IFR ASIA: Welcome everyone. Florian, what do we mean when we think about frontier markets? Can you help us define that?
Florian Schmidt, Frontier Strategies: Yes, good afternoon Steve and good afternoon to the panel. The term frontier markets is commonly used to describe the equity or bond markets of so-called newer, often smaller or less accessible – but still investable – countries in the developing world. These assets are typically pursued by investors seeking high returns as well as low correlation with other markets.
These frontier markets are diverse. Companies have typically lower market caps and lower liquidity. Financial markets are less developed than those of, say, mainstream emerging markets like the BRICs. However, frontier economies do have a common a desire to embrace market mechanisms to boost economic growth and development.
Apart from exhibiting stronger economic growth various empirical studies suggest that frontier markets are less correlated with world markets and have a lower level of integration and interdependence with other market groups. Such findings give frontier markets high diversification potential and certain advantages within an investor’s overall portfolio.
The low correlation seems to follow a rather asymmetric distribution in which international economic distress intensifies relationships among financial markets. What this means is frontier economies do share certain characteristics, such as a young and increasingly educated population, but individual economies face entirely diverse internal and external forces. Growth drivers are unlikely to be the same in Kenya, which is oriented towards agriculture, as they are in a manufacturing economy such as Bangladesh, or an island nation like the Maldives where a large proportion of the economy is linked to tourism, or commodity-driven economies like Kazakhstan or Mongolia.
IFR ASIA: Anushka, what kind of characteristics do rating agencies expect in frontier markets?
Anushka Shah, Moody’s: Sure. I think Florian summarised it quite well. While investors look at frontier markets through criteria like size and restrictions on foreign ownership, on liquidity, as a rating agency we are really focusing on credit quality here. We look at essentially a group of credits that are sub-investment grade, and I think that since we are basically looking at or gauging the ability and willingness of these issuers to repay debt we particularly focus on their external or their overall financing profiles.
What we find is that these frontier markets are typically those that still rely for a bulk of their financing on concessional forms of debt, be it from multilateral or bilateral lenders. In many cases, sources of non-concessional financing are growing very rapidly but access to global markets is still very nascent. Of the 152 countries we rate, 77 fit this definition.
In terms of the credit profile, we have found that they share certain similarities. That’s something that Florian was referring to earlier. Typically, credit strengths come from very low per capita incomes but very high growth rates. They are still catching up with more developed markets, which lends them these high growth rates. Often these high growth rates are driven by trade openness or a commodity concentration. They often have young expanding populations that act as a support factor, particularly if it’s a productive one.
At the same time they all seem to have this common thread in terms of credit challenges. These tend to come from rising debt levels, so I point to their dependence on external financing. Often this lends itself to higher leverage. Many of them face liquidity risks or external vulnerability risks because they have substantial fiscal deficits and increasing reliance on non-concessional financing.
Finally, their institutional capacities are still growing and coming from a relatively new starting point in many cases. That limits the policy toolkit that many frontier economies have available to them to address the challenges that they face.
These are just some common observations. Generally speaking, our definition of a frontier market is a credit that is sub-investment grade. That’s the starting point from a credit perspective at least.
IFR ASIA: Leo, welcome. As an investor, how do you get comfortable with the challenges Anushka has just mentioned?
Leo Hu, NN IP: I think the biggest challenge is around disclosure. In our investment approach we consider two types of disclosure: hard disclosure and soft. Under hard disclosure, sometimes the financial data tends to be less complete and increasingly nowadays we look at ESG data, and that also tends to be less complete. In addition to that sometimes we see accounting methodologies and definitions can be less vigorous.
In terms of soft disclosure, normally what we come across is the management might not be that effective in terms of formulating a clear message to investors. They may not hold investor meetings as often as more developed markets, or sometimes they tend to be less timely, so that also can be the challenge we are facing. It’s not really about the data but it’s more about the skillset or the lack of frequent interaction with investors. These are the two things that sometimes can be very challenging for us.
On the other hand it’s also fascinating opportunity for alpha, because very high growth is less correlated with mainstream emerging markets. Normally to mitigate these kinds of challenges we like to have more frequent interaction with the issuers. Also we tend to have more site visits, so that’s why I’m looking forward to the return of investor trips to understand more about the frontier market countries.
IFR ASIA: Felipe, what’s changed for the legal community since the Covid-19 outbreak? Are there any new considerations that issuers or investors need to be aware of?
Felipe Duque, Allen & Overy: I would say on the one hand surprisingly little has changed from a legal perspective. If you go back to February-March last year the call that I was getting most frequently was a very nervous issuer saying, “What are the force majeure provisions of my bonds? Covid must be covered, right?” To which the answer was, “Well actually there are no force majeure provisions in your bond. You are liable just the same.”
