Rising above: Rebounding from a crisis, market should benefit from new regulations

While economic growth is forecast to be in the double digits for 2012, the slowdown in GDP growth from 16.5% year-on-year (y-o-y) in the first quarter 2011 to 11% in the second quarter, election jitters and the migration to a new trading framework kept investors largely on the sidelines in 2012. Equities realised significant value over the last two years before slowing in 2012. Yet over the medium term, both listings and liquidity should grow markedly once new legislation is enacted. Although larger Mongolian firms have typically raised funding on offshore markets, wholesale sector reform should attract at least some of this value to domestic equity and debt markets.

PRIVATISATION LEGACY: The State Property Committee (SPC) created the Mongolian Stock Exchange (MSE) in 1991 as a vehicle for privatising state assets during the transition to a market economy. By 1995, stakes in a total of 475 firms worth an aggregate MNT21bn, which was equivalent to ($48.3m) distributed in MNT7000 blue vouchers, then worth $16.10, and MNT3000 pink vouchers, then worth $6.90, to every citizen. But with a mere 14 initial public offerings (IPOs) since then, the supply of shares has not grown significantly and the structure of listed stocks remains broadly a legacy of privatisation.

According to the MSE, by year-end 2011, an estimated 23 listed firms were 100% government-owned, while 29 were partly state-owned. State-linked shares accounted for 75% of market capitalisation by year-end 2011, according to local stock brokerage firm BDS ec, with the government holding controlling stakes in four of the eight largest firms by capitalisation on the exchange (Small Tavan Tolgoi, Shivee Ovoo, Baganuur and Telecom Mongolia). The SPC continues to manage the exchange, though the committee was transferred from the prime minister’s office to the Ministry of Industry and Agriculture after the 2012 election. Single-day price fluctuations are capped at 15% of the previous close, curbing volatility driven by low liquidity, and the creation of the Financial Regulatory Committee (FRC) in 2006 has led to a clearer, more strict regulatory framework for securities trading.

MARKET GLUT: Secondary share trading began in 1995 with the licensing of 28 brokerages, following passing of the Securities Markets Law in 1994 and the Corporate Law in 1995. Since then, trading hours have been extended from a weekly two-hour session to three-hour sessions every weekday. Despite original attempts to broadly spread ownership, shares remains highly concentrated in few hands. A handful of affluent Mongolians bought up shares early in the privatisation process, often taking majority control of firms and drastically reducing the number of freely traded shares.

In the first eight years of secondary trading to 2004, only MNT38.8bn ($27.2m) in shares traded hands, according to real estate finance firm ResCap, indicating that by November 2010, about a dozen people held roughly 80% of market capitalisation. Despite efforts to enfranchise more domestic retail investors through the distribution of shares in state-owned coal mining firm Erdenes Tavan Tolgoi (ETT) in 2012, retail investors’ are still scarred by the declines of 2009. The expiration of the blanket guarantee on bank deposits in 2013 may lead to more participation in the securities market, but foreign investors have led much of the recent trading.

COMMODITY PLAY: In the years since the 2009 crisis there has been a stark rebound in the exchange’s fortunes, driven primarily by foreign investors seeking exposure to commodity-dependent markets. Similar to Australian, Hong Kong and Canadian natural resource-based stocks, Mongolian equities were seized upon as a proxy for Chinese growth by foreign investors barred from investing directly in China. With a small institutional investor base, 95% dominated by commercial banks, Mongolia’s capital markets are increasingly driven by foreign portfolio activity. “Mongolia is a leveraged play on China, given the very small size of the domestic market,” Sardor Koshnazarov, head of research at Eurasia Capital, told OBG. “The trend of growth or slowdown in China tends to be exacerbated in Mongolia.”

