Golomt sets Mongolian benchmark
Golomt Bank successfully raised a debut US$300m three-year senior bond, breaking a decade-long absence of Mongolia's commercial banks from the US dollar market.
The bank achieved its targeted benchmark size, despite some hiccups during the bookbuilding. It also became the first Mongolian commercial bank to tap the dollar bond market on a standalone basis in 12 years.
The last deal from a commercial bank was the US$300m 8.5% three-year note sold by Trade and Development Bank of Mongolia in 2012. TDBM returned to the market in 2015, raising a US$500m 9.375% five-year non-call three with a guarantee from the Government of Mongolia.
Norihiko Kato, CEO of Golomt, was pleased with the bank's debut in the international market.
“For us, everything is new,” he said, explaining that his team introduced not only themselves but also Mongolia's private sector banks to global investors.
A banker on the deal said Golomt's trade will reopen the dollar bond market for Mongolia's banking sector.
“We think this will set a benchmark to bring more issuers to the global capital market,” said the banker.
Golomt, which was listed locally at the end of 2022, began considering a deal at the beginning of the year. It held a global roadshow during the week of April 29 when it gathered US$350m to US$400m in indication of interests from about 30 accounts.
With the solid response, the leads launched the deal on Wednesday morning at initial guidance of 12.25% area. They found good demand from Asian hedge funds and real money investors with orders reaching US$500m after the Asian session. Some hedge funds dropped out after the final guidance of 12% was announced at the Asia close, while some anchor investors from Mongolia needed more time. By the US close, the leads decided to extend the execution by one day to give both anchor investors and offshore investors more time to study the credit and put in orders.
The banker said the main goal for the issuer was to hit the US$300m target, which some high-quality US investors had said was the minimum threshold under which they would not participate. He said by the end of the first day, it was “decently close” to the target.
Orders reached US$500m at reoffer. Asia took 83%, Europe 12% and the US 5%. Asset managers accounted for 67%, banks 22%, hedge funds 10% and private banks 1%.
Price discovery
“Comparing to other countries' situations, around 10%–11% might be possible, and that was my personal expectation,” said Kato. But he recognised that this being a debut from an unfamiliar name required some premium, and he voiced optimism that the notes could tighten in the secondary market as investors get more comfortable with the credit.
The US and Asian investors were divided on the pricing. US investors looked at the sovereign as the closest comparable and added spreads based on the difference between the trading levels of banks and sovereigns in other emerging markets. Mongolia's sovereign US dollar bond due July 2027 was bid at a yield of around 7.1%, according to LSEG data.
Asian investors tended to use individual names as the starting points, including Development Bank of Mongolia’s 11% 2026 private bond sold in April and Mongolia Mortgage Corp's (MIK) 11.5% 2027 notes, printed as part of an exchange offer in January. The two notes were trading at yields of around 10.5% and 13% respectively.
The leads took the view that the sovereign would be a more suitable reference and MIK’s 13% yield would be the ceiling. They came out with a relatively wide initial guidance to be inclusive for both Asian and US investors.
“Investors used the argument that Mongolia is trading exceptionally tight … compared to other Single B sovereigns,” said Florian Schmidt, founder and director of Frontier Strategies. He said investors still wanted a premium to DBM.
“We managed to get it inside MIK, so that is a positive,” he said.
Frontier Strategies was the financial adviser to the issuer. Deutsche Bank and JP Morgan were joint global coordinators. Korea Investment & Securities Asia was the bookrunner.
The bonds were sold at a cash price of 97.541 with a coupon of 11% to yield 12%. They were trading at around reoffer in the secondary market on Friday morning.
The notes will be rated B3/B (Moody's/S&P), in line with the issuer as well as the B3/B/B+ sovereign rating.
The leads said a 12% yield makes sense for a Mongolian bank, as the lending rate at the country's central bank has remained at around 12%–13% in the past two years.
“It works from a funding cost perspective. The proceeds will be swapped … and the cost after swap is still substantially inside the lending rates in Mongolia,” said Schmidt.
Kato said the all-in cost for the bonds after swaps will be around 15% to 16%, which is manageable, and the liquidity is helpful.
Golomt Bank’s objective is to find a new long-term funding avenue, which is not available onshore, to support its fast-growing business. Mongolia’s banking sector saw loan growth of 15% in the first half of 2023, up from 7% in 2022, according to a Fitch report in October 2023. Golomt Bank saw total loan growth of 25% in 2023.
"We feel we are ready to grow … so we need liquidity," said Kato, emphasising the banking sector's role in the broader Mongolian growth story.
Golomt Bank is Mongolia's third-largest bank by assets, with loan and deposit market shares of about 18% and 20%, respectively, at the end of 2023, according to S&P. It is also one of five domestic systemically important banks in the country.
Golomt Bank has an average funding cost of around 6% to 7% including both its deposit base and retail investors, and it had a net interest margin of 6.5% in 2023, said the banker.
“Taking into consideration onshore funding costs, the longer tenor and the amount they can absorb from the international market for its further expansion, it’s a decent transaction,” said the banker.
The issuer plans to request a long-term swap agreement with Bank of Mongolia to swap all proceeds to finance its business and extend its loan portfolio.
(Additional reporting by Morgan Davis)