Back then we were all expecting a wave of defaults, especially among lower-rated issuers and lower-rated economies. Actually, that never came. There was a bit of a pause and then after that the market opened up and there were debut issuers out of the frontier markets, and repeats out of frontier markets. Rates went down, market access was preserved and from a legal perspective the protections around bonds to cover these events looked largely the same, other than a few things at the margins. There really was no innovation.
On the other hand, if you look at the first deals that came to market after the market reopened, they all had some type of ESG flavour. The sovereigns were the first out of the gates doing Covid bonds or pandemic bonds or recovery bonds. That was the start of what I think is a trend that has only become more pronounced.
I was interested Leo referred to ESG data as hard disclosure, alongside financial data and accounting. We are seeing that on the legal side, too. Whereas a few years ago green bonds were a little bit – if we are honest – soft. People liked to dress up the green message because it helped with the marketing. It helped people feel good. What we are seeing now is legally the frameworks around ESG and sustainability, the accuracy and completeness of ESG data, is a point of focus. I think soon we’ll start to see legal liability on the disclosure around ESG. I think that’s one of the things that we will see emerge from this past year.
IFR ASIA: That brings us nicely to a quick conversation around Mongolia. Sonor, could you tell us how Mongolia thinks about international capital markets?
Sonor Luvsandorj, Mongolia: In order to talk about the role of capital markets in Mongolia’s funding I think it’s very important to give just a little bit of background. Now our current funding is diversified, with a mix of both concessional and commercial funding. From the 1990s when we embraced capitalism up until 2012 most of our external funding was in the form of concessional loans from the Asian Development Bank, the World Bank – very much concessional funding.
In 2012 that’s the year when we first issued our international bonds. Since then we’ve issued a number of bonds to the international markets. When we first entered the IMF programme in 2017 we embarked on two highly successful liability management exercises to ensure sustainability in our international debt stock.
Since then, bonds became more of a liability management tool for us so it’s not routine to increase debt. Even since the IMF programme has ended we have, our parliament has passed a debt management strategy that has kept the spirit of the programme, where we can only issue in the capital markets for liability management purposes. For the last bond, for example, it was 100% for refinancing of the upcoming maturities, so we had a maturity this year and up until 2024. That one targeted this year and ‘22’s bonds. That helps us to diversify our investment base without increasing our commercial debt. Finally, I need to say that with Florian we chose the right adviser who helped us designing the right strategies, the right liability management avenues and the right narratives with investors.
Over the last four to five years a lot of the budget support, a lot of the funding came from concessional sources – from Japan, World Bank, IMF, and with these types of liability management exercises. The credit rating agencies have taken a positive view on this and kept our rating stable and specifically noted these in their latest rating reports.
IFR ASIA: Just a quick follow-up, Sonor. After the IMF programme ended, you could go out and issue more if you wanted to. What is the thinking there?
Sonor Luvsandorj, Mongolia: Yes. Of course investors are actually asking us to issue more! Currently our debt management strategy, which runs until 2022, is embedded in a document that is approved by parliament. Secondly it’s just to keep the prudent debt management. If you look at our debt to GDP ratio, back in 2016 it was around 70%, 79%. At the end of last year it went down to almost 60%. It helps us to reduce the funding costs in that sense as well.
In 2016 when we first started to talk to the IMF about our debt stocks, our bonds were yielding around 10% to 11%, and our bond at that time was issued at a 10.875% coupon. Now today our value benchmark on the secondary market is yielding around 3.5%. One reason we got there is through these very well-orchestrated refinancing exercises. For example in 2017 when we first did an exchange offer the coupon was at 8.75%, and later it was further reduced to 5.6%. The last bond we did at the end of 2020, it got a coupon of 5.125%.
Restoring this confidence also required an ongoing dialogue and transparency with our global investors. Yes, we do have the access, but it’s our choice to have a more prudent debt management strategy for the government.
IFR ASIA: Anushka, what is your take on Mongolia at the moment? Where does Moody’s view this?
Anushka Shah, Moody’s: Sonor is right, we did change the outlook to stable from negative back in March this year. The rating is at B3, so we have it at B3 stable. I think one of the main factors actually driving that change and the outlook from negative to stable really was the fact that there was demonstrated access to market funding. I think this process of actually conducting the refinancing mitigated the government’s liquidity risk.
I mentioned earlier that many frontier markets have similar characteristics where they face liquidity risks. In Mongolia’s case – and I think in many other frontier markets in Asia Pacific – you have a bunching of maturity schedules that add to these external vulnerabilities and raise questions around financing sources. By conducting this refinancing exercise and securing its financing sources there was a mitigation of the government’s liquidity risks.