THE PIE GROWS: Market capitalisation grew from 2.28% of GDP in 2002 to 18.45% in 2011, reaching $1.58bn, according to the World Bank, but it remains the second smallest in the world after Laos. The MSE Top 20 (MSETOP) index reached a low point in June 2009, but driven by appetite for global commodity-linked markets, the MSE quickly rebounded from its downturn to star as the world’s best performer by 2010, rising from a low point of 4656 in June 2009 to 14,759 by the end of 2010. The exchange’s capitalisation grew some 121% in Mongolian currency – tugrik terms to MNT1.4trn ($980m), and 154% in dollar terms in 2010, according to Renaissance Capital. Further annual growth of 58% in dollar terms in 2011 to MNT2.17trn ($1.5bn) made the MSE the world’s second-fastest-growing exchange in 2011 after Venezuela.

The MSE calculates one index, the MSE Top 20 ( MSETOP). While the top 20 largest capitalisations on the MSETOP represent a variety of sectors, mining-related stocks have fuelled the valuation rises of recent years. Coal mining stocks in particular have driven market performance, with several registering over 200% share price increases in the record-breaking year of 2011, according to BDS ec. Key to Mongolian stocks’ appeal to foreign investors, despite low liquidity, has been exposure to a stronger local currency in the commodities upswing of 2010 and 2011.

Real money managers and hedge funds have shown increasing interest in the Mongolian market, with trades by foreign entities on the rise. Still, access has remained constrained: aside from exposure to Mongolian-linked stocks on international markets, investment in MNT-denominated securities was limited to depositing money in a Mongolian bank, opening an account with a local broker and the securities clearing house or lending directly to Mongolian corporates, an option only for larger institutional investors. The absence of a domestic custody regime has deterred many investors concerned over counterparty risk. Emerging market investors expect significant liquidity to flow to Mongolia once legislative and infrastructure reform is fully enacted.

FEW TRADABLES: Concentrated shareholdings and the limited number of IPOs since inception have left only around 30 stocks traded daily on the MSE. A mere MNT56.8bn ($39.8m) in IPOs and MNT26.6bn ($18.6m) in secondary rights issues added limited new supply between 2005 and 2011, according to BDS ec. Trading volumes have largely been limited to the index of leading shares, with 20 stocks accounting for 86% of market capitalisation at the start of 2012, according to the London Stock Exchange (LSE). Traditionally – although not entirely – an over-the-counter (OTC) market where brokers conclude deals bilaterally before reporting prices on the board, price discovery has often been based more on brokers’ internal valuations.

LISTED: The exchange is split into two boards, with 36 companies listed on the A Board of largest capitalisations. Six of the 10 largest market capitalisations by June 2012 were in the mining sector, accounting for a combined market value of MNT969.3bn ($678.5m) by the end of the first half of 2012. The largest capitalisation by far is that of Small Tavan Tolgoi (TTL), at MNT392.7bn ($274.9m) by end of June 2012, a 51% state-owned coking coal miner with a mere 4% free float on the MSE. Other highly traded mining stocks on the MSETOP include Baganuur, Shivee Ovoo, Sharyn Gol, Berkh Uul and Khukh Gan. The top equities are more diversified than merely mining, however, with several interesting offerings in beverages (APU), telecoms (Mongolia Telecom), financial services (BDS ec), cashmere (Gobi), as well as hospitality (Bayangol Hotel, Genco Tour Bureau and Hotel Mongolia) and retail (State Department Store). Local dairy producer Suu saw some of the highest gains in 2011, with share price doubling in one year.

Following a lull in new listings in 2009 and 2010, limestone and cement producer Silikat staged the first IPO in three years, raising MNT3.65bn ($2.55m) in July 2011. Sharyn Gol, a coal miner majority owned by US-based Firebird, raised MNT18.3bn ($12.8m) in equity in the MSE’s largest secondary rights issue in October 2011. Meanwhile, the first transport firm to list on the MSE, E-Trans Logistics, completed its IPO in April 2012, raising MNT924m ($646,800).

