Central Asia

Uzbekistan embraces the international capital markets

After years as a closed economy, the central Asian republic sold a dollar-denominated benchmark in February. One bank followed in November and other issues are planned for next year.

After a successful debut sovereign bond earlier this year, Uzbekistan has already seen one private bank tap the international bond markets and others are expected to follow next year.

This would have been unthinkable under Islam Karimov. The former (and late) president was also the country’s last first secretary of the communist party. Although he guided the country to independence in 1991, Karimov was an unreconstructed strong man who preferred international isolation to either the shock therapy, or indeed market liberalism, favoured by central Asian peers like Kazakhstan or Azerbaijan.

It all changed with the election of Shavkat Mirziyoyev. After winning the presidential elections in December 2016, the country’s former prime minister has put the country on a new path of openness.

In February this year, the sovereign made its debut in the international bond markets with a $1 billion two-tranche deal.

“They didn't have to borrow money, it wasn't about raising the money, it was really an introduction of the country to international markets,” Stefan Weiler, Central & Eastern Europe, Middle East and Africa debt capital markets lead at JP Morgan, told FinanceAsia in a telephone interview. “It’s an external reference point that they can use as a tool to communicate to the population what they're doing and that the reforms they're putting in place are the right things to do,” he added.

JP Morgan was global coordinator and joint bookrunner on the deal along with Citigroup and Gazprombank.

During bookbuilding, orders peaked at $8.7 billion, which allowed initial price guidance to come in a dramatic 62.5 basis points (bp) from the 5.375% area and 6% area for the five-year and 10-year tranches respectively before the 2024s priced at 4.75% and the 2029s at 5.375% on issue prices of par.

Final order books stood at $3.8 billion, with investors split more or less equally between the UK, the US and Europe and around 10% going to Asia, the overwhelming majority going to asset managers and funds with around a fifth going to sovereign wealth funds and pension funds.


But the execution of the deal raised eyebrows and there were complaints that the leads had squeezed too much. Certainly, immediately after the break both tranches traded down and were bid at 99.38%.

The leads reject charges of aggressive pricing.

“It was a function of supply and demand. There was a lot of demand for limited supply, and that allowed us to price [this transaction] very competitively,” said JP Morgan’s Weiler. “Uzbekistan is a new country, and it offers diversification and investors do appreciate the ability to diversify their portfolios.”

And he appears to have been correct, with both tranches trading up significantly in the ensuing months. As of mid-December, the five-year was up five points and the 10-year by an even more impressive 10 points.

The sovereign then paved the way for Uzpromstroybank, also known as the Uzbek Industrial and Construction Bank, which came to the international bond markets towards the end of November.

Uzpromstroybank’s chairman, Aziz Voitov, admits that the deal took time to emerge after working with IFC to improve corporate governance, transform its business model and to improve its risk management system.

Under the lead of Citigroup and JP Morgan as joint global coordinators, plus Commerzbank and Raiffeisen Bank International as joint bookrunners it priced a $300 million five-year Reg S Eurobond.

The deal carried the sovereign’s BB- rating. In a press release, ratings agency S&P explained its decision: “We think that the issuance will not materially change the stability of the bank's funding nor the overall creditworthiness. We assume the bank will use the proceeds to develop its commercial lending.”

Again demand was heavy – books were covered 3.7 times – and pricing came in from initial price talk of mid 6% to print at 98.934% on a coupon of 5.75% to yield 6%.

But despite that contraction, the Uzpromstroybank paper still came in 250bp wider than the sovereign, worthy of note given that up to 150bp wider would have been a more typical dynamic.

“We are happy that we have successfully closed the deal and you know the pricing is within our expectations and we are happy,” said Voitov. “The funds are being distributed to 86 projects all over the country to mostly medium and small business enterprises that have export revenue so we’re hedging our foreign exchange risks. The potential exposure of all those projects within the next four or five years will be $1 billion,” he added.

Since then, it has also traded well, up two points to mid-December.


With two issues from the country under its belt, 2020 could see more transactions emerge from the country. Following a briefing with journalists in mid-November, finance minister Jamshid Kuchkarov confirmed that another sovereign issue was on the cards.

“It's a very good time to refresh the benchmark,” confirmed Jasur Karshibaev, head of Uzbekistan’s debt management office within the Ministry of Finance, by telephone from Tashkent.

There is much market speculation about which currency it might be denominated in.

The first Samarkand bond – denominated in the national currency, the som – was issued by IFC and priced in June 2018. The Asian Development Bank has been named as a possible issuer next year and the finance ministry too has toyed with the idea of selling a som-denominated Eurobond.

“A second benchmark in som or other currencies will also provide a good measure to measure the cost of money in those currencies,” Karshibaev added.

But although a deal is expected in the first half of next year, the government will not be drawn on details. “We are considering different options and we still haven’t made a final decision yet on the timing and volume of issuance,” Karshibaev said.

What no one doubts is that a number of other banks are likely to follow in Uzpromstroybank’s footsteps. “There’s a pipeline of a couple of other deals that are likely to materialise next year,” said JP Morgan’s Weiler.

Karshibaev confirms that three more banks are gearing up to tap the bond markets. “We’re preparing for issuance in the near future. Other banks are also getting ready,” he said, naming Ipoteka BankNational Bank of Uzbekistan and Asaka Bank.

Markets will have to wait longer for state-owned enterprises. Uzbek officials said that the process of moving non-core assets away from the businesses would take at least until 2021.

It might have taken a long time to get there, but Uzbekistan is finally open to the debt markets.


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