Tapping offshore: Issuing and floating abroad to finance growth

Fundraising offshore has been a major trend among Mongolian corporates over the last three years. While commodities slumped in 2012 and political risk reemerged on foreign investors’ radar, Mongolia seems likely to continue tapping international markets via both debt and equity issuance in coming years. The government, however, must be cautious to preserve investor appetite for new issues by forging consistent policies.

LISTINGS & REVERSE TAKEOVERS: Around 30 firms operating in Mongolia have shares listed on overseas exchanges. The main competition to the Mongolian Stock Exchange (MSE) are the commodity-rich global exchanges, such as London’s Alternative Investments Market (AIM), the New York Stock Exchange (NYSE), the Australian Stock Exchange (ASX), Canada’s Toronto Stock Exchange (TSX) and Canadian National Stock Exchange (CNSX), the Stock Exchange of Hong Kong (SEHK) and the Singapore Exchange (SGX).

While several firms have undergone a full listing process, a growing number of Mongolian owners have used reverse takeovers as a backdoor means of listing assets abroad. The four largest stocks listed offshore in 2011 were Ivanhoe Mines (listed in on the NYSE and TSX), Centerra Gold (TSX), Mongolian Mining Corporation (MMC, an MCS Group subsidiary listed on SEHK) and South Gobi Resources (TSX and SEKH), holding a combined market value of $23.1bn, roughly three times Mongolia’s 2011 GDP. Other resource-linked stocks like Mongolia Energy Corporation (SEHK), Petro Matad (AIM), Aspire Mining and Xanadu Mines (both on ASX) and Prophecy Coal Corp (TSX) also represent large offshore Mongolian listings.

CLEAR BENEFIT: Australian investment bank Azure Capital estimated in May 2012 that Mongolian-linked companies listed on the ASX such as Draig, Voyager Resources and Haranga Resources were roughly seven times more liquid than the top 20 firms on the MSE. Listing abroad has also generated interest from new investors in emerging economies looking to consolidate on Asia coal play, exemplified by the September 2011 $477m acquisition by Thailand’s Banpu of ASX-listed Hunnu Resources, a coal miner in Mongolia. An increasingly attractive option for Mongolian asset owners in 2010 and 2011 was to transfer assets to vehicles listed on an offshore exchange, in which the owners acquired a stake in a backdoor listing that would channel funds to the asset needing development. This process was most common with ASX-listed entities, although increasingly with SEHK and SGX as well. While the process was popular in 2011, it all but died as commodity prices fell, but remains a preferred way of listing assets during a cyclical upturn.

The world’s largest banks have flocked to assist Mongolian corporates issue debt and stock offshore. Goldman Sachs and Deutsche Bank have led the way with investments, while JP Morgan, ING and Bank of America Merrill Lynch (BoAML) have been active in developing an investment pipeline, such as with MMC’s March 2012 eurobond issue. Meanwhile Citibank, HSBC, Credit Suisse and Macquarie have assisted in plans to privatise large state assets like Erdenes Tavan Tolgoi (ETT).

Macquarie and BoAML have structured the proposed Hong Kong listing of iron-ore producer Altain Khudur (owner of the Tayn Nuur mine), originally by raising $1bn but converted to a eurobond issue later in 2012.

OFFSHORE: Eurobonds, public debt issued offshore, are increasingly appealing to firms with international credit ratings. Trade and Development Bank (TDB), Mongolia’s largest corporate lender, paved the way in raising funds offshore, issuing $75m in 2006, $150m with a secondary issue of $25m in 2009 and $300m in September 2012. ING and investment bank Mongolia International Capital Corporation (MICC) have helped carve out a commanding share of offshore fixed-income issues for Mongolian corporates.

Following years of speculation and attempts to issue a sovereign eurobond, Mongolia’s government tapped the markets in March 2012. State-owned Development Bank of Mongolia (DBM) launched a sovereign-guaranteed $589m eurobond via SEHK to fund long-term infrastructure projects. Underwritten by ING, Deutsche Bank and HSBC and rated BB- by Standards & Poor’s (S&P) and B1 by Moody’s, the issue was priced tighter than any debut offering of an emerging market sovereign at a 5.75% coupon, yet garnered orders of $6.6bn. Investors from Asia, Europe and North America each bought roughly one-third of the offer, although Mongolian banks and ING were the largest buyers overall.

