Mongolian issuers including the Bank of Mongolia and Golomt Bank are considering selling offshore renminbi bonds in 2013, following in the footsteps of banks from countries such as Russia and Brazil to make their debut in the burgeoning market.
“We would look to sell a three-to-five-year bond in 2013 initially,” a source from Golomt Bank told Asiamoney PLUS. “We saw the Russian banks issue, and other commercial banks [from Mongolia] are interested in following them.”
He added that banks are considering non-deal roadshows to begin educating investors of Mongolian banks’ names, though he would not elaborate on a timetable for these meetings.
Banking sources note that Mongolia’s central bank has also expressed interest in issuing an offshore renminbi bond this year, though the bank has not released details on its plans.
If Bank of Mongolia decides to issue in 2013, it will be among the first sovereign to enter the offshore renminbi, or CNH, bond market. To date, only China’s Ministry of Finance (MoF) has issued a CNH bond, though British Columbia has long been rumoured to sell a dim sum bond of its own.
“There would be pretty decent interest in a Mongolian sovereign dim sum because there are no sovereigns in the dim sum market,” said one debt syndicate banker. “There’s been a lot of interest in high yield this year too, which is positive for other Mongolian banks that would follow...As long as it is a credit that is sort of quite well known with the issuers and has good assets then investors will be interested.”
However, while market participants are pleased to see a new level of diversity in the dim sum market, bankers say Mongolian issuers will face key challenges to getting their deals done.
Among these challenges is name recognition. ‘BB-‘-rated Bank of Mongolia only made its debut into the global capital markets in November of last year, when it sold a US$1.5 billion duel-tranche bond. And Mongolian credits in general are rare as only three other names have sold dollar bonds overseas.
Moreover, the two most notable deals out of Mongolia last year – Bank of Mongolia’s bond and one sold by Mongolian Mining Corp. on March 22 – have seen lacklustre secondary market performance paralleling Mongolia’s economic strains that have continued into 2013.
As of May 29, Mongolia’s 10-year dollar bond was trading below par at 95, while Mongolian Mining’s five-year bond was trading at 96.5.
This may be in part to the downbeat reports from the ratings agencies. On April 11, Moody’s labelled Mongolia’s banking system outlook as negative, due to banks’ challenges coping with rapid loan growth commodity-driven economy. And on May 14, Standard & Poor's (S&P) downgraded Mongolia Mining’s long-term credit rating to 'B' from 'B+', coming two months after revising the company’s outlook to negative from stable, citing Mongolian Mining’s cash flow inadequacies.
Moreover, Mongolia’s largest private bank Golomt Bank has yet to issue a bond into the international market, after withdrawing a planned US dollar issue last April.
“Their profile is completely different from the Russian banks that we saw earlier this year, several of which are investment grade,” said one senior rates strategist. “Frankly speaking, it will be harder for them to come to the market unless they’re willing to pay up. People don’t know about Mongolian names – even their sovereign isn’t a frequent issuer in the global market. The sovereign has come first and then it will be possible for these other entities to determine their pricing level. For now it will be difficult to gauge pricing because there is no benchmark for them.”
Mongolian issuers also can’t be compared with other high yield names which have been prevalent in the dim sum market this year, predominantly Chinese real estate companies.
“The Chinese high yield names that came out priced extremely tight and it’s not likely a new Mongolian issuer will be able to do that,” said the rates strategist. “If they come to the CNH market for five-year bond, the sovereign may pay 5%, but the banks will be another story.”
In addition, swapping CNH into currencies such as US dollars has also become less favourable for international issuers. While Mongolian banks may have more of a reason to keep their renminbi currency, given their trade ties with China, analysts say that it’s unlikely they would keep their proceeds into CNH.
Early in 2013, when banks such as BTG Pactual and Gazprombank made their dim sum debuts, three-year swaps were at a low of 1.9%, but it dropped to 1.3% by early May - marking a 60 basis point (bp) difference.
“I would think that these issuers would want to swap the renminbi proceeds from CNH into dollars...But the markets have come off,” said one renminbi-focused banker. “There are financial institutions who say that they would like to tap the market but they’ll have to wait for CCS opportunities. This can become a waiting game for Mongolia, too.”
Bank of America Merrill Lynch (BoA-Merrill), Deutsche Bank, HSBC, J.P. Morgan and TDB Capital were the bookrunners on Mongolia’s US$1.5 billion dollar sovereign issue.
BoA-Merrill, ING Bank, J.P. Morgan, Standard Bank and Standard Chartered were the bookrunners on Mongolia Mining’s US$600 million bond sold March 22, 2012.