Russia crisis, oil price fall dim appeal of first Kazakhstan Eurobond since 2000
Oct 2. Reuters. LONDON
BY SUJATA RAO
Energy-rich Kazakhstan, gearing up for its first Eurobond in over a decade, is seeing its appeal dimmed by falling oil prices and the crisis in nearby Russia, potentially forcing it to give investors a slightly higher yield premium than expected.
Kazakh government officials are meeting investors in Britain and the United States this week, aiming to enter the market for the first time since a previous bond expired in 2007.
Positives that should earn the bond a rapturous reception: rock-bottom debt ratios of around 12 percent of GDP, 5-6 percent economic growth a year, 1.6 million barrels per day in oil output, and a BBB+/Baa2 investment grade credit rating.
The negatives? The shutdown of a giant oilfield and slumping exports to Ukraine and sanctions-hit Russia are hurting economic growth. That may cause trouble for banks and companies, rekindling memories of a spate of corporate debt defaults in 2008-2009.
Brent crude futures are now below the $95 per barrel level on which the 2014 Kazakh budget is calculated.
“With this backdrop it’s definitely not as good as it was a few years ago,” said Simon Lue-Fong, head of emerging debt at Pictet Asset Management. “The appetite for dollar debt has been very solid so it will all come down to the price.”
Fund managers, some of whom attended the presentation in London, said Kazakhstan was keen on a two-tranche five- and 10-year deal with an ultimate possible size of $3 billion or so.
With no sovereign bond outstanding, investors will look to either the bonds of state energy firm Kazmunaigaz (KMG) for price guidance, or to another investment grade ex-Soviet oil state Azerbaijan, which has a 10-year dollar bond outstanding.
Yerlan Syzdykov, head of emerging debt at Pioneer Investments, noted that KMG’s 2021 bond was trading with a 4.75 percent yield, providing a zero-volatility, or z-spread, of around 270 basis points. A z-spread refers to the yield premium to the same-maturity U.S. Treasury bond.
“You could expect (the KMG bond) to carry a 100 bps premium to the sovereign which means 170 bps and I think the aim is to issue around that level, but if you look at the sovereign accounts they may have to pay a bit more,” he said.
“A few months ago they may have got away with 170 bps.”
But Kazakhstan should be able to obtain a lower yield than Azerbaijan. Azerbaijan’s credit ratings are slightly below Kazakhstan’s at Baa3/BBB-/BBB-. Its 2021 issue is trading with a 4.5 percent yield and a z-spread of 208 bps.
Azerbaijan’s credit ratings are below Kazakhstan’s at Baa3/BBB-. Its 2021 issue is trading with a 4.5 percent yield and a z-spread of 208 bps.
“Given the respective credit fundamentals it would be appropriate to price inside of Azerbaijan, not only is Kazakhstan a stronger standalone credit, Azerbaijan also has niggling political risk in the Nagorno-Karabakh conflict – that is absent from the Kazakh story,” said Mark Baker, a portfolio manager with Standard Life Investments.
Dozens of people have died in clashes this year in Nagorno-Karabakh, an enclave disputed by Armenia and Azerbaijan. Ethnic violence killed 30,000 people in the area in the early 1990s.
Baker reckons a yield of around 4.15 percent on a 10-year bond would be fair, providing a discount of 60 bps to the state oil company’s bond. That is similar to the yield discount on Azerbaijan’s sovereign bond relative to state oil firm SOCAR.
Some investors are also keen for Kazakhstan to issue a 30-year tranche. That would allow it to lock in some cheap long-term cash before U.S. interest rates start rising, while providing investors with a long-dated investment-grade bond.
Based on a comparison with the Turkish and Russian bond yield curves, a 30-year tranche would price at an approximate 50-70 bps premium to the 10-year deal, Baker said.
Kazakhstan also wants to return to markets more frequently in future, Baker noted, adding: “It won’t hurt to leave a bit of concession on the table to create (investor) goodwill for future issues.”