Mongolia dines on dim sum

Mongolia becomes the second non-Chinese sovereign after the UK to issue dim sum bonds as it embarks on a new foreign fundraising programme.
Mongolia looks for new investors
Mongolia looks for new investors

The Government of Mongolia made its dim sum bond market debut on Wednesday, hoping to ride on the back of positive momentum generated by the resolution of its dispute with Anglo-Australian mining group Rio Tinto over the expansion of the Oyu Tolgoi copper mine in May.

The two had been locked in disagreement for two years over how to share the costs and revenues of the $5 billion phase two development at one of the world’s largest copper deposits.

Mongolia will now be hoping the resumption of the project will not only bring in much-needed cash but also help set its credit rating back on a positive trajectory as it starts to venture out into the international bond markets again.

The Rmb1 billion ($161 million) transaction, which priced on Wednesday, is likely to be but an appetiser before a much larger dollar-denominated deal of up to $1 billion, according to local press reports. 

At the moment the sovereign’s B2/B+/B+ foreign currency rating is on negative outlook from all three agencies.

In a ratings assessment accompanying the dim sum bond offering, Moody’s said that, until production at Oyu Tolgoi ramps up, Mongolia is very dependent on external borrowings and liquidity easing measures. It said its negative outlook “reflects the strain on the external liquidity position, with the sharp loss in foreign-exchange reserves over the last year.”

“Although reserves have stabilised they remain insufficient to cover fully maturing external debt obligations in the event of a sudden stop in credit,” it added.

The new bond deal adds to two dollar-denominated bond issues in its own name, which have 2018 and 2022 maturities, and two bonds it has guaranteed for the Trade & Development Bank (TDB), which mature in 2017 and 2020.

The most recent TDB bond has traded extremely well since its debut in mid-May and dim sum investors will be similarly hoping to reap gains from the new offshore CNH deal, which has a 2018 maturity and 7.5% coupon. According to a term sheet seen by FinanceAsia, the deal drew demand of Rmb1.5 billion from 44 accounts.

The vast majority of the deal was allocated to Asian investors (93%), with the remaining 7% going to Europe. By investor type, fund managers took 66% of the bonds, banks 42% and private banks 12%.

Mongolia’s dim sum deal has rarity value since it represents only the second non-Chinese sovereign issuer following the UK’s debut last October. It also provides greater diversity among high-yield offshore Rmb credits, the majority of which are Chinese property names.

However, some thought it had little value.  “Investors are reluctant because it’s Mongolia issuing the bond, not the UK,” said one Hong Kong-based bond analyst.

“Just look at the country’s rating,” he added. “Even the 7.5% yield doesn’t look very appealing.”

The sovereign’s existing 2018 bonds and 2020 bonds were trading on Thursday at a mid-yield of 5.58% and 6.67%, respectively.

Meanwhile, TDB’s new $500 million 9.375% 2020 bond was trading at a mid-yield of 7.54% and mid-price of 107.25%. This represents almost 200bp of tightening in the space of one month.

TDB has also previously issued a dim sum bond, pricing the deal at a yield of 10.0%, a record high coupon for a dim sum offered by a bank issuer.

Joint bookrunners for the dim sum deal were Citic CLSA Securities, China Citic Bank International, HSBC and ING. TDB Capital was joint lead manager and Ulaanbaatar Capital was co-manager. 

The bonds will list in Singapore.

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