Landmark corporate bond issue. Mongolian Mining Corp. (MMC), the largest Mongolian coking coal producer with 7.1Mt of total coal output in 2011, successfully sold US$600mn 5-year 8.875% guaranteed senior notes on 22 March, 2012. The interest is payable semi-annually starting from September this year. The notes are due 29 March, 2017. The sale of the notes was arranged by Bank of America Corp., ING Groep NV, JPMorgan Chase & Co., Standard Bank Group Ltd., and Standard Chartered Plc. MMC notes were assigned corporate credit ratings of B+ and B1 by S&P and Moody’s ratings agencies, respectively. With total orders exceeding US$5.5bn, nearly 10 times the offer size, MMC notes represent a landmark US$-denominated corporate issue for Mongolia being the first corporate bond issued internationally.
Use of Proceeds. MMC intends to use about 67% of the US587mn net proceeds for transportation infrastructure improvements and development projects, including UHG-GS railway. The company currently transports all the coal on the paved road it commissioned in 2011 to the Chinese border. MMC intends to build a 240km railway to increase cost efficiency with 15Mt per annum capacity. According to 2009 study, conducted by MMC, the estimated cost of the railway project would be US$700-US$800mn. In 2011, MMC acquired the Baruun Naran (BN) mine, about 30km from the main Ukhaa Khudag (UHG) mine, and will conduct development work at the BN site. The rest of the proceeds will be used for working capital and other corporate needs, including exploration and debt refinancing.
Strong investor appetite for Mongolian bonds. Mongolian entities have become increasingly active in international debt markets recently. The Development Bank of Mongolia, a state-owned policy bank placed 5-year notes at 5.75% yield for US$580mn last week. The proceeds will be used to kick-start major housing construction and infrastructure projects initiated by the government. Trade & Development Bank of Mongolia, the country’s third largest bank was the first Mongolian bank to tap international debt markets with US$75mn bond placement in 2007. TDB returned to markets again in December 2011, placing US$150mn senior 3-year debt and US$25mn subordinated 5-year bonds. Mongolia related Winsway Coking Coal Holdings Ltd raised US$500mn placing 5-year bonds at 8.5% yield in April, 2011. We expect that more Mongolian banks and corporate will be launching their bond issues in the near future. XacBank plans issuance of US$150mn Euro-Medim Term Notes in Singapore in 2012. Two largest banks, Khan Bank and Golomt Bank may also issue their debut bonds in international markets later this year. We expect DBM return to international markets in the near future again and become a frequent issuer.
Sovereign credit ratings. S&P ratings services revised the outlook on Mongolia to positive from stable in December 2011 reflecting expectations of exceptionally strong growth outlook over the medium term. The agency affirmed the ‘BB-‘ long-term and ‘B’ short-term sovereign ratings. Mongolia remains three notches below investment grade. S&P stated that it could raise the sovereign’s ratings if fiscal and external debt metrics continue to improve, or if improvements in fiscal, monetary, and banking sector policies materially reduce vulnerabilities in these areas. Moody’s and Fitch rate Mongolia B1/Stable and B+/Stable/B respectively. S&P and Moody’s rated recently issued DBM bonds equal to Mongolia’s sovereign due to government stated unconditional and irrevocable guarantee of the issuance.
Conclusion. We view that MMC note placement coming hot on the heels of DBM sovereign debt issuance indicates at healthy investor appetite for Mongolia-related debt. We expect more corporate and bank bond offerings will take place on international debt markets with increased confidence in the Mongolian growth story.