That being said, these are still coming off relatively high debt levels and that basically speaks to the rating level itself. But I think that some of the improvements that we are seeing in terms of the debt financing strategy is essentially what drove the change to the outlook for Mongolia.
IFR ASIA: One more on Mongolia perhaps before we move on. Florian, what can you tell us about the strategies used to bring down these funding costs?
Florian Schmidt, Frontier Strategies: I think there are various factors that come into play here. We already established that frontier market bonds, unlike emerging market bonds, are lowly correlated to each other. Empirical research suggests that a single common variable explains the volatility of such bond choices – possibly the global macroeconomic environment and corresponding risk appetite of fund managers. In the case of Mongolia, I think idiosyncratic factors offer an explanation.
First of all Sonor is right, yields came down from 11% in 2016 to 3.5% in 2021. One factor clearly has been a prudent fiscal policy with international debt only issued in the context of liability management. This creates scarcity value for Mongolian bonds, and I think that has been a decisive factor to lower Mongolia’s yields. Last year, when I was advising the government on the latest – IFR award-winning – liability management exercise, investors and bankers alike made a very strong case to issue US$1bn for a larger liability management. But what we have in mind is making sure that we have a manageable refinancing task ahead of us, so we want to cap it at US$600m in every single year.
Another matter relevant to Mongolia is that investors are aware that abundant natural resources are often a curse in frontier markets. Nigeria’s oil boom, for example, led to a depreciation of the naira, which all but destroyed the textile industry in the northern part of the country, enabling the rise of Boko Haram. Nigeria has seen its average income fall from 8% to 4% of the US average since it started pumping oil in 1958. Manufacturing is now at 5% of GDP, one of the lowest in Africa.
Such worries had to be addressed, and Mongolia’s endeavours to save commodity revenues for future generations via the Future Heritage Fund appear important within this context, as do Mongolia’s substantial efforts to diversify the economy by pushing food and cashmere production as well as renewable energy. The latter part is particularly important and Felipe alluded to this as the percentage of ESG investors gets bigger and bigger.
It is a remarkable achievement by Sonor and team that five-year Mongolia trades at a yield of 3.5%, while B3 rated manufacturing economies such as Pakistan and the Ukraine, which are typically favoured versus more volatile commodity economies, trade at 5.4% and 5.5%, respectively, two percentage points north of Mongolia.
Finally, idiosyncratic and flexible narratives as part of regular and comprehensive investor relations work are an extremely powerful tool to define investors’ perceptions and influence yields, and I think Mongolia has done this particularly well.
IFR ASIA: Let’s move on to MMC, staying with Mongolia but moving from government to the private sector. Ulemj, what challenges have you faced when dealing with international finance?
Ulemj Baskhuu, MMC: MMC was the first Mongolian company to do an IPO, and the first corporate to issue bonds in the international markets. This meant that not only did we have to face challenging price discovery in the absence of a sovereign benchmark but we also had to deal with investors to whom the legal and regulatory framework was totally unfamiliar. This required continuous communication and education about the economy, the country and the political system.
As mentioned by other panelists, investor relations has been very important. We have continued communication with investors, and transparent and regular reporting, which we always try to improve further.
IFR ASIA: You were also the first Mongolian company to go through an SEC restructuring of your bonds. What did you learn from going through that?
Ulemj Baskhuu, MMC: Well, the lesson learned was you don’t want to do it again! It was not easy because we had two sets of creditors – bankers and bond investors – so that in itself was quite challenging. But all that investor relations work paid off, and I think there was trust in the management from investors. Before we decided to go through restructuring, we went to our shareholders for support and raised a substantial amount in the rights offering, and we also made many difficult operational decisions in order to preserve our liquidity position. And creditors were well informed all along about the company and market situation. Therefore, there was no “what happened?” moment, and the restructuring negotiations were generally very constructive between the management and the bond investors.
We also tried to be pragmatic and differentiate between “must have” and “nice to have”, or in the case of restructuring it would be “OK not to have” flexibilities. We tried to strike a balance between investors feeling comfortable with the deal so that they support you when you are back in the market, and the company having enough flexibility to continue with its normal operations and plans after the restructuring.
As a result we won IFR Asia’s Restructuring Deal of the Year award, and this is also thanks to our advisors including Florian Schmidt, who is on the panel here, and JP Morgan.
Florian Schmidt, Frontier Strategies: The MMC restructure, having been one of IFR’s deals of the year, was really a poster child for how it should be done. It’s very important for an issuer to keep investors informed, to remain transparent. I cannot stress enough how important it is for issuers to have good investor relations work or public relations work. In that context what MMC did right was that they engaged lenders and bondholders before they defaulted. They told them, “This is coming up. Let’s sit down, build a steering committee and let’s start to talk.”
