Mongolian trade bank pulls bond deal

Trade and Development Bank of Mongolia has postponed its dollar bond deal, blaming a banking crisis in Portugal.
Out in the cold: Mongolian credit is too risky for investors
Out in the cold: Mongolian credit is too risky for investors

Trade and Development Bank of Mongolia (TDBM) pulled its five-year dollar bond on Friday, having only announced the deal a day earlier.

The bank blamed adverse market conditions, sparked by concerns over Portuguese lender Banco Espirito Santo’s failure to make coupon payments on its short-term debt on Thursday.

In a statement, TDBM said that the environment was not conducive for primary issuance due to heightened volatility in the secondary markets.

“A few bank bond deals also got pulled in Europe in addition to TDBM’s due to the Portuguese crisis,” said a source close to the deal. “Stock markets dipped and market sentiment was much weaker, which is why we decided that timing is not good right now.”

Shares in the troubled Portuguese lender have been under pressure since May, when the bank disclosed that an audit ordered by Bank of Portugal had had uncovered accounting irregularities at its parent company, which was described as being in “serious financial condition”.

Worries about the financial health of the major Portuguese lender spooked global markets, drubbing shares in Europe and sending US stocks down. The Dow Jones Industrial Average closed down 0.4% after falling as much as 1.1% early on Thursday.

Japan shares fell 0.3% on Friday morning, while Korea shares were down 0.6%, according to Bloomberg data.

TDBM marketed its B1/B rated bond at an initial price guidance of 11.25% area early Thursday morning, according to a term sheet seen by FinanceAsia.

Mongolia’s rising risk
In spite of the high yield on Mongolia’s proposed bond, investors have already been concerned about the prospects for the country’s commodity-reliant economy and the financial institution’s concentration of loans to the commodity and construction sector.

Moody’s notes that TDBM’s top 20 group borrower exposures were equivalent to 45.5% of its total loans at the end of 2013. More than 50% of these borrowers were also in risky sectors, such as mining and construction. The latter accounted for 21.7% and 16.7% of the bank’s total loans at the end of last year.

As a result, the rating agency changed the rating outlooks of all rated Mongolian banks to negative from stable in January 2014, reflecting their vulnerability to market shocks.

“TDBM is vulnerable to a deterioration in asset quality, given its high loan concentration and portfolio of corporate loans,” Hyun Hee Park, credit analyst for financial institutions group at Moody’s. “An upgrade of the bank’s ratings is unlikely.”

Bank of America Merrill Lynch, Goldman Sachs and ING were the joint bookrunners of TDBM’s deal.

Select issuers succeed
Syndicate bankers away from TDBM’s deal said that conditions in Asia’s debt capital markets are still very favourable, but only for select credits.

For example, Baa2/BBB rated China Gold International Resources, a Vancouver-based mining and exploration company, priced a $500 million three-year bond on Thursday, selling it in the Reg S-only market, which excludes onshore US investors.

The transaction obtained a whopping order book that was 14 times oversubscribed from more than 250 accounts, as investors continue to hunt for yield. The bond offers a yield of 3.63%, according to a term sheet.

China Gold’s bond was launched at an initial price guidance of Treasuries plus 310bp, and ended up pricing at Treasuries plus 275bp. In secondary market, the bond has also traded 20bp tighter, indicating continued demand from investors for the credit, a source familiar with the matter said.

“The overall backdrop is still very positive, with a lot of accounts doing very well,” a Hong Kong-based syndicate banker told FinanceAsia. “But it’s still only good for seasoned or high-grade issuers.”

Asian investors subscribed to 82% of the offering while the rest went to Europe. Fund managers purchased 61% of the paper, while financial institutions bought 17%, private banks 18% and sovereigns 4%.

The company will use the proceeds for working capital and general corporate purposes.

Citi and Standard Chartered were the joint global coordinators and bookrunners of the BBB- rated transaction. Other bookrunners include BofA Merrill and CCB International.

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