By late 2012 six Mongolian eurobonds had been floated, establishing a benchmark for future issues. MMC followed suit in March 2012 with a $600m five-year eurobond, drawing some $5.5bn. The float in Hong Kong, where MMC is listed, proved successful at the lowest end of its price target with a 8.875% coupon. US-based investors accounted for 56% of the buyers, while Asian and European investors bought 22% each.

TIMING IS KEY: Amid volatile swings in investors’ risk appetite, the window of opportunity to issue foreign-currency securities is narrow. While TDB’s issue saw significant success in September 2012, it benefitted from a window of confidence in a week when central banks around the world announced new measures to support financial markets. TDB’s $300m bond, rated B1 by Moody’s, held a tight coupon rate of 8.5% and a yield of 8.625%. A volatile global economy helped delay Golomt, Khan and Xac banks’ plans to issue eurobonds in 2012, and investor concerns over the depth of Mongolia’s banking market concentrated appetite in the first and only issuer, TDB. “The lack of depth in the Mongolian banking sector limited international investor appetite to TDB bonds for the time being,” O. Orkhon, first deputy chief executive officer of TDB, told OBG. “We would prefer other banks to be successful in floating eurobonds as we do not like being alone in the market.”

Political risk re-emerged as a concern in 2012 prior to parliamentary elections, given new restrictions on foreign investment and seemingly politically motivated prosecutions on corruption. Investors were cautioned by the experience of TSX-listed Khan Resources, whose uranium-mining licence was revoked and whose stock was delisted prior to an international arbitration in the Australian firm’s favour in 2012. Public demands for renegotiating the Oyu Tolgoi agreement after the elections also muted investor enthusiasm. S&P’s revision of Mongolia’s sovereign BB- rating from positive to stable in October 2012 highlighted these concerns alongside the future debt servicing inherent in bigger government borrowings before large revenue streams come on-line. Equity listings did not fare better in 2012. The triple listing of ETT in Mongolia, London and Hong Kong, due to raise in excess of $3bn, is expected in the fourth quarter of 2013, following the new securities law, a rebound in coal prices and a deal with foreign partners for West Tsankhi.

PIPELINE: The SEHK built a pipeline of Mongolian IPOs, including property investor Asia Pacific Investment Partners, iron ore miner Boldtumur Eruu Gol, coking coal producer Ikh Gobi Energy and iron ore producer Iron Mining International. In late 2011 the previous government announced plans to privatise up to 49% of Mongolian Railways through the MSE, but this plan will not be carried out by the new administration. Australia is also banking on several mining IPOs, including Kara Minerals (tin), Kumai Energy (coal), Wolf Petroleum (oil and gas), Eumeralla Resources (tungsten) and First Mongolia. Canada expects to list a number of ventures in both mining and real estate, including Gobi Coal & Energy (coking coal), Mogul Ventures (thermal coal), Altan Rio Minerals (copper and gold) and Real Estate Mongolia. International banks have cultivated closer links with local investment banks, with Macquarie working with MICC on the Altan Rio IPO for instance. Meanwhile US-based Van Eck Global has planned to list an exchange-traded fund (ETF) focused on Mongolia on the NYSE. The Singapore-based operator of Mongolia’s national lottery, Monvest, received approval for listing on Germany’s Frankfurt Börse in July 2012, although new issues have all but stopped in 2012.

MORE ON THE HORIZON: Despite volatile risk appetites, Mongolia’s sovereign debt remained the darling of investors in 2012. With DBM bonds yielding 3.6% in October 2012, the government announced plans to issue more bonds by early 2013 to raise funds for infrastructure projects and budget support. It also announced plans for a bond issuance of $5bn by year-end 2014. In November 2012 the government floated a 10-times-oversubscribed $1.5bn eurobond issue in five- and 10-year notes at 4.125% and 5.125% yields, respectively, raising $15bn. The turnout signals strong investor confidence in the national economy, which has a current GDP of around $8.76bn, according to the World Bank. Rating agencies monitored DBM closely in late 2012 amid concerns that the bond’s funds were being partly diverted to non-commercial loans and would need to be brought onto the government’s balance sheet before full repayment in 2015. Despite the planned issue of eurobonds, offshore equity listings will need a credible upswing in the price of commodities. While dual listings may follow domestic advances, global markets are likely to continue playing a key role in funding both corporates and government over the medium term.