MODERNISING THE INFRASTRUCTURE: Mongolia’s shallow capital markets were in the midst of radical modernisation in 2012, framed by a $14m, three-year partnership between the MSE and the LSE Group (LSEG) concluded in December 2010. The partnership’s aim is to grow market capitalisation to $15bn in the coming five years by listing on the MSE 15 strategic mining deposits, a number of state-owned enterprises and several Mongolian firms currently listed abroad.

Partnership with LSEG, including the secondment of LSEG staff to the MSE, saw tangible results in 2012 in the form of an innovative electronic trading system, LSEG’s Millennium IT global offering, and the T+3 settlement mechanism. While some brokers were already using an electronic system, the Millennium IT system launched at the start of July 2012 has seen many more choose a platform with an electronic trading system linking brokers rather than OTC. With the physical trading floor due to disappear, brokers will view market data and trade from their offices, while investors can trade online. Aside from the established Mongolian Securities Clearing House and Central Depository (MSCH&CD), the system involves banks as clearing centres for the upgraded settlement system, moving from a pre-funded system (T+0) to settlement within three days of the trade (T+3), the global standard.

Beyond holding an account at the MSCH&CD, all brokers have been required to establish accounts with one of four clearing banks (Khan Bank, Golomt Bank, Trade and Development Bank and XacBank), as are each of the individual accountholders, in order to trade under the new settlement framework. This prompted a significant drop in trading in July 2012 as most brokers or investors were slow to conclude deals with clearing banks. Beyond the high fees being charged, brokers were sceptical of opening accounts with banks that had just launched brokerage operations, such as TDB Capital and Golomt Securities. “The requirement for brokers and individual investors to open an account with a clearing bank caused significant delays after the implementation of the new trading system,” Koshnazarov said. “Brokers could not negotiate the high fees charged by banks, while they had concerns about potential conflict of interest on the part of these banks as they have also established their own investment banks.”

The MSE’s surveillance system has been fully automated and trading hours extended from two to three hours daily. While counterparty risk does not arise in a pre-funded T+0 settlement, such a system is deeply inefficient given its manual nature and the need to block capital with one’s broker, which ties up capital and generates some interest for the brokerage. Meanwhile, integration of the MSCH&CD with the Central Bank of Mongolia’s (BoM) Banksuljee system of real-time gross settlement of payments has been on-going since 2010 to improve efficiency and ease of clearing. While the first several weeks of trading on the new system faced teething problems with few trades and a low level of broker registration, participation rebounded by late 2012. In addition to overhauling the market’s technology, LSEG conducted training programmes for market participants. Perhaps due to the low level of daily trading during the transition, the settlement process did not witness any failures through year-end 2012.

LAYING DOWN THE LAW: The LSEG has also advised on the formulation of a new securities law, expected to unleash “a flood of new capital looking for exposure to one of the world’s fastest-growing economies”, according to BDS ec in a September 2012 report. A number of laws covering governance, disclosure and asset securitisation have already been passed. A new Company Law in 2011 improves corporate transparency and accounting requirements. Larger corporations were in the process of moving towards International Financial Reporting Standards (IFRS) in 2012, with a preliminary deadline of 2013 year-end for compliance.

Meanwhile, a new conflict of interest law in January 2012 requires full disclosure of assets by public officials.

While a law on asset-backed securities (ABS) was passed in 2010, a mere MNT6.3bn ($4.4m) in mortgage-backed bonds have been issued since then. “Assets in Mongolia are largely un-encumbered,” Nick Cousyn, chief operating officer at BDS ec, told OBG. “If the new securities law is passed with provisions for ABS, the floodgates for lending will really open.”

While these new laws are necessary and important, they are insufficient without wholesale reform. The new law would allow the FRC to license issuance of covered bonds (securities backed by the cash flow from recurrent income instruments like mortgages). Beyond training staff of the MSE, the FRC and brokers, LSEG has started work on diversifying instruments and establishing a market index that meets global standards.

