Page 23 - bne magazine March 2017 issue

bne March 2017 Companies & Markets I 23
Kazakh sovereign bond fails to
spark hoped-for corporate issuance
Naubet Bisenov in Almaty
The Kazakh government’s move to issue a Eurobond in 2014 for the first time in 14 years was hailed at the time as a positive move for the country’s corporate bond issuers, because it was hoped the sovereign would act as a benchmark for their securities. While the sovereign issue did help Kazakh corporate bonds already in circulation in London and elsewhere, its impact on new corporate bond issuance was limited due to the poor domestic and global economic climate.
The government returned to the global capital markets in October 2014 by selling $1.5bn of 10-year bonds priced to yield 4.073% and $1bn of 30-year bonds priced to 5.116% as part of its $10bn bond issuance programme. The success of this first issue in years prompted the government to go back to the bond market in July 2015, when it sold $2.5bn of 10-year debt priced to yield 5.26% and $1.5bn of 30-year bonds priced to yield 6.58%.
Bloomberg reported at the time of the first bond issue that
the yield on the 30-year bonds of national oil and gas company KazMunayGas immediately fell by 0.14 percentage point to 5.92%, while the yield on its 10-year notes fell by 0.15pp
to 4.56%.
Kazakhstan’s Eurobond was placed at a time when oil prices began their rapid descent from around $100 per barrel and the economies of the country’s main trading partners – China, Russia and the EU – started showing signs of weakness. This in turn affected the Kazakh economy, the growth of which
fell from 4.2% in 2014 to 1.2% in 2015 and 0.4% in the first three quarters of 2016. The economic slowdown, caused by a contraction in oil output due to falling oil prices, led to the downgrade of Kazakhstan’s sovereign ratings by Standard & Poor’s from ‘BBB+’ in 2014 to ‘BBB-’ in 2016 (other international ratings agencies followed suit), leaving the country hovering just above junk status.
Despite the downgrades, the yield on the Kazakh bonds due 2024 fell as low as 3.6% in early November 2016, over 100 basis points lower than when they were issued, as global
KazMunayGas' Astana HQ.
bond investors ploughed back into emerging markets in what BlackRock has dubbed the “Great Migration” in the search for higher yielding assets. bne IntelliNews calculations based on the latest prices of the Kazakh 10-year bonds on the LSE in January show that the current yields on the debt stand at 3.79% and 4.13%, still lower than at launch.
At the same time, since the market for Kazakh bonds is relatively small on a global scale, it is hard to talk about
the effects of certain global events on their yields when
the liquidity of these bonds is so limited, argues Akmal Nartayev, director of the consultancy services director
at PwC in Almaty. “The general trend on the market of Kazakh corporate Eurobonds is set by the Kazakh sovereign bonds,” Nartayev says. bne calculations show that the yield on KazMunayGas bonds due 2021, issued with a coupon
of 6.375%, had fallen to 5.07% on January 7.
Renegotiations
The launch of the Kazakh sovereign bond has also helped Kazakh corporate issuers renegotiate the conditions on notes with high coupon rates issued before the sovereign Eurobond. For example, the country’s seventh largest lender ATF Bank managed to reset the 10% coupon rate on its perpetual
bonds issued in December 2012 at six-month Libor + 7.33% from November, which means the current coupon rate is
now at 8.584%. The country’s largest but troubled lender Kazkommertsbank managed to do the same with its 9.2% perpetual bonds issued in November 2005, resetting the rate at three-month Libor + 6.1905% from November 2015 (the current rate is 7.077%).
In 2015, KazMunayGas, burdened by costly debt and feeling the pinch from low oil prices, launched a campaign to offer $3.4bn in cash to buy out some of its notes – $2bn 2043s with a yield of 5.75%, $1bn of 6% 2044s, $1bn of 4.4% 2023s, $500mn of 4.875% 2025s, $1.5bn of 7.00% 2020s and $1.25bn of 6.375% 2021s. It offered to buy notes at 88.5% to 10.75% of the nominal value of notes for November 19 and at 85.4% to 104.75% of the nominal value after December 4.
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