Mongolia sovereign bond first explained

Author: Ashley Lee | Published: 19 Dec 2012
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The government of Mongolia’s recent Regulation S/Rule 144A debt offering marked the first time the country has tapped the sovereign bond market.

Despite the country’s foreign investment environment still being in flux, 2012 has seen a spate of Mongolia-related bonds. This year quasi-sovereign entity Development Bank of Mongolia issued its debut bond, and Mongolia Mining Corporation became the country’s first company to tap the high-yield market.

But a sovereign offering from a country rescued by the IMF five times in the last 22 years caught some by surprise. The offering, rated B+ by Moody’s, was launched on November 28 and was 10 times oversubscribed.

“The Mongolia sovereign priced better than Sri Lanka and even better than Spain, and set a new benchmark,” said Matthew Bersani, Asia managing partner of Shearman & Sterling, who represented the Government of Mongolia.

Allen & Overy’s Walter Son, who acted for joint the lead managers, said that this is an important deal for the economy. This is not just because of the significant deal size compared to the country’s nominal GDP, but also the need for financing to support Mongolia’s infrastructure and industrial development.

The deal also signals the new government’s intentions for inbound foreign investment. Following the passage of the foreign investment law earlier this year, and the election of several politicians considered resource nationalists, foreign investors shied away from Mongolia.

Bersani said the sovereign offering was a chance for Mongolia’s new government to articulate its vision. In connection with the offering, the government adopted a number of policies that were well received by investors, such as a more reliable budgeting policy for annual state budgets.

Moreover, he said that the new government is taking steps towards stabilising the budgeting process and making Mongolia more attractive for investors.

Political complications

Following the offering, there was a well-publicised report that the Mongolian People’s Revolutionary Party, which held three cabinet positions, was withdrawing from the coalition government.

However, after a collapse in the price of Mongolia’s global bonds, Moody’s issued a report titled ‘Political Infighting is Without Credit Implication’. This stated that the political threat created by the minority member’s withdrawal from the coalition is a sideshow and does not signal greater political instability.

But the price collapse demonstrates the global market’s concerns regarding Mongolia’s uncertain political and investment climate. In 2013, counsel hope for more guidelines regarding the implementation of the May foreign investment law.

Joint lead arrangers are Bank of America Merrill Lynch, Deutsche Bank, HSBC, JP Morgan and TDB Capital.

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Channel correspondents