Being transparent and releasing the numbers allowed investors to commence their credit work and assess the situation.
The second item I think that needs to be highlighted here is that debt restructuring are not only a matter to be resolved between shareholders versus creditors. It is typically a matter between creditors. There are always inter-creditor conflicts, and amongst the restructurings, whether sovereign or corporate, the ones that dragged out the longest were the ones where the creditors themselves were are not able to agree on who gets what, even if the issuer was happy to come to an agreement.
IFR ASIA: Felipe, what’s your advice these days to issuers when you are talking to them about capital markets funding? Has the documentation changed when you issue a bond, in terms of where a restructuring should take place?
Felipe Duque, Allen & Overy: To be frank, I don’t think there is sufficient deliberation in most cases around those types of things. When the bonds are issued in most cases advisors are up against tight fee budgets. The timetables are constrained. If it’s a debut issuer, absolutely everything is new. How does it work with an SGX listing? Why is this bond governed by New York law and not my local law? What are all these various parties and documents etc.? The basic building blocks of getting a company sufficiently familiar with and understanding that process is one layer of work. Beyond that, you start to fine tune and clear the hurdle of what is marketable and what other issuers do. But thinking about whether your country is party to the New York convention, and is an arbitral award more easily enforced onshore than a New York court judgement? That doesn’t really happen for the most part in the vast majority of deals. You need an issuer that is supremely well advised – not just legally but also commercially – and is looking at its capital structure generally and where its creditors are.
For the most part, these conversations don’t happen in the ordinary course of business, and so I think issuers would do well to have advisors that are thinking about this. The issuer might not even see it but a good advisor is thinking about how this will play out, not just after the bond prices and closes but over the life of the bond.
IFR ASIA: Let’s move on to the Maldives now. Maryam, we all know the Maldives has had a very difficult year because of the lack of tourism, but you have managed to refinance a great proportion of your overseas debt. How did you approach that?
Maryam Abdul Nasir, Maldives: That’s true. Actually last year we were severely hit by the pandemic. In rufiyaa, the local currency, we had a financing gap of around Rf6bn (US$388m) and because of the revenue shortage it actually doubled to around Rf14bn. Our strategy was to first of course finance this gap through the concessional financing methods, but this was also not enough.
We did explore other means, including the debt capital markets. One of it was our ongoing engagement around accessing the Japanese market to issue a Samurai bond, but that didn’t go through. After we received various financing proposals we decided that it would be best to work with ICD [the Islamic Corporation for the Development of the Private Sector] and issue a sukuk under a sukuk programme. This was the first sukuk from the government of Maldives.
But at the time the bond that we had issued in 2017 was trading at 75 cents on the dollar, so we did have a non-deal roadshow and we were advised to conduct an LM exercise as well. We did listen to the investors. We also took this into account and we did the necessary before we issued our sukuk in the market in March. As a result, as you can see our bond and the sukuk are trading a bit above par as well, so I think with the help of our global lead managers we were able to push the prices up and get a successful issuance in the market.
IFR ASIA: Have you considered the debt relief efforts started by the World Bank and then carried on by the G20?
Maryam Abdul Nasir, Maldives: Yes. We were eligible under the G20 Debt Service Suspension Initiative and after much evaluations internally we decided to join it because we thought that there were more benefits, both on the financial and non-financial side. To note this was only applied to the official bilateral creditors. The saving was pretty small compared to the huge financing gap we had. But we did join this because, for example, one of the bilateral creditors did offer us a very, very concessional loan after we had joined, so I think we did benefit from it as well. This is also a positive in terms of investor relations and also a positive sign to the financial market that we are committed to any such initiatives to reduce potential expenditures that we could defer for later.
IFR ASIA: Did you get any questions from your institutional investors about why you were trying to suspend some of your payments to other, bilateral creditors?
Maryam Abdul Nasir, Maldives: Yes, but it wasn’t much. We didn’t get a significant set of questions from the investors, I think because we did disclose this information during our engagements with them and also explained why we participated in this initiative. We didn’t engage the private sector because of the potential downgrade that we might receive. We didn’t want to risk any such downgrade because we were already at a lower rating at that time.
IFR ASIA: Anushka, how does Moody’s think about rating impacts when it comes to something like the DSSI or its successor, the G20 Common Framework?
Anushka Shah, Moody’s: Firstly, I want to clarify that DSSI and the Common Framework are actually quite distinct. The DSSI was introduced from our impression to essentially provide liquidity relief as swiftly and quickly as possible to deal with some of the liquidity concerns that came up post-pandemic. If you look at the Common Framework it’s a little different because it’s seeking to address countries that have solvency issues, so essentially to qualify for it you must have an unsustainable debt burden. That’s one differentiation.
