retail bought around a quarter.
“There are not a lot of institutional investors yet, though some insurance companies, high-net-worth individuals and commercial banks have begun buying corporate bonds,” said MICC's Darambazar.
Darambazar said the bond offering was attractive to investors earning low deposit rates at their banks, since the company is one of the biggest in Mongolia and is owned by the nation.
Every citizen born before April 2012 was given 1,072 shares of Erdenes TT, which was established in 2010 to develop the Tavan Tolgoi coal deposit. Around 2.5 million citizens hold a combined 14.5% stake, and the Mongolian government owns the rest.
“Everyone knows this company because everyone is a shareholder,” said Darambazar. “We decided to issue the bonds in a second and third tranche because not every deposit term is expiring in the same month.”
The next tranche is expected in the next two months or so, and the company is likely to try to broaden its investor base.
“On the second tranche we will try to attract more foreign investors,” said Darambazar. “We have advised the company to get credit rating agencies to rate it.”
Erdenes TT earns much of its revenue in US dollars, so it is natural to raise debt in the currency. A Singapore-based banker said that the company considered issuing offshore bonds many years ago, but might find it difficult today, given financial institutions’ increased focus on environmental matters.
“Not many banks would bookrun a coal deal these days,” said the banker.
Market reforms
A national programme is underway that aims to make financial market reforms by 2025, including streamlining corporate bond issuance requirements and improving the bankruptcy regime, which does not lay out the waterfall of payments from senior to junior creditors.
Mongolia is also developing its bond market infrastructure, and last year adopted delivery versus payment with T+2 settlement for securities trading, aligning with international standards.
The Mongolian Association of Securities Dealers, an industry association, will put forward regulations for the country’s first over-the-counter bond trading platform in the coming weeks.
Currently, public bonds have to be traded on exchanges, which are mostly used by retail investors, and private placement debt tends to be held until maturity. The regulations will also update the definition of a professional investor and ensure that all debt issues are assigned ISIN codes.
The end of the IMF programme could also mean the government will resume issuing bonds.
“We hope we can include government bonds in our platform to be traded,” said Khuyag Tsedendamba, secretary general and CEO of MASD. “There are also some government-related entities that could issue.”
Tsedendamba said Mongolia is also working towards harmonising its bond issuance regulations so that companies would be able to issue in the ASEAN+3 standardised format.
“The mid to long-term goal is for foreign investors to be able to invest in local currency denominated bonds in Mongolia,” he said.
Source: ifre.com,
Author: Danial Stanton
Article title: Mongolian bonds take giant steppe
Date: 30 Apr 16:31
Link: https://www.ifre.com/story/2847870/mongolian-bonds-take-giant-steppe-dc338w3rrf