FIXED INCOME: The Ministry of Finance (MoF) has made increasing use of local funding in the last two years, issuing tugrik-denominated government bonds of varying maturities and in greater numbers. Following strong growth in domestic capital markets rebounding from 2009, the government switched from private placements offshore in 2009 to bond auctions through the MSE in 2010 and 2011, with technical assistance from the Asian Development Bank. Some MNT200.2bn ($140.14m) in government bonds were issued in 2010, rising to MNT236.7bn ($165.7m) in 2011, out of a total authorised by parliament of MNT372bn ($260.4m).

The government also launched a bond programme for the Mongolian Mortgage Corporation (MIK) in 2009, approving an issue of MNT25bn ($17.5m) in mortgage-backed securities that were included in the BoM collateral list. By mid-2012, however, a mere MNT6.3bn ($4.4m) in such bonds had been sold, mostly to those domestic banks writing the mortgages in the first place.

In 2011, the government tended to favour issuing bonds with maturities between one and five years, although some bonds had seven-year maturities, with an 8% rate on average. Coupons on government bonds have displayed an upwards trend, increasing from approximately 9% in 2011 to 12% in 2012.

SHORTCOMINGS: Upon reaching maturity, bonds can only be refinanced through new bond issues. So far, pricing of new issues has not reflected market forces and has been set by the ministry unilaterally, according to the IMF. There is no bond auction calendar, and updated bond holding information is only published at the next auction, with no central database of bond information available. These factors have impeded the development of a yield curve on government securities.

With no secondary trading platform, very few OTC bond deals have taken place – only one transaction was recorded in 2011, at a similar yield to the auction. The IMF has lobbied the Debt Management Office to move away from issuance through the MSE, favouring the creation of market-driven pricing by licensing primary dealers for bond issues. In the meantime, the fund has argued for a standardisation of bond issues by setting a regular frequency for issues and limiting the types to a select number of popular “benchmark” maturities.

While the MoF had been authorised to issue up to MNT270bn ($189m) worth of bonds in 2012, the lion’s share of issues were left to late in the year. The value of outstanding MNT government bonds in circulation dropped from a high of $219.8m in December 2011 to $133.87m in October 2012, according to data from CB onds Info, a bond information tracker. Facing a liquidity crunch over the summer of 2012, the MoF conducted two private placements in July, raising $50m each with Khan Bank and TDB, in dollar loans priced in the 8% to 9% range, far higher than the Development Bank of Mongolia’s 5.75% benchmark rate.

THE CYCLES AHEAD: As the government sought to restart bond auctions in the fourth quarter of 2012, it is likely to opt for shorter maturities of three-month debt rather than the one-, two- and three-year tenors authorised by parliament. However, the 2013 budget unveiled in October 2012 aims to ramp up bond issuance in the short term. The MoF will issue a record MNT738bn ($26.6m) in 2013, but it will also have to repay some MNT422bn ($295.4m) in bonds in addition to covering a forecast deficit of MNT361bn ($252.7m) in 2013.

Dominated by domestic banks and Dutch bank ING, the government bond market remains constrained. A proposal in late 2012 to parliament allowing the central bank to purchase government bonds looked set to bring major changes, however. While the BoM regularly extends funds on an ad-hoc basis to the government, such as an MNT200bn ($140m) loan in early 2012, the bank look set to add open market bond operations to its set of monetary policy instruments should the bill be passed. However, this will be predicated on the emergence of a secondary bond trading market, and a number of alternatives have been proposed.

The MSE established a bond-trading platform with the Millennium IT system on November 19, 2012. BoM plans to expand the number of links to the securities clearing house to link into the platform. Additionally, a parallel system has been proposed using the estimated 44 Bloomberg terminals in Mongolia to set up a secondary market that would be based on the US financial information provider.

