High-yield Bond

IFR Asia Awards 2012
4 min read
Christopher Langner

In a challenging first half for high-yield, one deal stood out for opening a new market with the largest Single B rated new issue of the year. For helping to reopen Asia’s corporate high-yield market and setting a benchmark for Mongolian credits, Mongolian Mining Corp’s US$600m debut is IFR Asia’s High-Yield Bond of the Year.

While investment-grade financings were already running at a rapid pace, the early part of IFR’s review period looked very different on the high-yield front. With risk appetite in short supply, Mongolian Mining Corp had to be patient. The issuer, rated B1/B+, had been eyeing a dollar bond for a while, after mandating in December, but had to wait until March to bring the deal to market.

“At that time, we felt we could do a deal, but it was still a challenging environment, price discovery was still a very hard task,” said Florian Schmidt, head of debt capital markets for Asia at ING.

The timing, however, paid off. MMC’s US$600m debut was the largest Single B bond from Asia’s corporate sector during the review period – and, indeed, since 2007 – and came with one of the lowest coupons for its rating.

It was also the first Mongolian deal to use 144a documentation, introducing the frontier market to onshore US investors for the first time.

Furthermore, it was the biggest bond out of Mongolia and the first US dollar deal from the country’s corporate sector, building on a popular US$580m deal from quasi-sovereign Development Bank of Mongolia a week earlier.

It also stood out as one of the largest debut issues from Asia in its ratings bracket in the last five years, alongside Macau’s Melco Crown Entertainment.

The issuer kicked off a roadshow in Asia, although communications with major asset managers in the US had already been established. At that stage, the leads had a faint idea of potential pricing and Asian accounts seemed keen on a double-digit coupon. However, one large order came from the US West Coast that anchored the transaction with a 9% handle. When the issuer reached London, it received a warm welcome from some of the biggest high-yield investors.

That allowed leads Bank of America Merrill Lynch, ING, JP Morgan, Standard Bank and Standard Chartered to try for a tighter print, with official price talk released at 9.375% area. As orders poured in, they revised the pricing to 9.125%. With no end to interest, they took the leap and went inside 9.000%. At that level, some accounts jumped ship, but the order book remained solid enough to allow MMC to price at par to yield 8.875% and enlarge the size of trade to US$600m from the original target of US$500m.

The move to tap the US investor base was a risk that paid off dividends. The US accounted for a robust 56% of the orders, and then an equal split of 22% each going to Europe and Asia. Asset managers took a hefty 75%, banks 11%, while private banks, insurers and others got only 14%.

“The books were a who’s who of the high-yield world,” said Simon Crisp, head of Asia debt syndicate at JP Morgan. He added that the US$5.5bn book, for an oversubscription of 9.3x, came before padded orderbooks became the norm in Asia.

MMC also allowed for some flexibility in its use of proceeds, given the regulatory uncertainty surrounding its plans for a railway project. Investors, meanwhile, saw their interests protected through a package of high-yield covenants, including a clause limiting the company to a leverage ratio no higher than 3.5x. The guarantee from Energy Resources LLC also offered direct recourse to the holder of the mining license – the company’s crown jewel.

The leads for the senior guaranteed issue described it as the deal that put Mongolia on investors’ maps. Previous issues had opted for a Reg S-only format, meaning MMC was the first time many of the world’s biggest funds had looked at the country.

They were not disappointed either. The bonds rallied on the break, trading at 100.50 the day after. They remain above reoffer, having traded at 102.5/103.5 at the end of the review period.

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