Kazakhstan is developing a first-rate bond market

Kazakhstan’s capital markets are flourishing, with tenge-denominated bonds attracting interest from all over the world. The work of financial institutions like Tengri Partners has helped to whet investors’ appetites

Kazakhstan’s capital city, Nur-Sultan, has ambitions to become one of the world’s foremost financial centres, with investors from East and West taking advantage of its favourable geographical position 

Kazakhstan’s financial market is developing rapidly. Its capital city, Nur-Sultan, has ambitions to become one of the world’s foremost financial centres, with investors from East and West beginning to take advantage of the country’s position at the crossroads of Europe and Asia. Tengri Partners Investment Banking, a premier independent investment banking and asset management firm headquartered in Almaty, Kazakhstan, provides full-scale investment banking services in the fields of debt and equity capital markets, mergers and acquisitions, brokerage and asset management, merchant banking, and private equity investments.

Having tapped into IFI bond markets, Tengri Partners has demonstrated that it is a forward-looking enterprise ready to accept new challenges

Established in 2004 as Visor Capital (the investment banking arm of Visor Holding), our firm has advised and executed more than 40 transactions, collectively valued in excess of $17.3bn, over the years. At the end of 2015, Visor Holding sold the firm – the only investment bank in Kazakhstan holding a brokerage licence on the London Stock Exchange – to Tengri Partners Investment Corporation. Since then, the local investment banking market has entered a new era.

A capital idea
Tengri Partners has garnered a reputation as the go-to bank for attracting debt capital, as shown by our repeat clientele and status as the preferred investment bank for international investors on issues related to bond transactions in Kazakhstan. At the end of Q3 2019, Tengri Partners’ presence in debt capital markets significantly increased, reaching 20 percent of total market share, compared with one percent in 2018. Tengri Partners is also the market leader for debt capital in terms of completed transactions.

Our main aim is to boost the development of local capital markets, which are currently suffering severe deficits in terms of new issuers and secondary liquidity. Bringing risk-free instruments denominated in Kazakhstani tenge to local institutional investors has improved the potential for diversification from sovereign bonds and short-term notes. It has also allowed international financial institutions (IFIs) to expand their operations and avoid the currency mismatches that have been present for a number of years.

Tengri Partners brought AAA-rated IFIs to the public debt capital market for the first time in the history of Kazakhstan, at a time when the country’s sovereign rating was BBB. The deals we pioneered strengthened our position in the investment banking sector; now, we are looking to take Kazakhstan’s capital markets to the next level.

Transitioning International Finance Corporation (IFC) bonds out of global medium-term notes programmes and placing them on the Kazakhstan Stock Exchange (KASE) represented the first hybrid transaction in the history of Kazakhstani capital markets. Tengri Partners successfully saw through the adjustment of local legislation and regulation in order to make this a reality. This proved to be the most challenging aspect of the transaction, requiring us to develop new mechanics of issuance and conduct a public offering on the KASE.

Other challenges we faced were: allowing these deals to be settled through a local depositary system; developing a market valuation methodology for these bonds amid scarce secondary liquidity; including IFI bonds with AA and above ratings in the list of eligible collateral for the discount window with the National Bank of Kazakhstan; and applying identical haircuts as sovereign bonds. This final requirement proved to be a game changer for many investors and primary commercial banks, for which secondary liquidity is an extremely important issue.

In July 2018, the first IFC bond was placed for KZT 8.5bn ($22m), representing back-to-back funding for the issuer, with funds being immediately disbursed to the local borrower. The deal was structured to mirror the terms of the loan disbursement and resulted in an amortising fixed coupon bond – the first of its kind in Kazakhstan in almost 10 years. In arranging the deal, Tengri Partners outperformed the sovereign yield curve, which was a great achievement for us and the IFC as the issuer. It reduced the loan cost for the borrower, granting them access to the private sector for affordable funding amid limited local opportunities.

The transaction was an important benchmark in the history of Kazakhstan’s capital markets development. It was the first IFC bond to be denominated in tenge, the first AAA-rated bond placed on the KASE, the first AAA-rated IFI bond primarily for private sector investors in Kazakhstan, and the first time an AAA-rated IFI engaged a Kazakhstani investment bank for a public bond offering.

A done deal
In another unprecedented move, Tengri Partners has managed to engage every type of investor currently present in Kazakhstan, with 19 bids from 10 participants and a bid-to-cover ratio of 2.25. The issuance of the IFC’s tenge-denominated bond is in line with the IFC’s strategy to source long-term funding and create access to local currency finance for private sector expansion, helping to boost economic growth and create jobs.

The IFC almost immediately followed up with two deals in September 2018 and January 2019, worth a combined KZT 25bn ($64.7m), underwritten by Tengri Partners. Again, demand significantly exceeded the offered volume by an average of 1.64 times. The maturities of the three bond issuances were 7.5, four and two years respectively. This perfectly matched with investors’ appetites for risk-free, medium-term instruments. It allowed them to diversify their investment portfolios and comprehensively enhance the average quality of liquid assets.

An Asian Development Bank (ADB) bond issuance in tenge has also provided a back-to-back funding strategy for the issuer. The milestone dual-tranche, inflation-linked bond possesses a highly tailored structure mirroring the terms of underlying loans that will grant cheaper debt funding on market terms.

The hybrid bond approach was crafted by issuing and documenting the transaction under the ADB’s global medium-term notes programme and English law while settling the deal through the local depositary system – a first for the ADB in any developing member country. The issuance was placed exclusively with institutional investors and marked a series of firsts both for the ADB and the local market. It was the ADB’s first tenge bond issuance, the first ADB inflation-linked bond in a local currency and the first inflation-linked bond in Kazakhstan since 2016.

Building a reputation
The European Bank for Reconstruction and Development (EBRD) is the most active development bank in Kazakhstan in terms of project numbers and volume. With the help of Tengri Partners, it is the latest IFI to successfully tap the local market with a tenge-denominated bond issuance. The EBRD already raised KZT 260bn ($673m) through five issues in 2019 alone – another milestone for the local market. We have witnessed the first domestically placed public bond offering for the EBRD in Kazakhstan and the largest single inflation-linked bond issuance by an AAA-rated IFI in Kazakhstan. The execution phase of the deal took just one week from the approval of bond terms to final settlement. The bond issuances also provide proof of the feasibility of tapping spare tenge liquidity for a risk-free borrower.

For Kazakhstani investors, such bonds are important for diversifying their portfolios, while commercial banks and insurance companies that urgently need medium-term, high-quality liquid assets in tenge will also benefit. It is worth noting that the issuance of IFI bonds took place on market terms and was a significant success, since the demand of most placements exceeded the offered volume, emphasising the high rating appreciation by local market participants.

Moreover, the entry of issuers such as the IFC, ADB and EBRD to the KASE opens the way not only for other IFIs, but also entails further interest in local debt capital markets from both international investors and issuers, which is a positive sign for the reputation of the country and the development of capital markets in Kazakhstan.

Having tapped into IFI bond markets, Tengri Partners has demonstrated that it is a forward-looking enterprise ready to accept new challenges. The next cutting-edge solution for local quasi-government companies will be an opportunity to place their bonds among international investors. Tengri Partners has already developed a unique issuance structure that will make tenge-denominated local bonds an attractive security for overseas bond investors. At the same time, local capital markets will experience an investment boost, not a mere capital reshuffling within the country.