Central Asia

The unusual flight path of Kazakhstan's first Falcon bond

Kazakhstan's first offshore renminbi bond makes little financial sense but might go some way to repairing the suspicion built up of Belt and Road Initiatives in the country.

The club of cutely named foreign bonds has a new such member. At the end of March, the first Falcon bond joined Kangaroo, Samurai and Panda bonds.

A Rmb1 billion ($141 million) renminbi-denominated bond in Kazakhstan – the paper’s nomenclature is a nod to the country’s tradition of falconry – was sold via the Astana branch of China Construction Bank.

Joint global coordinators, joint lead managers and joint bookrunners CCB, CLSA, Mizuho Securities, Standard Chartered Bank and Agricultural Bank of China (Hong Kong) priced the March 2022s at par to yield 2.95%. This was 25bp inside initial guidance after books hit Rmb1.3 billion, according to a banker close to the deal.

Bankers are reluctant to be drawn on comps on the deal, though the last offshore deal in the market came from Agricultural Development Bank of China which sold a Rmb1.5 billion tap of its 2024s in mid-February at 2.98%.

Information of the distribution of the deal has been unforthcoming and bankers away from the deal believe that it has been retained by the leads.

In the secondary market, the bond has held its value. Listed on the Astana International Exchange (AIX) in Kazakhstan’s capital as well as Hong Kong, it was last seen at a bid/ask of 99.6/100.2.

Weakening Yuan

While the Falcon bond is a decent-enough symbol of how the market is maturing (“It is a significant milestone and will promote the offshore RMB market development,” trumpeted Kairat Kelimbetov, governor of the Astana International Financial Centre), at the moment it makes little sense from a borrowing perspective given the weakness of the renminbi.

Certainly, bankers don’t speak of any other issues in the current pipeline.

It is up to 50bp more expensive for Chinese organisations to borrow offshore at the moment, indeed Chinese offshore borrowing slumped more than 70% in January this year to Rmb12.2 billion, according to Thomson Reuters.

And the currency is unlikely to bounce back any time soon. The renminbi slipped 1.3% against the US dollar in March and a weaker currency has been a deliberate part of Beijing’s toolbox in its trade war with the US since August last year.

Tightening the belt

But the Falcon bond comes into its own when it is considered in the context of China’s Belt and Road Initiative (BRI), and more specifically, in the light of the Middle Kingdom's lack of success in Kazakhstan.

CCB says that funds raised will be used to support local infrastructure projects and BRI projects.

AIX chief executive Timothy Bennett calls the bond “an innovative model of financing Belt and Road Initiative projects which will contribute to the development of the local economy and create new job opportunities.”

This is much needed and there is no getting away from the fact that China's initiatives in the country have been anything other than successful in Kazakhstan.

In contrast, the Central Asia Regional Economic Cooperation (CAREC) Programme, a partnership of 11 countries and development partners, has invested more than $9.1 billion in 28 projects between 1997 and September 2019 in the country.

These have improved transport, trade, and energy infrastructure in Kazakhstan.

Most recently the Asian Development Bank signed a $20 million loan at the end of last year to RG Brands, the country’s largest food and drink brand, to modernise operations along the company’s regional distribution chain.

Last year the BRI’s highest-profile project in the country imploded spectacularly amid charges of corruption.

Work on the Astana Light Rail Transit Project, a 22-kilometre, $1.5 billion light railway system in the capital was halted after China Development Bank pulled the plug on funding after the local bank to which it had lent the money collapsed.

In October, Kazakh president Kassym-Jomart Tokayev ordered an investigation into senior officials involved and the Kazakh Anti-Corruption Agency is looking into significant embezzlement of funds.

The launch of Falcon bond goes some way to repair the damage that the fall out of that project has created.

CCB senior executive officer Wang Songhua made it clear that the bond came in the aftermath of the meeting between the Kazakh and Chinese presidents in September last year.

The offshore RMB centre, Wang said, would “implement the joint communiqué issued after bilateral talks between President Xi Jinping and President Kassym-Jomart Tokayev outlining the promotion of bilateral local currency settlement jointly by China and Kazakhstan.”

Kazakhstan has always said that it is the buckle in the BRI. The Falcon bond is one step towards tightening it.

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