The other is in terms of how the private sector features. In DSSI comparable treatment for the private sector and the public sector of the G20 economies participating is “nice to have”, but it’s not necessary. But the impression that we get from the Common Framework is that comparable treatment between official and private sectors is much more likely, and essentially that raises the risk of losses for private sector creditors.
As a rating agency we have a responsibility to investors to provide an accurate assessment of credit risk. The minute that the private sector is involved that’s something that we need to be reflecting in the ratings, commensurate with the risk of losses that we expect. If comparable treatment is of a greater likelihood then that actually raises the risk of losses to private sector creditors and we would be obliged then to reflect that risk of investors either not being paid in full or not being paid on time in our ratings assessment.
Obviously we have taken a differentiated approach, so losses in excess of 5% in our rating scales are consistent with the rating of Caa1 or lower, so that’s speculative grade essentially. But we’ve taken a very selective approach, so in the case of Ethiopia, for example, we placed the ratings on review for downgrade and then spent time in the review period trying to understand what the likely outcome was going to be. In contrast, for Zambia, there were no implications for the rating because we were already anticipating sizable loses even before they went with the Common Framework.
We would take a similar approach in the sense that we would move the ratings down when we consider that there were losses to the private sector. But since essentially the Common Framework is applicable for countries with unsustainable debt burdens, these countries tend to be lower down on the rating scale to begin with, so the positioning is already relatively precarious.
IFR ASIA: Sonor, can I ask you about this as well? What’s been Mongolia’s approach and how have you thought about DSSI?
Sonor Luvsandorj, Mongolia: Well I believe it was around the early part last year when we started looking at the DSSI. Now because of the composition of our debt portfolio with G20 nations, the savings weren’t that huge for us. We had a lot of funding from other sources and the IFIs. Secondly unlike some of the other countries with a lower rating Mongolia has retained access to other avenues of funding. We did get funding, concessional funding last year from the World Bank, Asian Development Bank and other sources. Also we have retained the funding from the bond market, from the capital markets even throughout the Covid-19 pandemic.
The rating agency was our third concern. I remember that if we were to join the DSSI, they would have preferred if we asked a similar thing from our private sector creditors – even though it’s not a requirement. We did not want to do that. We wanted to keep our access to the capital markets. There were a number of reasons, and because we managed our debt stock prudently and brought it towards more sustainability both in terms of the amounts and in terms of the maturity profile we didn’t see a need to really engage with the DSSI. We just weighed both the pros and cons.
IFR ASIA: Leo, it must be music to your ears to hear governments say that they don’t want to impose losses on private sector creditors, right?
Leo Hu, NN IP: I think for us the more important thing is to look at the underlying reason behind it, so that we understand why they are taking this relief or why they are not taking this one. If that reason is valid, either way should be fine and investors should be receptive, because we also don’t want to be in a situation where they don’t take any consideration at all until debt becomes unsustainable and there will be some credit events. From that perspective I think the analysis from the issuer would be more important to consider than the action itself.
IFR ASIA: I want to bring in a couple of other big talking points here. Leo, what’s your view on the growing importance of China?
How does that change the investment thesis when you come to look at emerging markets around Asia?
Leo Hu, NN IP: We think this is the best time for frontier market countries. The reason being that we are now in a new global order, so there are a lot of opportunities for frontier market countries to basically capture this geopolitical alpha. The reason being that the world order is no longer one simple power. There are multiple powers. You have the US, China. You also have regional powers. For frontier market countries in the past there was only one power, so the choice was limited. Nowadays there are multiple sources of funding, and so from that perspective if you play all the powers well, I think the geopolitical alpha for frontier market countries would be tremendous.
As mentioned earlier, bilateral funding or multilateral funding are resources they really can tap into on the back of this new global order. The options are tremendous. That’s the key thing we like about frontier markets, actually.
Felipe Duque, Allen & Overy: If I can tack on to what Leo said, there is a flipside to that, which is there is no framework for restructuring sovereign liabilities. It used to be a lot easier because the creditors were mostly bond creditors, mostly from Paris Club nations, and so there were fewer phone calls to make, fewer stakeholders if you needed to restructure the liabilities of a sovereign.
Precisely from the reasons that Leo gave, these opportunities are so exciting, but it means there are so many other players. We are now in a multipolar world. Those conversations are much harder from the sovereigns’ perspective because it is not perfectly clear what the position of China might be, what the position of a hedge fund might be. That conversation just got a lot messier, so the need for an orderly, structured insolvency regime or a way to restructure liabilities for sovereigns that just can’t bear the debt load anymore is probably greater than ever. It’s precisely for the flipside of what Leo was saying, many more actors have come to what is a very exciting opportunity.
