Mongolia to tidy up debt profile

By Frances Yoon
HONG KONG, Oct 20 (IFR) - The Government of Mongolia (Caa1/B-/B-) plans to buy back foreign debt due next year and issue new bonds to address its short-term maturities and complete a turnaround from last year's economic crisis.
The sovereign has announced tender offers for its US$500m 4.125% January 2018 bonds and Rmb1bn (US$152m) 7.5% June 2018 Dim Sum notes. If completed, the buybacks will leave it with no major foreign debt maturities until 2021, according to Thomson Reuters data.

If successful, the plan will leave Mongolia in better shape than last year, when government overspending and declining commodity exports left it at the risk of default. The country was forced to pay 10.875% to issue a US$500m five-year note in March 2016, at the time the highest yield on any sovereign bond since 2011.
The latest buyback comes amid a much-improved economic backdrop. The International Monetary Fund earlier this year approved a US$5.5bn bailout to relieve debt pressures and maintain stability in the local currency, the tugrik.
A recovery in coal exports also helped drive demand for its US$600m sovereign bond this March, allowing the new-money component to price more than 300bp inside the 2016 deal.
As of the end of September, export revenue more than doubled from the same period in 2016, National Statistics Office data showed.
Moody's expects higher real GDP growth and for foreign reserves to recover to US$1.7bn this year from US$1.2bn at the end of May.
The IMF estimate for the overall fiscal deficit is 10.6% of GDP this year, and the actual deficit will likely be lower than this, according to Moody's.
"Mongolia has emerged from the brink of default," said Anushka Shah, a credit analyst at Moody's. "Government revenues are materially up. It's been a good year for them. They are also likely to surpass some of the targets set by the IMF after the loan. What might happen is that the government will have to revise targets based on the performance so far."
The proposed issue comes amid a rally in Mongolia's outstanding bonds. Mongolia's 8.75% 2024s were trading at 112.958/113.625 to yield 6.26%, near their tightest level since issue, while its US$1bn 5.125% December 2022s, its largest outstanding issue, were also trading at a record low 5.58%, according to Tradeweb.
"Mongolia's bonds have tightened across the curve, reflecting the demand for emerging-market debt which continues to be strong," said another banker on the deal. "There have been some investors sitting on the sidelines and missing out on the rally, who are now quite keen to pick up bonds."
The banker added that demand was expected to be healthy, given that the curves of emerging-market peers, such as Vietnam, Pakistan and Sri Lanka, have become very tight.
Still, Mongolia has a long way to go to improve its fiscal position. The resignation of the cabinet last month reflects the country's political instability, which does not bode well for the IMF's requirements to implement policies to improve its fiscal position and structural reforms over a three-year period.
Newly appointed Prime Minister Ukhnaa Khurelsukh has asked the IMF to disburse about US$38m in funds after the programme's suspension in mid-September.
"External fragilities remain. Their external borrowing needs are still one of the highest. So, when rates rise, there's a risk that they face limited market access and this could raise debt servicing needs because of its material portion of external debt," said Shah.
The proposed 144A/Reg S notes have initial ratings of B-/B- (S&P/Fitch).
Credit Suisse, Deutsche Bank and JP Morgan are joint lead managers and joint bookrunners for both the tender offer and proposed new issue.



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