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 US 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.
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