Mongolia prices tightest deal yet
Investors poured into Mongolia's tightest-ever trade last week, a US$500m five-year bond issue made to fund a liability management exercise.
The new notes, which were marketed at 7.125% area, were priced at par to yield 6.625% or 222bp over Treasuries – the narrowest spread achieved by a Mongolian issuer.
"Our efforts to bring the nation forward [are] reflected in our credit spreads against US Treasuries," finance minister Javkhlan Bold said in a statement to IFR.
The offering was announced on February 10 alongside a tender offer for the sovereign's US$566m of 5.125% 2026 and US$650m of 8.65% 2028 bonds that closed on February 14.
Some US$391.729m of the 2026s and US$377.809m of the 2028s were tendered. Mongolia accepted the total tendered amount for the 2026s and US$108.271m of the 2028s.
Florian Schmidt, a director at consultancy Frontier Strategies, which advised the issuer on the transaction, said the pricing of the new bonds was 17.5bp inside the issuer's curve. "They were aiming to price flat, without any new-issue premium, no higher than 6.8%," he said. "Anything inside of that, they thought would be a huge success."
Mongolia had offered to repurchase all the 2026s at par and a pro rata amount of the 2028s, subject to the new-issue proceeds, at a cash price of 106.50. By targeting the 2026s, the notes with the closest maturity, and the 2028s, those with the highest coupon, the issuer was extending its maturities and lowering its costs, Schmidt said.
The government will "address" the remainder of the 2026 bonds through its budget as it continues on a deleveraging path, he said.
“This transaction will further Mongolia’s strong standing with global investors," said Sonor Luvsandorj, director general of the financial policy department at the Mongolian finance ministry.
"Despite strong supply from three other non-investment-grade emerging market issuers, we obtained a nearly eight times oversubscription to price 17.5bp through our curve. This is the strongest possible testimony of Mongolia's strong reputation as a savvy and reliable issuer,” he said.
Uzbekistan, the Dominican Republic and Brazil were also in the market last week.
Mongolia had considered offering a second 10-year tranche but the price differential demanded by investors was 50bp–70bp, even though there is only a 15bp difference between five and 10-year US Treasuries, Schmidt said.
"It's not a big a jump in terms of curve extension if you look at other emerging market sovereigns," said a banker on the transaction. "But, for Mongolia, paying 7%-plus was deemed expensive in the current market."
He said the issuer needed to raise a maximum of US$800m for the tender exercise but wanted to prioritise US$500m for the five-year, which would have capped the 10-year at US$300m, below what some investors consider benchmark size and ineligible for inclusion in the JP Morgan Emerging Market Bond Index. This was a second reason for dropping it.
Books grew steadily on Tuesday, reaching nearly US$2.4bn by the London open. Final orders landed at US$2.8bn from 184 accounts, including US$60m from the leads, after reaching US$3.8bn at one point. Some 37% of the notes went to each of Asia-Pacific and EMEA, and 26% to North America. Asset and fund managers took 74%, banks 17%, pension funds 5%, private banks 1% and broker-dealers 3%.
Mongolian appeal
Demand for the trade benefited from the country's overall growth dynamics and credit upgrades by all three international ratings agencies last year, as well as its policy to reduce overdependence on Russia for energy by expanding renewables such as hydropower.
Mongolia is also improving its export infrastructure. The construction of a new railway link with China announced earlier this month will increase coal transportation capacity, while also reducing reliance on China and Russia for exports under a long-standing "third neighbour" foreign policy of building relationships with other nations.
In January, the government signed a US$1.6bn agreement with French nuclear player Orano to develop a uranium mine in Mongolia's Dornogovi province.
Additionally, the country has been focused on diversifying its domestic economy away from minerals – into areas such as agriculture, cashmere production, renewable energy and tourism.
All these factors were highlighted in virtual roadshows that took place with 150 investors across different time zones last week – an "extraordinary turnout" even compared with Mongolia's recent deals, Schmidt said.
The banker said some investors may perceive there to be a high chance of Mongolia receiving a further credit upgrade, given S&P's positive outlook on the sovereign, strong commodity prices, strong coking coal and copper export volumes, and higher contributions to the economy from tourism.
"This is why this is trading rather tight – more like a Double B name," he said.
The 144A/Reg S notes will be rated B+/B+ (S&P/Fitch), in line with the issuer's B2/B+/B+ ratings.
Credit Agricole, Deutsche Bank, HSBC and JP Morgan were joint lead managers and bookrunners for the bond and tender offer.
Sodali & Co was the tender and information agent.
The bonds traded slightly above par on their first day in the secondary market, February 19.
Mongolia was last in the offshore bond market in December 2023, when it raised US$350m from 7.875% 5.5-year bonds at a yield of 8.10%. The spread on that transaction was 382bp over Treasuries.