March 13, 2019 / 12:19 PM / 7 months ago

AAA-rated Kazakh tenge bonds catch eye of Russia-wary investors

* Kazakhstan allows IFIs to sell offshore bonds domestically

* IFC, ADB, EBRD tap state-dominated local currency market

* Broker Tengri Capital plans offers to foreign investors

* Some see Kazakhstan as Russia proxy minus sanctions risk

By Olzhas Auyezov

ALMATY, March 13 (Reuters) - How do bond investors respond when the Russian market takes a hit from Western sanctions? Some are readying to go south too – literally – to Kazakhstan, where a new breed of local currency bonds is arousing interest.

Bankers in the country’s financial capital Almaty say international financial institutions plan to offer more Kazakh tenge-denominated bonds after initial issues from the World Bank and Asian Development Bank enjoyed strong demand.

These bonds, like the issuers, tend to be AAA-rated and governed by English law, allowing foreigners to take a position on the oil-rich Central Asian nation’s seemingly stabilising currency, but more easily and with less risk than locally issued paper.

And with Russian assets pressured by another round of U.S. sanctions and the prospect of more to come, some funds are now eyeing high-yield Kazakh bonds as a potentially better value proxy.

Ilias Tsakalidis, head of capital markets at Tengri Capital, an investment bank helping to arrange these bonds, reckons financial institutions could issue at least half a billion dollars worth of internationally clearable tenge bonds this year. These issues would significantly increase currently small trading volumes.

Since August, around $300 million has been issued by the International Finance Corporation, the private-sector arm of the World Bank, the ADB and the European Bank of Reconstruction and Development.

Initial buyers into what is a state-dominated market have been so far exclusively Kazakh, according to Tengri Capital. “Historically... the whole thing was just too complex for most international players,” Tsakalidis said.

But at least three foreign funds have now expressed interest, he added.


There is also a large maturity gap as the Kazakh central bank issues short-term notes, while Treasury debt is usually for ten years and longer.

According to Tsakalidis, the idea of tenge bonds issued by international institutions took off after Kazakhstan allowed the currency to lose half of its value against the dollar in 2015.

Many IFIs issue debt in emerging market currencies, often to fund local operations and help develop capital markets. But only the EBRD routinely issued tenge bonds before 2018.

Adjusting to each market’s laws takes time and incurs costs, so Tengri has worked with Kazakh authorities on making offshore tenge bonds issued by IFIs tradeable and repo-able locally.

As a result, such bonds can now be used as collateral in the Kazakh money market on the same terms as government and central bank securities.

The arrangement - the first of its kind for all the IFIs involved - allowed borrowers to test the waters before moving towards locally registered bond issues while also making the bonds directly available to foreign investors.

The first bond in the series, a $25 million 8-year IFC paper yielding 8.3 percent, was issued last August. Others since then include two ADB bonds issued in January with coupons linked to Kazakhstan’s consumer price index.

For comparison, 10.6-year Kazakh government bonds sold in January yielded 8.6 percent. The sovereign is rated ‘BBB’ by Fitch, ‘BBB-‘ by S&P and ‘Baa3’ by Moody’s.

ADB Treasurer Pierre Van Peteghem said the bonds marked the first time the lender had issued in a developing member country under its global note programme and under English law.


So far, Tengri has marketed the bonds to local investors, but Tsakalidis says “significant” foreign interest has surfaced.

“We are currently working on a similar deal which will target both local and international buyers,” he said.

For Aziz Jurayev, a funding manager at the EBRD, foreign demand will depend very much on investors’ view of the tenge’s prospects.

The yield on a recently issued EBRD tenge bond due in April 2020 has fallen 1.5 percentage points since early February to 9.57 percent, according to Reuters data.

After falling 14 percent against the dollar last year, the tenge has gained 1.2 percent in 2019 thanks to stronger oil prices. Kazakhstan also posted its first current account surplus last year since 2014.

Accordingly, foreign investors have increased their holdings of short-term central bank notes by about $75 mln so far this year to about $329 million, central bank data shows.

Lutz Roehmeyer, fund manager at Capitulum Asset Management in Berlin, holds the AAA-rated tenge bonds from the IFC and the EBRD and said he always registered interest in upcoming issues with the IFIs.

“But it is not just us, it’s even more so the U.S. investors – the main problem is that the fundamentals in Russia or in Kazakhstan are good, but that investors are scared to put their money into Russia because of sanctions,” he added.

“They think of Kazakhstan as the better Russia. You don’t have all those political problems and you get an even higher return.” (Additional reporting by Karin Strohecker and Tom Arnold in London; editing by John Stonestreet)

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