IN NEED: High coupon rates and non-existent liquidity in secondary trading have constrained the nascent corporate bond market. BDS ec was the first bond underwriter licensed in 2004 and has dominated since with issues for the Puma Group, Anod Bank and Moninjbar, among others. In 2011, corporate bonds accounted for a mere 1.88% of bond market capitalisation, according to the IMF, with over half as short-term issues of around one year. With no corporate bond issues in three years, Just Agro broke new ground in September 2011 when it floated a first tranche of one-year bonds worth MNT10bn ($7m) at 16.2%, and it aims to issue another two MNT10bn ($7m) tranches in coming years.

Capital-constrained Mongolian corporates will likely require more financing, although so far they have largely focused on offshore funding, given high coupon rates onshore. “We have seen only one corporate bond issue in the last three years. This is unlikely to change unless asset-backed securities are allowed by the regulators, or the government ends its blanket deposit guarantee,” Cousyn told OBG. “The deposit guarantee subsidises depositors and local banks at the expense of corporate borrowers, with one-year deposit rates in excess of 16% in late 2012.” This rate is generally between 14% and 15%, according to the MSE.

WAIT & SEE: A confluence of downside risks in the second quarter of 2012 put a break on the growth of the past two years. Political risk re-emerged on investors’ radars in the three months leading up to the June parliamentary elections. Following a proposed takeover bid for South Gobi Resources by China Aluminium Corporation (Chalco), the government rushed in the Strategic Foreign Direct Investment Law in May 2012, which carries vague new restrictions on foreign investments.

The new law allows the government to intervene to block sales of strategic assets for deals of over $75m by foreign investors wishing to control over 49% of a firm in three strategic sectors of mining, banking and telecoms. Equity investors grew worried at the prospect of state intervention in share sales. The law has proved particularly concerning for investors in mining stocks. Although the legislation is not retroactive, investors remained unsure as to the procedures for complying with the new rules for any future deal. Coupled with potential renegotiation of existing mining deals like Oyu Tolgoi under the new government, significant new mining investment were put on hold as 2012 wore on.

To a degree, falling commodity prices also contributed to a slowdown in Mongolia’s GDP growth from 17% in 2011 to 10.2% y-o-y in the first three quarters of 2012, according to the National Statistical Office. Rating agency Standard & Poor’s (S&P) revision of Mongolia’s BB- long-term outlook from positive to stable in October 2012 reflected investor concerns over growing sovereign debt, albeit from low levels, and domestic credit growth was still close to 30% in 2012, implying possible overheating. Highlighting the economy’s narrow dependence on commodity exports and “lack of a strong political leadership” to steer investment towards productive long-term uses, S&P’s move was symptomatic of investors’ confidence in the country’s long-term growth prospects but cautious of short-term risks.

TAKING A HIT: Migration to the new trading system in July 2012 further slowed the exchange. The value of average daily trading dropped from around MNT432m ($300,000) in 2011 to about MNT583m ($410,000) in 2012, as of late December. While OTC trading was mostly shifted onto the new platform, limited liquidity dried up even further. Although trading volumes recovered somewhat, with MNT35.7bn ($25m) daily turnover in the last week of October, the MSE erased most of 2012’s gains and the MSETOP index dropped to 16,550.12. The leading shares’ price-to-earnings ratios (P/E) thus remained low in 2012, with TTL recording the lowest P/E of between 6 and 7 throughout 2012. The largest industrial stock, APU, grew from a P/E of around 11 at the start of 2012 to peak at 17 in early August, before dropping back to 13 in late October.

STRUCTURED FUNDS: A handful of structured investment funds have emerged to cater to growing investor appetite in Mongolia, although most have only partial exposure to MSE-listed equities. Structured in offshore jurisdictions such as in the Cayman Islands, these funds for the most part invest in select equities listed both onshore and on international markets, as well as property and bank deposits in the capital Ulaanbaatar. Hong Kong-based Quam Silk Road Mongolia Fund, advised by Eurasia Capital, Singapore-based Khan Mongolia Fund, advised by Monet Capital, and ResCap’s Origo MSE Liquidity Fund all launched in 2011.