Florian Schmidt, Frontier Strategies: The issue with China, to get back to the previous question, is that the DSSI process is run by the Paris Club, and the Paris Club in that sense is no longer relevant because China is by far the largest creditor now to the emerging markets and the frontier markets world. The problem is that the due diligence around that is extremely challenging, because a lot of the debt provided by Chinese entities is subject to very stringent non-disclosure agreements – sometimes as stringent as not disclosing the very existence of a loan at all! In that sense how can we expect that a debtor nation could possibly tap this initiative when disclosure agreements will not even allow other parties to assess how big the debt stock is? I think that is a very important point.
IFR ASIA: A question from the audience: What does the panel think about IMF programmes? Do they do more harm than good, and if they are good then why are so many frontier markets end up going back to the IMF over and over again? Sonor, any thoughts?
Sonor Luvsandorj, Mongolia: Mongolia was under an IMF programme from 2017 until 2020. The programme ran for three years. The foundations were on the debt sustainability side of the fiscal prudency and also the banking sector side. Now our experience has been positive throughout, and we continue to keep constructive dialogue with the IMF to this day.
The IMF funding was a US$5.5bn programme, at that time equivalent to half of our GDP. It covered not only the IMF, it included Asian Development Bank, IMF, World Bank, Japanese government, China, it was a whole package of bilateral and multilateral creditors. In our case the programme encompassed the whole arena of creditors.
The most important part for us was that it enabled us to reduce the funding costs as well from the capital market itself. From our discussions with investors, they felt the programme gave a lot of transparency back in 2017 because there were quarterly reviews of the economy, the overall fiscal policy, debt management. On top of the funding that we received from the creditors it helped us to lower our funding costs in the international capital markets. Florian, who is on this call, had been advising us at that time, and probably can also give some details.
Florian Schmidt, Frontier Strategies: Yes. Let me frame this slightly differently. I think in today’s bipolar world the debtor nations would ask, “Do I go to Washington – the IMF – or do I go to Beijing?” The traditional global financial safety net comprises of four elements: you have national foreign exchange reserves, bilateral central bank swaps, multilateral regional financing arrangements, and then as a last resort you have the IMF. Each of these elements of course has its weaknesses, and financial history shows emerging and frontier market economies have not always been well served by this global financial safety net. I think the Asian crisis of 1997 is a good example and so is a certain tenets of the Argentinean debt crises.
The conditions attached to IMF assistance mean that recourse to the IMF is almost always a last resort. The stigma of requiring support from the fund with its attended conditions means that it is a politically difficult option for many countries. But it seems to me the best place to organise a global financial safety net because it is inclusive. It promotes longer-term structural change. It has done this in Mongolia in various aspects with regards to budgeting, with regards to the banking sector that has been restructured. So there are not only negatives with the IMF, there are, as Sonor said, quite a few positives.
Looking at China as an alternative, as I said earlier it’s the largest official creditor now with emerging market loans exceeding US$400bn, but PRC loan agreements have become subject to debate and controversy, and there are a lot of people suggesting that Beijing deliberately pursues a debt trap diplomacy, allowing the seizure of strategic assets when debtors run into financial difficulties. Others see these loans as indispensable for development, especially in frontier markets. Let’s face it, a lot of western institutions, especially commercial banks, are reluctant to lend into these economies.
A recent study conducted by the Kiel Institute for the World Economy in cooperation with some US universities shows that China is a very muscular and commercially savvy creditor, though, seeking to maximise commercial leverage or even going beyond that. Firstly, China uses collection accounts and fixed assets as collateral. In some of the agreements there are “no Paris Club” clauses, which enables Chinese lenders to seek preferential treatment which contradicts commitments made by China to the G20 framework, thereby complicating multilateral cooperation in debt crises. Thirdly there is a clause called, “termination of diplomatic relations” in an event of default, which increases PRC influence. There are clauses prohibiting any actions that are “adverse to any PRC entity”, which can create a challenge to labour laws, health or environmental standards. Then there are strict and often unusual non-disclosure agreements. I mentioned before sometimes the very existence of a Chinese loan cannot be disclosed, which makes the assessment of the nation’s debts in a restructuring or full disclosure for a 144A bond issuance almost impossible.
When we say the IMF is stigmatised and China is always there as a lender of last resort, yes China has been willing to lend into frontier markets, but frontier borrowers should consider at least the aspects I just mentioned.
IFR ASIA: Another question from our audience: Among all frontier markets in Asia, which ones offer the most attractive risk-reward ratio and why?
Leo Hu, NN IP: When we look at frontier markets we look at primarily four things. Number one is of course the economic fundamentals. Then it’s about the technical picture, valuation and ESG. These are the four let’s say key notes of our analysis when assessing frontier market countries. As Sonor mentioned earlier about Mongolia for example, the country has a good fundamental story because of very high commodity prices. At the same time, unfortunately, the yield is only at 3.5%, so from a valuation perspective it does not appear to be necessarily that attractive compared to some other countries trading at 7% or 8% or even 10%. That’s more the perspective.
