A Compelling Credit
KazMunayGaz’s debut $3 billion Eurobond this summer was a trailblazer – the largest ever regional offering in the euromarkets and a benchmark that put Kazakhstan on the map
KazMunayGaz (KMG) generated huge international enthusiasm in June when it created a new liquid benchmark for the country. Its $3 billion dual-tranche issue was the largest ever Eurobond from central and eastern Europe. The country’s state-owned national oil and gas company, KazMunayGaz, braved volatile global conditions and investor worries about Kazakh risk to launch a higher-than-expected debut bond in one clean market sweep. This consisted of a five-year, $1.4 billion bond and a $1.6 billion, 10-year tranche.
“At first we planned two tranches, one coming in the first half and the other in the second half of 2008,” says Yermek Jalankuzov, director of corporate finance at KMG. “However, after a successful roadshow and large-scale demand from investors, and also in view of the sharp downturn in market conditions, the decision was made to bring in $3 billion in a single issue.”
His decision was the correct one. In difficult markets he still attracted some $6 billion of demand – an impressive size.ABN Amro, Citi and Credit Suisse were joint bookrunners for the Baa1/BBB/BBB rated Reg S/144A issue, which was widely marketed in the US, Asia and London in a five-day roadshow.
With investors describing KMG as the “Gazprom of Kazakhstan”, according to Nicky Darrant, head of CEEMEA bond syndicate at ABN Amro in London, and with the last sovereign bond maturing in 2007, the leads were forced to use two comparables in pricing. This revolved around Gazprom and Kazakh credit default swaps.
At launch, Gazprom 2013s were yielding 6.95% and the 2018s 7.75% – this represented Russian risk, while five-year Kazakh sovereign CDS stood at 105bp and 120bp for 10-year protection. So, in theory, a possible five-year KMG deal would have had a fair value yield of 8% and a 10-year transaction 8.95%. To compensate investors for the new credit, price guidance at 8.25–8.50% for the five-year bond and 9.0–9.25% for the longer maturity transaction was released.
Sliding Scale
But just as the deal was being priced at the end of June, markets slid, with the iTraxx Europe index widening by 10bp to 100bp while Gazprom’s cash curve skidded by some 15bp. Given this market backdrop, the transaction finally came in towards the wide end of price guidance.
The five-year deal offered a coupon of 8.375% and was priced at 99.499 to yield 8.5% – this is the equivalent of 496bp over US Treasuries. The $1.6 billion, 9.125%, 10-year tranche had a 99.196 reoffer price and a 9.25% yield – 514bp over US Treasuries.
“The deal has huge scarcity value since it is tantamount to sovereign risk, and there has been precious little supply from the corporate sector in Kazakhstan. KMG also carries the whole oil and gas story so it is a very compelling credit,” says Darrant.
It could have been priced tighter if it had been smaller, but the borrower wanted to make its mark on the global fixed income market in its debut offer. “KMG understood that the debt capital market is more expensive than the loans market, but the issuing of Eurobonds expands the investor base,” says Jalankuzov at KMG.
Appetite for the bonds was global. For the five-year tranche, US accounts took 44% of the paper, UK names 31%, Asia 10%, Switzerland 6% and others 9%. For the 10-year paper, US investors bought 44%, UK 35%, Asia 5%, Switzerland 3% and others 13%.
Institutional investors took 61% of the shorter-dated bond and 65% of the 2018s, while hedge funds mopped up 21% and 26%, respectively. Both bonds performed well in the secondary market, trading up as high as 101.5 before reaching par compared with their 99.499 and 99.196 re-offers.
Jalankuzov dismisses claims that the deal could have been priced cheaper given its positive aftermarket performance in difficult conditions. “We were prepared for something in the region of 8.5–9% annually,” he says.
“That’s because the price of the issue was essentially the same as analogous securities issued by Gazprom with corrections for the differences in the countries’ ratings and premiums on a debut issue.”
Apart from Halyk Bank’s $550 million, 51⁄2-year Eurobond in April, KMG’s deal is only the second from Kazakhstan this year.
Good Story
The turmoil in the international credit and bond markets continues to put a dampener on new bond issues, especially from non-triple or double-A credits, which was another reason for praising the KazMunayGaz transaction. “This deal showed that the right name, with the right story – and especially if it is told well – can still break through the ratings ceilings that have been artificially imposed on emerging market credits,” said a commentator later.
Darrant says that this trailblazing transaction has helped to bolster foreign investor perceptions of the country and, equally importantly, improved the market infrastructure: “This has put Kazakhstan back on the map and set a benchmark for other Kazakh issuers to go to the market.
“Before there was only the Kazakh credit default swap market, which is not the best guide in terms of providing reference points for pricing deals.”
With so much volatility in market trading, secondary market bond prices are seen as a more stable guide than CDS when estimating the pricing dynamics for new issues.