Khan’s $5m standalone fund tracks MSE equities alongside bonds, private equity and property, with roughly 70% of total assets in natural resources. Quam’s segregated portfolio fund only invests in companies with Mongolian exposure listed on foreign exchanges, while Origo Partners, part owner of brokerage ResCap, launched its MSE Liquidity Fund in September 2011 to invest in the 10 largest capitalisations alongside private placements and time deposits. Emerging markets investment firm FMG opened the first fund dedicated to the top-25 MSE-listed equities in January 2012, implying expectations of high growth for the MSE. At its launch in April 2012, the fund was weighted 40% towards coal mining firms, such as TTL and Sharyn Gol, and 60% in non-mining sectors like APU, Remicon and confectionary producer Talkh Chikher.

While interest in exposure to the local currency has grown, 2012 was a tough trading year on the MSE.

With new requirements implemented by the Strategic Foreign Investment Law, shrinking liquidity from the second quarter on, and a sell-off by foreign and domestic investors in the face of political uncertainty, structured funds saw muted success in 2012. Quam’s Silkroad Fund was dragged down due to its exposure to over 30 offshore listed Mongolian equities. Hong Kong-listed Mongolian stocks, down some 30% year-to-date on average in October 2012, proved more sensitive to political developments than those on other exchanges, generally traded as a function of Chinese growth and commodities demand. Origo’s MSE Fund reported in June 2012 that it had recorded positive returns in the eight months since its launch with annualised returns of 16% since October 2011. While authorities have plans to implement a new investment fund law sometime after late 2013 to encourage the structure of more funds onshore, uncertainties over looming changes to the tax code will need to be clarified before investors look to incorporate investment funds locally.

THE BIG FISH: Authorities seek to strike a balance between the need to attract foreign investment to large-scale projects and channelling part of the dividends to ordinary citizens. While spreading share ownership was a central aim of the 1990s’ privatisation process, plans to privatise ETT and distribute shares to all citizens have been a driver in the securities reform effort. State-owned ETT covers both East and West Tsankhi coal deposits in South Gobi, the former under state operation and the latter intended for joint venture with international partners. The firm has prepared a triple listing on exchanges in London, Hong Kong and Ulaanbaatar, expecting to raise approximately $3bn.

The securities law has delayed the listing, but once passed will allow dual listings on the MSE. Another sticking point has been the level of government involvement and ownership. The government initially agreed to develop the West Tsankhi section of the deposit with a consortium of the US’s Peabody, China’s Shenhua and a Russian-Mongolian venture. Uncertainty continued around the project’s development as ETT officials proposed to develop the mine on their own in April 2012, and the government recalled Peabody to negotiate for the project in October. ETT is investing further in the eastern operations even though the IPO is not expected before the fourth quarter of 2013. The firm secured a $100m loan from the Development Bank of Mongolia in mid-2012 and is considering advance coal sales to China as a source of intermediate funding. “The IPO is unlikely go ahead until we see a strengthening of coal demand in China, which is unlikely before September 2013,” Graeme Hancock, chief operating officer of ETT, told local press in November 2012.

SHARED GAINS: Meanwhile the share reserved for Mongolians and local corporates has increased over time. While a 2010 parliament resolution indicated that some 30% of the firm would be floated, a new motion passed in January 2012 reserved 20% of the company each for Mongolian nationals and for local corporates. While these shares cannot be traded for two years, the government offered in May to buy them back for MNT1m ($700) per block from any Mongolian not wishing to wait for the IPO. The pay-out reached MNT1.53trn ($1bn), although the government also sold 93m shares to over 1000 Mongolian companies for MNT86.77bn ($60.7m) according to the SPC. Originally scheduled for early 2012, the IPO has been rescheduled for 2013, although the lack of clarity on the government’s stake has clouded the outlook. Hong Kong and London voiced concerns in late 2011 that the listing might contravene their rules, which require a minimum free float of 20% of stock, although by mid-2012 it appeared the listing would comply with these floors.

