The government of economically troubled Mongolia priced an upsized $800 million US dollar bond offering on Thursday at almost half the cost it managed a year and a half earlier as yield-famished investors lapped up the deal, underlining the sovereign borrower's return to favour.
The 144A/Reg S bond sold for a yield of 5.625%, contrasting with the 10.875% paid by Mongolia on its March 2016 $500 million five-year offering, and drew impressive support from global investors, building a $5.1 billion order book during Asia hours before taking orders from US investors late on Wednesday. For the sovereign, the deal offers an opportunity to extend its debt maturities.
The syndicate bank declined to provide the size of the order when taking US investors into account, but said the final order book settled at $5.5 billion.
Mongolia, a resource-rich country between Russia and China with a population of three million, suffered from a downturn in coal and copper prices last year. Its currency, the tugrik, lost almost 25% of its value against the US dollar last year, prompting a rise in Mongolian policy rates to a record 15% and a slew of austerity measures.
The financial turmoil forced Mongolia earlier this year to agree a $5.5 billion economic bailout led by the International Monetary Fund to stop state-run Development Bank of Mongolia from defaulting on a $580 million debt that matured in March.
“Investors forgot those slip-ups because Mongolia’s new deal offers attractive pick-up over other sovereign issuers,” a fixed income fund manager in Singapore told FinanceAsia. “The likelihood of a sovereign default is extremely low,”
"The Mongolia deal underscores a global search [for] yield and investors are willing to take higher risk for attractive returns," the investor said. "[That] the deal was upsized from $650 million to $800 million shows the risk-on sentiment."
On Wednesday, the Caa1/B-/B- rated issuer went out with initial price guidance in the “6.125% area”, before tightening it to 12.5 basis points either side of 5.75%. Final pricing was fixed at par to yield 5.625%, the low end of the marketing range, according to a term sheet seen by FinanceAsia.
The syndicate banker said the decisions to target US investors first on the global roadshow was an effective marketing campaign because this group usually has more exposure to frontier markets.
US investors took 42% of the deal, leaving the remaining 30% and 28% to investors in Asia and Europe, post-deal statistics shows.
“US investors have historically participated in the Mongolia curves, so they have a better idea of where the pricing is,” the banker said.
In terms of fair value, the country’s outstanding 2024 note traded at a yield of 6.11% on Tuesday morning, while the 2022 note traded on a yield of 5.38%. That said, the new deal, which will mature in May 2023, was priced inside the outstanding curve.
In the secondary market, the 2023 note traded up to a cash price of 101.5 on Thursday, or a yield of 5.52%, or about 10bp tighter than its reoffer, according to market data.
The newly raised proceeds will be used by Mongolia to buy back some of the $500 million 2018 note and a Rmb1 billion dim sum bond due June 2018 through a tender offer, as well as to retire certain external debt.
Credit Suisse, Deutsche Bank, and JP Morgan are joint bookrunners on the transaction.