SINGAPORE, May 13 (IFR) - Trade and Development Bank of Mongolia handed investors a one-day gain of as much as 3% after it paid a hefty premium to issue US dollar bonds on Tuesday.
TDBM defied volatile market conditions and an uncertain macro outlook to draw a huge order book for a US$500m government-guaranteed five-year bond, priced to yield 9.375%.
However, the bonds shot up to 103 in early secondary trading, a clear sign that the issuer had left value on the table.
The government guarantee helped TDBM avoid a repeat of last June’s failed offering, when it was forced to scrap a five-year dollar issue despite offering a yield of 11.25%.
It also lifts the country’s access to hard currency, as the proceeds will be swapped into dollars with the central bank.
But the extent of the premium led some to wonder why TDBM had not waited for the Mongolian Government to resolve uncertainty about its two major mining projects before launching the offering.
“The deal got done, but the timing was quite unfortunate. Had they waited for the OT-2 (Oyu Tolgoi gold and copper project) and TT (Tavan Tolgoi coal project) deals to get signed, buy-side confidence in the overall Mongolia story would have been much higher,” said Florian Schmidt, head of debt capital markets at high-yield specialist SC Lowy.
“On the spread against the sovereign alone, they had to leave more than 100bp on the table.”
Some investors clearly spotted a bargain. TDBM attracted a book of more than US$2.3bn from 231 investors, with US buyers taking half of the 144A/Reg S bonds, an unusually large proportion for an Asian high-yield issue.
The final pricing for a yield of 9.375% was well inside initial guidance in the 9.75% area, but it was 280bp above the interpolated sovereign curve. Some investors and analysts pointed to 104.5 as fair value, translating to a yield of 8.25%. The bond is expected to be rated in line with the Mongolian sovereign at B2/B+.
The Mongolian sovereign 4.125% “Chinggis” bonds due 2018 were trading at 6.22% and its 5.125% due 2022s at 6.93%, when TDBM opened books, pointing to an interpolated yield of around 6.6% for a new government-backed five-year bond.
State-owned Development Bank of Mongolia’s government-guaranteed 2017 notes were trading well outside the sovereign at around 7.7%, pointing to 8.2% for a new five-year issue, based on 16bp for each year of extension. TDBM paid over 100bp more than that.
Given that TDBM has ample foreign-exchange reserves and undrawn facilities to pay for its US$330m bond maturing in September, there was no urgency to come to market while uncertainty over two huge mining projects depressed investor sentiment towards Mongolia.
On the other hand, however, it could not be certain when government approval for those projects would arrive, or whether rising US interest rates would push up the cost of issuance later this year.
Rio Tinto is awaiting approval to proceed with the second stage of the Oyu Tolgoi gold and copper project, known as OT-2, of which 34% is under the control of the Mongolian Government. Meanwhile, the government has halted a US$4bn investment from Mongolian Mining Corporation, China’s Shenhua Energy and Japan’s Sumitomo Corporation in Mongolia’s Tavan Tolgoi coal project as it seeks further legislative approvals.
Nationalist politicians have been trying to delay the approval process, with some sources away from the deal even suggesting that the success of TDBM’s guaranteed bond will be used to show that the sovereign can access overseas capital markets without signing away stakes in its natural resources to foreign companies.
TDBM will swap the proceeds into Mongolian tugrik and use them for lending. The central bank will conduct the swap, giving the sovereign access to desperately needed dollars without technically breaching its debt ceiling, since TDBM will need to hold the same amount of MNT-denominated government securities for the guarantee to be valid.
If there had been room under the debt ceiling, there is no doubt that Mongolia could have issued a sovereign bond more cheaply. TDBM, though, actually saved on the cost of raising tugriks, since it might have expected to pay upwards of 12% to borrow two-year money in the local currency.
Bank of America Merrill Lynch, ING and Deutsche Bank were joint bookrunners. (Reporting by Daniel Stanton. Editing By Steve Garton.)