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Best Deal Emerging Europe 2008

Kazmunaigas $3 billion 2013 and 2018

Just weeks before last September’s global markets crash, KazMunaiGas (KMG), Kazakhstan’s state-owned oil and gas champion, took what appeared to be a risky decision to complete its international borrowing needs in one go.

KMG grabbed $3 billion – the largest-ever regional offering in the euromarkets in a benchmark deal, which put Kazakhstan on the map just before investor appetite plummeted. The size, pricing levels, timing and execution of the regional benchmark now stands out as one of the success stories for corporate borrowers in 2008.

The deal comprised a $1.4 billion, five-year 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.”

The decision to boost the borrower’s cash in hand with this blow-out deal now looks wise given the subsequent increase in borrowing costs. 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.

The Gazprom Connection

With investors describing KMG as the “Gazprom of Kazakhstan”, according to Nicky Darrant, head of CEEMEA (Central Eastern Europe, Middle East and Africa) 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.

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.

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.

Darrant says that the transaction provided a well-needed benchmark to price new deals – if and when the primary market fully opens. “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.”

But as fears grew over the large stock of foreign currency debt in the Kazakh private sector, the yield cure for the sovereign and corporate sector repriced rapidly to devastating lows. As a quasi-sovereign, KMG was hit with prices for both notes hitting a low of 70 cents on the dollar in February before gradually climbing back to 90 cents as capital markets seemingly came back to life this month.

The pricing levels and secondary liquidity for this deal have now adjusted downwards as cross-over investors have fled emerging market risk – beyond even the worst nightmares of the bookrunners. But once the deleveraging cycle passes, the 2013 and 2018 notes will serve as a useful benchmark for future deals.

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