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.

Record demand for credit 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.

International take-up 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.

The planned share acquisition is the second equity investment in the Kazkommertsbank group by the London-based supranational this year; in January it acquired a 35% stake in Kazkommerts Policy, an insurance company controlled by Kazkommertsbank.

Kouyoumdjian says: “KKB has demonstrated continued good asset quality, even through turbulent times, and seems committed to keeping clear of group investments in industrial concerns.” The two improving sub-investment grade ratings from Fitch and S&P have given further credence to Moody’s decision to raise the bank to an investment grade BBB- last year. This move has helped to expand the investor base for the bank’s debt, says Auezov, and prompted the decision to increase the bond in two stages to $500 million, from an initial $200 million at launch.

Demand by investor type for the KKB bond was 75% asset managers, 5% banks and 20% private banking accounts. Although there was some dedicated emerging market fund participation, the leads claimed that the majority of the demand, especially from the US, came from traditional investment-grade buyers.

Chris Tuffey, head of emerging-market debt syndicate at CSFB in London, says that the less price sensitive private-banking participation from accounts in Asia, Switzerland and the UK helped to create a favourable new-issue environment that enabled the leads to trim pricing at the same time as growing the transaction.

The strong demand for the KKB transaction has prompted other Kazakh banks to follow it on to the international bond market. In mid-May, the country’s number two bank, Bank TuranAlem (BTA), launched a $225 million seven-year via lead managers ABN Amro and Merrill Lynch. BTA, which numbers Austria’s Raiffeisen Zentralbank österreich among its major shareholders, successfully surfed the positive wave of investor sentiment following the blowout KKB transaction to secure a 7.875% headline coupon on the back of an order book of more than $500 million from more than 100 accounts.

Like Kazkommertsbank before it, BTA achieved widespread placement for its longest ever dated international debt offering, with the bonds distributed to non-Japan Asia (26%), the US (15%), Switzerland (13%), the UK (9%), Greece (6%), central Europe (5%), Scandinavia (5%), Russia (5%), Austria (4%) and Germany (4%), with the balance going elsewhere in continental Europe. Fund managers took 49%, banks 34%, retail 11%, insurance companies 3% and hedge funds 3%.

Factors that won over investors Reid Payne, executive director for CEEMEA debt capital markets at ABN Amro in London, says that investors bought into a number of positive factors surrounding the deal, including the bright economic prospects for the Kazakh economy and the well-managed Kazakh banking sector – which Payne says is widely regarded as the most transparent, resilient and efficient within the Commonwealth of Independent States.

In addition, BTA is one of the best-capitalized banks within a sector that has tremendous growth potential. Despite rapid growth in the past three years banking assets as a percentage of GDP in Kazakhstan are just 30% – well below the levels common in central Europe. They stand at 80% in Poland, for example.

Both bonds have been strong performers in secondary-market trading, although the actual trading volumes have been relatively light. “There’s strong interest in Kazakh bank Eurobonds,” says Robin Evans, head of emerging-market debt trading at Commerzbank Securities in London. He adds: “But there’s limited liquidity in the deals as they are principally bought by buy-and-hold accounts. The interest we see is principally from a mix of Kazakh pension funds and Russian banks acting on behalf of Russian individuals and corporate treasuries.”

In the meantime, there is no shortage of follow-on issuance candidates, with several Kazakh banks eyeing the Eurobond markets. The third biggest of Kazakhstan’s troika of leading banks, Halyk Savings Bank of Kazakhstan (HSBK), is seen as a sure-fire issuer, particularly after it reported a huge surge in profitability in 2002.

Separately, trade finance specialist ATFBank, which numbers Swiss commodities trading giant Glencore International as a principal stakeholder, sent out requests for proposals for a planned $110 million to $150 million three-year to five-year bond at the end of May. If it gets to market, it will be the bank’s first international bond.

Other potential entrants to the Eurobond arena include small and medium-size enterprise banking specialist BankCenterCredit, the country’s number-four bank by assets.

Fifth-ranked Nurbank confirmed to Euromoney that it too was looking to debut in the international bond markets, but not until the beginning of 2004.

“We’re pretty liquid at the moment and so we don’t want to borrow until we have a specific funding need,” says a Nurbank spokesperson, adding that the bank was looking to issue a roughly $25 million eight-year bond in the first quarter of next year.

Recent Kazakh bond issues

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