Some of the countries might have a bit less of a fundamental story but the valuation can be very attractive. For the time being, we actually still like countries like Sri Lanka and Papua New Guinea in the region, not because of the purely fundamental reason but it’s more due to the consideration of the four pillars – ie, fundamentals, valuation, technicals and ESG.
IFR ASIA: I was expecting you to say Pakistan.
Leo Hu, NN IP: Yes, Pakistan is also having very good progress in terms of dealing with the IMF programme and also having this very constructive dialogue over there. However, one thing that is a little bit lacking is also the valuation, because that’s been priced in, more or less.
IFR ASIA: I wonder if we can try to shed a little bit of light on how companies might be able to approach international markets. Ulemj, how did you think about building a profile in the international markets?
Ulemj Baskhuu, MMC: MMC operates the UHG coking coal mine, which we started as a greenfield project in early 2009. We also developed all infrastructure, including roads, electricity, water and even a township. As I mentioned earlier, there were no precedents for sizeable international funding of any kind. Therefore, building a profile in the international markets was also like a greenfield project, where much of the effort was on educating investors about Mongolia in general. Mongolia being a small country with very little news coverage makes it even more challenging.
Transparent and regular reporting and open communication lines are important. Also having a mindset, where you see covenants as guidance or IFI policies and requirements as best practices that you need in your operations, helps a lot.
By October 2010, we have already raised sizeable long term project financing and were listed on the HKEx. We have done number of other deals since then.
IFR ASIA: What advice can the panel give to other potential issuers? Felipe, can you tell the difference between the ones that succeed and the ones that don’t?
Felipe Duque, Allen & Overy: I think you can. A lot of it has to do with points that we have alluded to on this panel. But if you are viewing it solely as a transaction, I am only getting this bond done, I am ticking the boxes that I need to tick to do this bond, you will have a successful bond issue but that might be your final bond issue. If you are really interested in joining the ranks of companies that regularly access the international markets, that means establishing an investor relations department, being transparent, treating investors and creditors with the respect that they are due. Even from the kick-off call you can almost tell which companies will take that route and which companies are just in it for the low coupon.
Some companies after the bond closes will come to you and they will be so focused on complying with the covenants, if they are a sub-investment-grade corporate. They want to do things properly. They want to make sure that they are still doing things the way they are supposed to. Then you have other companies that kind of sign the indenture and then forget about it and good luck to their creditors.
In short that transparency, that willingness to engage is the same no matter what market you are coming from. You can have blue-chip issuers from frontier markets. Companies or debtors that take that approach I think are a lot more successful in the long run.
IFR ASIA: A lot of what you just said reminds me of a panel we did recently on ESG and sustainable finance. Is a sustainability strategy something that every issuer needs to be able to demonstrate?
Felipe Duque, Allen & Overy: Absolutely. I’ll let others talk about it from a commercial perspective or whether it’s important or not important, but as a legal matter I think that there will be a consolidation and an increased clarity around legal disclosure requirements. It’s not just what it means to be compliant with ICMA’s green standards, is it a step-up bond, a sustainability bond or something like that. That’s fine, but with respect to the disclosure of risks, the disclosure of contributions to climate change, the disclosure of commitments that you are making and the reporting of those commitments, I think that you will start to see legal liability attached to that.
You’ve seen pronouncements out of the US SEC where they are now looking at ESG disclosures and saying: “We don’t really have a benchmark where we can say companies are meeting their disclosure thresholds”. Whereas before it was a little bit woolly, I think now, to put it in legal language, you will have material misstatements or omissions around sustainability with legal liability attaching to it. I think that’s something that we will start to see soon.
IFR ASIA: Maryam, have you considered any ESG-labelled funding?
Maryam Abdul Nasir, Maldives: Yes, definitely. We have actually started some conversations with potential investors. We are at the very initial stages of preparing the draft framework as well, because we are pretty new to this. But it looks promising. We are just evaluating the proposals at this point. We are open to this as well as part of our diversifying our debt portfolios.
I’d like to add to the IMF question, just to give you a sense of why the Maldives hasn’t gone into the programme. Basically it’s because we believe that we have the capacity to begin these reforms, and it doesn’t need to be dictated by the IMF or any other MDB. We are not against IMF, of course. We have very, very good relations with them, but we think that we can bring these reforms in without being in a programme. We have taken strict measures as well.
I think from our perspective rather than being in a programme and now facing the consequences, it is better for us in the medium to long-term to go ahead with our own reforms and show the MDBs and other investors that we have been able to perform as we had committed.
