Kazakhstan launched its comeback deal in September 1999. A Wve-year $200 million issue demonstrated that Kazakhstan, despite being rated single-B and a neighbour to troublesome Russia, does have access to the international markets. The bond was, in fact, the Wrst issue from the Commonwealth of Independent States following the Russian crisis of August 1998.
The sovereign achieved this even though 1999 was not a particularly good year for Kazakhstan’s economy. Its number one export market, Russia, had hit trouble and oil prices were then at their lowest levels for 12 years. Meanwhile it had proved impossible to proceed smoothly with restructuring of the domestic economy. Privatization of state assets had been delayed. And the country’s prospects for borrowing in the international markets had suVered when it was downgraded by Standard&Poor’s in September 1998 (from BB- to B+), and by Moody’s in February 1999 (from Ba3 to B).
Yet in September 1999 investors’ conWdence in Kazakhstan’s economic fundamentals and in its ability to work through these problems had improved. ABN Amro, which lead-managed the bond with Deutsche Bank, highlighted Kazakhstan’s outstanding performance in meeting the IMF’s stated targets, reducing its economic links with Russia, attracting foreign direct investment, and proving its future commitment to reform, explains Reid Payne, head of emerging markets syndicate at ABN Amro.
“The country has also made great improvements in restructuring the banking system, created a private pension fund system, and implemented a comprehensive securities law,” adds Peter Schikaneder, director of debt origination at Deutsche Bank.
Kazakhstan is also one of the few stable democracies in the region, and it has oil reserves that could put it in the league of Saudi Arabia and Kuwait. The recently discovered Kashagan oil Weld is expected to be the biggest in the republic, and if a capacity of 30 billion barrels is conWrmed, it will be the Wfth largest oil Weld in the world.
The country’s oil export capacity will be increased by new pipelines. One is to be built by the Caspian Pipeline Consortium, and will run through Turkey, and another is planned to be independent of both Russia and Iran.
A Wnal boost in conWdence was delivered by a major increase in oil prices. After Opec voted to cut production in March 1999, prices recovered from $10 a barrel in early 1999 and reached new highs above $28 a barrel by January 2000.
Payne explains that, once convinced of the country’s credit merits, “investors needed a compelling relative value argument to commit to the transaction”. They were oVered a 13.625% coupon and an initial spread of 825 basis points over US treasuries. The pricing was very generous, considering that the outstanding 2002 issue was trading at 700bp over.
But the sovereign wanted to be sure of the deal’s success. It has not issued since the two dollar deals it did in 1996 and 1997, and wanted to establish a benchmark for further borrowing. It also wanted to be absolutely certain of its ability to pay oV the $200 million Eurobond that was due in December 1999 so as to set itself apart from its defaulting neighbour.
Market participants also thought the wider spread was appropriate because Kazakhstan would need to oVer a pick-up over B2-rated Brazil’s 2004 and B1-rated Turkey’s 2005 dollar bonds, which respectively traded at spreads of 810 bp and 600bp over US treasuries.
In the end, the $200 million issue was so well received by investors that two subsequent taps of $75 million and $25 million followed in November, both priced below the September oVering. ABN Amro and Deutsche Bank sold the issue to institutional investors in the US and Europe, including specialist emerging markets funds, hedge funds and conventional global bond funds.
On receiving the mandate in June 1999, the leads had initially wanted to market a euro-denominated bond to retail investors. This plan was quickly abandoned, when an atmosphere of crisis blew up around emerging market bonds after Argentine presidential candidate Eduardo Duhalde demanded the cancellation of foreign debt, and it persisted when Ecuador defaulted on its Brady bonds and Ukraine was forced to restructure.
“But by September we had the 144A regulation in place, and thought it would be advantageous to include the US on a roadshow to broaden the investor audience,” says Schikaneder. “This added to the status of Kazakhstan as a professional and Xexible issuer.”
In April, the 2004 issue had tightened to 450bp over US treasuries. Despite the choppy markets at the time, a second $350 million bond was successfully launched. Only six month after its amazing breakthrough, Kazakhstan was rewarded for its perseverance when it borrowed seven-year money at a spread of 500bp over treasuries.