UNLOCKING IPOS: The overall aim of on-going reforms is to better intermediate between privately held Mongolian firms looking for cheaper sources of equity and a growing pool of foreign investors seeking to unlock the value of the market in the coming years. Although the only two banks to have listed on the MSE – Anod and Zoos – went bankrupt during the 2009 crisis and were folded into the new State Bank, authorities expect to overcome the confidence gap and build a pipeline of IPOs in coming years. “Companies are starting to realise the benefits of capital markets,” Norihiko Kato, chief executive officer of Khan Bank, told OBG. “In the next three years fundraising through the capital markets will become increasingly important.”

With projected economic growth in the double digits over the next decade, the MSE will need to better reflect dynamic sectors from mining to services to property. Sustained government pressure did not lead to any new listing by year-end 2012. Upon passing new securities legislation, however, political pressure on large projects is likely to increase. The exchange thinks it could bring new value of up to $45bn to a market worth less than $2bn in 2012. This would include roughly $5bn in issues from large domestic corporates like MCS Group, Mobicom and Tavan Bogd; another $10bn in dual listings for Mongolian assets listed abroad such as MMC, South Gobi Resources and Turquoise Hill Resources; up to $10bn in listing the top strategic mining deposits; and about $4bn in the proceeds of privatising state assets like the airline MIAT and miner Erdenet. Meanwhile, the capital-constrained banking sector will increasingly require equity financing to cater to rapid economic growth. “We expect a number of banks to list on the MSE in coming years,” Dhamitha Cooke, the president of the MSE, told OBG.

The MSE has made outreach efforts since the start of its partnership with the LSEG. Establishing a business development division catering to the growing pool of underwriters, the MSE discounted its listing fees in September 2012 by 30% for IPOs and 50% for secondary rights issues, and estimates that listing fees now amount to only 0.1% of market capitalisation. BDS ec, traditionally the dominant underwriter, faced growing competition beginning in 2011 from new entrants like TDB Capital. BDS ec has prepared a large share of new potential listings, including Aurum Resources and coal miner Beren, which announced plans in 2012 to raise over $100m – the largest IPO in MSE history. Beren plans to sell 1.7bn common shares with a nominal value of MNT157.35 ($0.11) a share. TDB Capital, meanwhile, will act as underwriter for the planned secondary offering of coal miner Baganuur, which has announced plans in 2012 to raise up to MNT40bn ($28m) through a 30% equity sale. With only one IPO in 2012, that of E-Trans Logistics, most would-be issuers have delayed plans given the low commodity prices, relatively slow economic growth and the expectation of new legislation.

In addition to simplifying listing procedures, the new legislation will diversify the types of financing tools available to corporates. While bond rates remain too high for all but the most capital-starved corporates, the option of convertible bonds – where the bondholder can convert the debt into equity – may appeal to many. “Convertible bonds present the most attractive option for corporate borrowing,” Cousyn told OBG. “Corporations can borrow at much lower rates and pay back debt maturities with equity, while bond investors can get equity-like returns and equity investors keep equity-like returns while moving up the capital structure.”

OUTLOOK: Short-term risks were particularly evident in 2012, putting a damper on a still-illiquid and unrepresentative market that had realised significant gains in value since the bust cycle of 2009. While major upgrades of market infrastructure are crucial for Mongolia’s markets to reach full potential, political determination is needed to carry through reform. Significant growth prospects over the medium term will ensure high returns for investors in both the valuation of securities and strengthening the local currency. Yet timing is important: while some value investors will snap up cheap valuations during the economic rebound expected in 2013, enactment of the new securities law is crucial to opening the market to new liquidity and issues. Until then, Mongolian corporates will choose to issue securities offshore in the next commodity price upswing.


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