IFR ASIA: Following on from what other people have said, is there an increased effort in reporting your progress on some of those reforms?
Maryam Abdul Nasir, Maldives: I think we have been providing updates in terms of reporting, from the reporting side. But yes of course there is always room for improvement. The assessment is tested in different forums, different meetings, both at the technical and senior level as well.
IFR ASIA: Another question from the audience on the chances of other frontier markets, either sovereign or corporate that have not yet come to the international bond market. Which ones does the panel expect to do so soon?
Florian Schmidt, Frontier Strategies: I would say that this is more of a post-Covid scenario and quite hypothetical at that. But assuming that science and humanity will beat the virus, I could see manufacturing-driven economies coming to the market. I think Bangladesh would be an obvious candidate. With mobile phone operator Banglalink there has been a Bangladeshi corporate issuer before, so it’s similar to what happened in Mongolia where MMC preceded the government.
Laos has tried and failed three times. I think one of the reasons they failed, and this is again a good lesson for frontier issuers, is that in the second attempt they failed to disclose technical defaults on existing debt. This again shows how important it is to have full disclosure on all debt, even if the lender is Chinese. In the third attempt they had a covenant that suggested Laos must hold regular investor calls, which I find a little bit amusing, because adding such a provision as a covenant means that it doesn’t necessarily come voluntarily. That triggers questions about transparency and then you relay that back to the fact that technical defaults were not dealt with previously, and perhaps this is a way not to do things. Transparency has been mentioned many times here for good reasons.
There aren’t that many Asian frontier issuers left here unless you go to Central Asia, but even there B1 rated Uzbekistan did a very successful transaction not too long ago. I think a lot of the eligible Asian sovereigns have come to the market. Maybe at some point Cambodia will give it a shot. They have a rating but again in Cambodia there are transparency issues with regards to the debt stock. Maybe Anushka can comment as well.
Anushka Shah, Moody’s: Yes. We do have ratings on all of these. I agree with Florian. I think Laos, one of the main credit constraints is around transparency and as far as Bangladesh is concerned it’s around institutional constraints. For Cambodia as well, these are sovereigns that really have quite strong funding from concessional sources, so there is less of an incentive for them to then go to the market to seek market funding. Certainly it doesn’t come from a desire for financing but more for broadening or diversifying the financing base. I think that would need to be the driving force, rather than really seeking to bridge financing gaps themselves.
IFR ASIA: What are the panel’s views about engaging with international markets without face-to-face meetings? Leo, have you rolled back your exposure at all because you can’t go and see people?
Leo Hu, NN IP: Oh, not at all. Actually quite often the opposite. I think maybe not being on the ground actually can give you even more imagination of how great things are!
Jokes aside, I think this is actually a great opportunity for all the issuers to actually make their investor meetings more frequent. In the past we’ve had this excuse of how difficult it is to arrange travel more than once a year or once a decade. But now there is no excuse. We can do this online, so you can easily do it once a quarter.
I think back to the previous question of transparency, I think quarterly updates would really make a difference for any issuer. I think even a simple update via this online platform can be very beneficial and have an lasting impact for investors, because that shows what is going on and that you care about your investors.
Florian Schmidt, Frontier Strategies: I would like to second that. These virtual roadshows give you tremendous opportunities to engage with investors that are normally not on the radar if you follow the well-trodden physical path from Singapore to Hong Kong to London to New York and Boston, maybe to the West Coast as well. You can be in five or six or seven countries in the same day if you do it virtually.
For Mongolia’s deal last September we told the banks to utilise this opportunity. We can talk face-to-face to French, to Dutch, to German, to Midwest, to Middle East or LatAm investors. There is no excuse because it’s no longer a matter of travelling costs and logistics. I have to say the banks did a terrific job getting us in front of a much broader universe of investors, and that showed in the order book.
However, the physical roadshow is not and should not be buried here. It will come back and it should come back because there are advantages to face-to-face interaction. But for broadening the investor base and still seeing faces and having a dialogue, going virtual is fantastic.
IFR ASIA: One final thought: Felipe, I know you’ve done some work on different structures in Asia. Is there anything you can tell us about what might be possible in the future?
Felipe Duque, Allen & Overy: Sure. Given the appetite for yield that investors have all over the world and given the opportunities from the demographics and macroeconomics in Southeast Asia, I wouldn’t be surprised to see more project bonds or infrastructure-related instruments, perhaps securitisations, start to emerge. Really we expect a jump up in the variety and the sophistication of some of these products because the demand for exposure to these growing economies is so great. They might not all take the form of public bonds, but whether they are private bonds or something else I do think that we’ll see a lot more variety out of some of the frontier markets in the near future.
IFR ASIA: Thank you everyone for your time.
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