Frontier Markets Deal: Mongolia’s US$1bn liability management trade

IFR Asia Awards 2021
3 min read
Morgan Davis

Repeat performance

The Government of Mongolia was back in the offshore market in 2021 with the kind of outstanding trade that has become customary, this time reducing its refinancing risks and lowering its funding costs.

The transaction, which was split across a US$500m 3.5% 2027 bond and a US$500m 4.45% 2031 note, showed how Mongolia’s prudent approach to funding has paid off.

Back in 2016, the country sold a US$500m five-year bond at 10.875%. Even in September 2020, Mongolia paid 5.375% for its US$600m 5.5-year notes.

Mongolia’s US dollar deals in recent years have focused on making the sovereign’s liabilities more manageable, often in the face of political difficulties, earning it a reputation as a responsible issuer.

In 2021 the country, rated B3/B/B, paired its US$1bn deal with a concurrent tender offer for its 2022 and 2023 notes, pushing out its near-term maturities to a longer time span.

Finding the right balance for the deal took some work. The borrower debated whether this could be done as a US$600m trade or a US$1bn transaction.

Mongolia wanted to tender for its notes while also issuing new bonds that were index-eligible to bring in the greatest number of investors. To do so, it decided on two tranches of US$500m each, making them both index-eligible. The sovereign limited the size of each tranche, resisting pressure from investors to increase them, to ensure that its redemption schedule in the coming years would be manageable.

To achieve outstanding results, bookrunners HSBC, JP Morgan, Morgan Stanley and Nomura, with financial adviser Frontier Strategies, conducted a thorough remote roadshow, reaching new investors in the process. For example, Mongolia was able to meet with investors in Latin America and the US Midwest, outside the usual roadshow locations.

It conducted extensive work to update investors, explaining how it was handling the pandemic, how the latest round of government changes had affected the country and how it planned to diversify the economy away from a reliance on coal.

The result of these efforts was apparent, as 52% of the 144A/Reg S deal was allocated to European investors, 25% to the US and 23% to Asia. The order book peaked at US$6.4bn.

The 2021 transaction achieved the country’s longest tenor and lowest funding cost. The six-year bonds were priced at 98.668 to yield 3.75% and the 10-year portion was priced at 98.023 to yield 4.7%, after being initially marketed at the 4.25% area and the 5.25% area, respectively.

The proceeds took out US$662.412m in principal amount of its 5.125% 2022s and US$266.934m of its 5.625% 2023s under a concurrent tender, bringing down Mongolia’s overall funding costs and making approaching maturities easier to manage.

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