Mongolia made a daring outing in the US dollar bond market on Monday while other borrowers held back after the start of hostilities between the US/Israel and Iran.
Asia Pacific issuers went into "wait-and-see" mode on Monday following the weekend bombings and escalating conflict in the Middle East.
However, Mongolia printed a US$500m six-year high-yield bond, with rollover demand from existing bondholders supporting the transaction.
The sovereign had announced a mandate and tender offer the previous week and had closed the tender just before the weekend. After taking some time to weigh its options early on Monday, it released initial guidance at the 6.30% area for the new money issue. The bonds were priced the same day at par to yield 5.95% after books peaked around US$1.5bn at final guidance.
"The decision to go ahead on Monday [was] quite a serious one," said a banker on the deal. "[But] not only did we have a very successful tender exercise ... we also had pretty strong support and feedback from regional banks on this transaction."
While the decision to proceed was "extraordinarily bold", the implied demand from bondholders reinvesting after the tender offer was key, said Florian Schmidt, founder of the transaction's adviser Frontier Strategies. "Had it just been a new issue, we may have had the option to postpone ... but we had done a tender that was hugely successful."
Mongolia took a few days to meet with investors ahead of the tender exercise and new issue, as it had done in previous years. It offered to buy back its 5.125% 2026, 8.65% 2028 and 7.875% 2029 bonds with a deadline of February 27.
The conclusion of the tender offer, which was dependent on the new issue for funding, could have only been delayed by one or two days at most. "We were in a situation where we had to proceed with the transaction or cancel the deal in its entirety," which would have included the tender offer, Schmidt said.
The fact that the sovereign was only looking to raise US$500m in a debt-neutral exercise, as well as its expectation that the geopolitical volatility would last some time, encouraged it to come to market.
Hard work
"Years of hard work on improving our economy, our finances and our credit ratings are paying off," said finance minister Javkhlan Bold. "Getting such strong investor support in such a challenging environment shows that Mongolia has become a 'must own' investment."
The 144A/Reg S bonds will be rated B1/BB– (Moody's/S&P), in line with the issuer's B1/BB–/B+ ratings. The sovereign was upgraded by both Moody's and S&P in late 2025.
The banker estimated that Mongolia paid zero to 5bp of new issue premium after its secondary curve widened in sympathy with the market.
Nomura analysts put fair value at 5.95%, or at least 25bp–30bp outside of Mongolia's 4.45% 2031s and including some premium for the geopolitical backdrop.
Analysts at CreditSights saw fair value at 5.85%, including 15bp of risk premium to reflect the volatile market, based on their own emerging market sovereign fair value model. But they also noted in a prepricing note that the bonds were likely to print wider than that as Mongolia's notes were trading 5bp–15bp wider than CreditSights' fair value curve.
The new notes traded above par in the secondary market on Tuesday.
Mongolia had aimed to price through its curve but adjusted its expectations to try to price inside 6% instead, a goal that still looked ambitious. "We were willing to squeeze the order book pretty hard to get there," said Schmidt.
Some investors were stuck at 6% or so, but Mongolia pushed to land at 5.95%.
"The tightening that was achieved made that strategy the right decision," said David Yim, head of capital markets for Greater China and North Asia at Standard Chartered. "The final pricing was not much wider than what we expected before the weekend."
In hindsight, Yim said, Monday proved to be the right window as volatility endured for the rest of the week and bombings in the Middle East only increased.
"Despite an environment that could not have been more hostile, we managed to price this deal flat to the curve extension and at a record low spread against US Treasuries at 2.22%," said Schmidt, calling the deal "perfectly priced".
Orders reached US$1.3bn from 70 accounts, including US$125m from leads. Asia took 61%, EMEA 22% and the US 17%. Bank treasuries bought 48%, fund and asset managers 48%, insurers and pension funds 3% and corporates, private banks and others 1%.
Tender orders
Proceeds from the transaction will be used to fund the tender offer. Some US$122.638m, US$390.111m and US$190.75m of the 2026, 2028 and 2029 bonds, respectively, were tendered by the February 27 deadline. The respective outstanding amounts are US$174.271m, US$541.729m and US$350m.
Mongolia said in a stock exchange filing that it will accept all the 2026s tendered and US$321.606m of the 2028s. It will not buy back any of the 2029s, given the stronger-than-expected response to the other tranches.
The repurchase prices were set at par for the 2026s, US$1,075 per US$1,000 for the 2028s and US$1,077.50 per US$1,000 for the 2029s.
According to LSEG data, the bonds were trading at 99.875, 107 and 107.375, respectively, when the tender was announced.
HSBC, Morgan Stanley and Standard Chartered were joint bookrunners and lead managers.
The same banks were joint dealer managers on the tender offer and Sodali was tender and information agent.