Guaranteed returns: The small bond market is on the way up

The bond market in Mongolia is one of the world’s youngest. The government has committed to regular bond sales only since 2010, and a pioneer in the corporate segment appeared in August of the same year. Despite this small base, growth in the segment looks likely in the coming years, due in large part to the needs of the mining industry. As of October 2011 there were $172m in government bonds outstanding, with the longest maturities due in 2016. The vast majority of that total – about $150m – had been sold since June 2011, according to data from Bloomberg.

BY THE NUMBERS: Regular sales on the Mongolian Stock Exchange (MSE) started in September 2010, but it was the subsequent announcement of an MNT372bn ($290m) bond programme that brought volume to the market. Currently issued bonds range in maturity from one to five years and in yield from 8% to 12%, according to their issuer, the Ministry of Finance (MoF). As of late 2011 the plan was to continue holding auctions until the $290m goal was reached, and then announce a new bond sale programme.

This first batch of revenue from the bonds is earmarked for programmes to support small industry and develop housing. The biggest buyer has been the local representative office of ING. The Dutch financial services conglomerate was the first foreign bank to open a representative office in Mongolia and remains the only foreign bank that executes trades on the MSE.

Anyone with an account at the MSE has had access to the bond sales, and as of late 2011 there was no secondary bond market in Mongolia. The MSE is in the process of moving to a new, equities-focused trading platform that cannot handle bonds, according to the ministry. One option under consideration as of October 2011 was using Bloomberg market data terminals as a primary platform for continued bond trading.

SUPPLY SIDE: In addition to the MoF, bond issuers include the Central Bank of Mongolia (BOM) and, potentially, the Development Bank of Mongolia (DBM). The BOM issues one-, 13- and 28-week notes to licensed banks. The DBM, a newly created institution with a mandate to lend to projects that advance the government’s agenda, plans to issue bonds worth about $700m, likely in Singapore. Other future offerings may include sub-national government bonds. In January 2012 local investment bank BDS ec announced that it would underwrite a bond for Sukhbaatar aimag (province). The note, which will have a maturity period of one year or 18 months, is expected to raise MNT2bn ($1.6m) with a yield of 12-12.5%. Firebird Mongolia, a foreign institutional investor, has been quite bullish. It acquired 14.2% of Baganuur JSC in 2010, which pledged to underwrite the Sukhbaatar Aimag bond in January 2012, saying it expected to raise MNT2bn ($1.56m).

PREVIOUS ATTEMPTS: In 2010 the South Africa-based Standard Bank underwrote a $75m private placement that was undersubscribed. The issue came in the middle of the global credit crunch and also just as prices for copper, Mongolia’s largest export at the time, hit a slump, falling by 65%. Additionally, in June 2011 the Mongolian government floated the idea of a $500m sovereign international bond issuance denominated in either dollars or yen. At an investment-promotion conference in Hong Kong in October 2011, Mongolian officials announced that international banks had offered to underwrite a $2bn issue. Due to ongoing concerns about the state of the global economy, however, the state is likely to wait until at least the end of 2012 to move forward on this proposal.

A corporate bond market is expected to follow the recent growth in government issuances, but as of late 2011 just one company – the meat-processing firm Just Agro – had issued debt. The company’s “meat bond” is the largest in the country’s history and the first in three years. Just Agro initially aimed to sell MNT30bn ($23.4m) in one-year notes carrying a 16% yield, but as of October 2011 it had only sold around a third of that amount. Meanwhile, several other Mongolian corporations have sold debt abroad, including the beverage-maker APU and Remicon, a construction firm.

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The Report: Mongolia 2012

Capital Markets chapter from The Report: Mongolia 2012

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