Safe haven gets upgrade

You can never have too much of a good thing. That's the clear message from the international bond markets, where investors have been gobbling up the spate of recent Eurobond issues from Kazakhstan's leading banks, secure in the knowledge that there continues to be plenty of good news from the former Soviet Union's star economy. In recent years, Kazakhstan has proved a profitable safe haven from choppy market conditions in other emerging markets.

Investors' faith in the improving Kazakhstan credit story received a timely endorsement at the end of May with the announcement by Standard & Poor's that it had raised its long-term foreign currency ratings for the Republic of Kazakhstan to BB+ from BB, and its local currency ratings to BBB-/A-3 from BB+. According to S&P the upgrade was prompted by the sustained strengthening of the republic's economic prospects, as well as prudent policies keeping the government's deficit and debt at low levels.

"Public sector net external assets are expected to reach about 28.4% of current account receipts in 2003, on the back of continued economic growth and the resource-based tax revenues that follow," says S&P credit analyst Luc Marchand. "Moreover, fiscal prudence is underpinned by the accumulation of oil and tax windfalls in a national fund, which will smooth the impact of oil price volatility." He adds: "The government's commitment to market-oriented reforms, as well as improved confidence in the banking sector, should deepen the financial system."

Given continued growth in investment, production and export capacities in the oil and gas sectors, Kazakhstan has been able to post high potential growth and low deficits even in the face of low oil prices, which has helped to ensure that there has been strong foreign appetite for Kazakh risk. With the Kazakh sovereign not having issued any new bonds internationally since April 2000 - and unlikely to do so for the foreseeable future - the stage has been set for sub-sovereign credits to take full advantage of the growing offshore investor bid for Kazakh assets.

And that is just what they have done. In mid-April Kazakhstan's Kazkommertsbank scored a blowout success in the international bond markets with a transaction that smashed all records for investor demand for Kazakh debt. Central Asia's leading bank had originally planned a relatively modest $150 million seven-year to 10-year transaction via joint lead managers Credit Suisse First Boston and JPMorgan, but in the end it raised a total of $500 million of funding at the long end of the indicated tenor range. What's more, thanks to a near four times oversubscription the bank also secured the new money at a highly competitive cost.

"Kazkommertsbank's credit story attracted a tremendous response from investors and this resulted not only in the bank being able to extend its average debt maturity profile but also achieve pricing at the tight end of an already downwardly revised pricing range," says Peter Malik, head of emerging-market debt origination at CSFB in London. He adds: "The bond perfectly matched the demand for relatively high-yielding, long-duration plays."

Given the massive amount of excess liquidity chasing the transaction, the leads were able to trim the indicated yield range from an initial 9% to 9.25% level to a more aggressive 8.875% to 9 - and were still able to launch the issue at the tight end of this revised pricing spectrum.

"With a total of 145 investors spread across the globe and $1.9 billion of orders, this issue attracted a magnitude of demand which has never previously been seen for a deal from Kazakhstan, not even for the sovereign," says Jonathan Brown, head of emerging-market debt syndicate at JPMorgan in London. "Amid the current geopolitical uncertainty Kazakh credits are seen as safe-haven investments with genuine investment-grade status."

At a launch spread of 487.5 basis points over the February 2013 US treasury, the issue was priced well through the 530bp secondary market trading level on KKB's $200 million 10.125% May 2007 bond. That's a notable achievement given that Russian oil titan Gazprom's similarly dated $1.75 billion 2013 paper was trading 150bp wide of its own 2007 transaction, highlighting the aggressive pricing on the smaller, less liquid issue for Kazkommertsbank.

Arguably as impressive as the size and pricing of the issue - the largest and longest-dated sub-sovereign offering yet from Kazakhstan - was the genuinely international distribution, with primary placement split 44% to the US, 21% to the UK, 13% to Asia, 11% to Switzerland, and the balance going elsewhere in Europe. Less than 3% of the deal went to the Kazakh and Russian accounts that had played a much more significant role in previous corporate issues from Kazakhstan, such as oil company Hurricane Hydrocarbons' $125 million 9.625% 2007 issue in February.

"We're very happy with the investor base for the bond," says Magzhan Auezov, managing director at KKB in Almaty, who adds that the strong, diversified bid for KKB's latest Eurobond reflected a combination of factors, including positive ratings momentum. In early April, for example, ratings agency Fitch raised its rating for the bank to BB from BB-, citing "KKB's continued development of a universal banking franchise as reflected in its increased activity in the retail and SME markets. The ratings also reflect the bank's track record of good profitability and risk management and maintenance of an adequate level of capital."

Meanwhile, at the end of March Standard & Poor's upgraded KKB to BB- from B+ "The rating action reflects the EBRD's decision to acquire a 15% minority stake in KKB's capital," says Standard & Poor's credit analyst Magar Kouyoumdjian. "The expected presence of the EBRD should help improve KKB's corporate governance, funding, and capitalization."

In March the board of directors of the EBRD approved the acquisition of up to 15% of ordinary shares and voting rights in Kazkommertsbank which in mid-May announced the issue of 81 million newly issued shares with a face value of KZT10 and issue price valuing the size of the EBRD's mooted capital injection at around $38 million.