The Government of Mongolia grabbed a strong market window on Tuesday to print its first US dollar bond in more than 18 months alongside a tender and exchange offer for near-term maturities, in a now familiar mix of new issues and liability management.
The sovereign, rated B3/B/B, priced the US$450m 8.65% five-year bond at 98.812 to yield 8.95%, in line with final price guidance and inside initial guidance of 9.625%. An ongoing exchange offer could bring the total issue size to US$650m.
The new 144A/Reg S senior trade, rated B/B (S&P/Fitch), is its first offshore deal since June 2021, when it raised US$1bn from a US$500m 3.5% six-year and a US$500m 4.45% 10-year offering, also alongside a tender offer for two outstanding bonds.
Investors expressed indications of interest of more than US$400m before books opened. Orders built quickly, peaking at around US$3.9bn before final price guidance, and standing at more than US$3bn at reoffer.
Similar to the 2021 trade, this deal was launched to facilitate the government's exchange and tender offers, this time for its 5.625% 2023 and 8.75% 2024 bonds, with the offers announced on Monday alongside the mandate for the new 2028s. The 2023s and 2024s have outstanding principal of US$517.2m and US$600m, respectively.
However, the timing of the liability management exercise took a bit more finagling than usual, as Mongolia went ahead with the new bond issue before the tender and exchange offer closed. The deal was priced on January 10 and the offers expired on January 13 at 5pm New York time, after IFR went to press. Results are expected to be announced on January 16.
"We front-loaded the new issue into this transaction before closing the tender and exchange offers, because we wanted to access this market window, while minimising market risks, being cognisant that this was the first Single B sovereign from APAC in 11 months," said Florian Schmidt, founder and director of Frontier Strategies, which acted as financial adviser to the Mongolian government.
Although the books were strong for the new bonds, the issuer kept the deal at a relatively modest size out of prudence and to avoid high funding costs, bankers said. Mongolia had a good sense of how many investors would want to tender or exchange before it opened the deal, which helped it size up the new offering, said a DCM head on the trade. The exchange offer is expected to result in an up to US$200m tap of the 2028s, pushing the final deal size to US$650m, which will make the bonds index-eligible.
Mongolia offered to exchange the old bonds on a par-to-par basis plus accrued interest. After calculating the exchange ratio, for every US$1,000 of the two old bonds, the exchange price is US$1,012.023 in aggregate principal amount of the new notes plus interest.
Bondholders could also choose to tender their bonds for cash, for par plus accrued interest. The government will use the US$450m proceeds from its Tuesday sale to fund the tenders for the 2023s, with any excess proceeds to be used to purchase the 2024s.
The issuer, which was the first high-yield sovereign globally to price a deal this year, benefited from an active primary market.
"In line with the rest of the market, we benefited from an overall yield/spread tightening that presented a good opportunity for the issuer to seize the window. As we saw in the past days, the market has turned very positive and supportive," said a syndicate banker on the deal.
Issuers are usually willing to pay a heftier premium during the first week of a new year, as was seen with the double-digit premiums paid by Indonesia for example. But by the second week the concessions shrink, something that supported Mongolia's efforts, said the DCM head.
APAC took 24% of the new bonds, EMEA 46%, and the US 30%. Asset managers and hedge funds received 92%, banks 4%, pension funds 2%, and broker dealers and others 2%.
Overall, the issuer made "an extraordinary effort" to help investors understand its improvements in areas like its current account and recovery from Covid, said the syndicate banker.
"Investors were interested as to how Mongolia wants to boost its balance of payments, exports and foreign exchange reserves, how to reduce import dependencies on energy and agricultural products, and its ESG commitments, to name but a few focal points," said Schmidt.
Credit Suisse, HSBC, JP Morgan and MUFG were joint bookrunners and dealer managers.