DBM to ramp up lending with offshore bonds
Development Bank of Mongolia is gearing up to resume policy lending and will lean on the US dollar bond market to meet the bulk of its financing needs, while testing the waters in the domestic bond market with a debut planned for later this year.
In June, DBM issued its first public US dollar bond since 2018, a US$500m 6.9% five-year senior bond priced to yield a record tight yield for the bank of 7.2%.
Over the past eight years DBM has raised funds via private placements while it focused on debt workouts and recoveries to address a non-performing loan ratio that peaked at 60%.
The NPL crisis prompted DBM to halt lending in 2021, impacting its ability to carry out its role as a development bank.
“We’re trying to transform the bank and fulfil its mandate as a policy bank. The main reason we wanted to do a public deal this time is we want to reposition the credit,” said deputy CEO Enkhjin Atarbaatar in an interview with IFR Asia.
The sovereign’s progress in lowering its debt-to-GDP ratio (close to 40% today from around 80% in 2017) and the surge in commodity prices (minerals such as copper and coal are Mongolia’s top exports) created a positive macro tailwind to the bank’s latest bond issue.
“The medium-term economic outlook is quite good, and that’s why investors are actually quite attracted to Mongolia,” Atarbaatar said.
A new law expected to come into force by the end of the year, subject to parliamentary approval, creates an implicit government support of DBM, increases the degree of central bank supervision, and strengthens DBM’s governance.
“Previously the government had the option to recapitalise the bank but under this new draft amendment, which we worked on with the World Bank, the government must recapitalise the bank whenever necessary,” Atarbaatar explained.
DBM has ratings of B1/BB–/B+ from the three major international rating agencies, equal with the sovereign.
Against this backdrop, DBM envisions becoming a frequent issuer in the public US dollar market and will seek to raise at least another US$500m in 2027.
“If we are very successful [in our lending activities], we may need to issue more,” Atarbaatar said.
DBM resumed lending operations this year and has approved several loans in partnership with development finance institutions and local financial institutions.
It will contribute US$100m to a US$200m loan with the International Finance Corporation to state-owned Mongolian Railway (MTZ) to finance a railway project circumventing Ulaanbaatar, reducing transit traffic time and easing traffic congestion in the capital.
DBM will also participate in new solar and battery storage projects for which the government launched a tender in June and be involved in other infrastructure investment projects seen as vital for Mongolia’s development.
“In the next four or five years, our main target sectors will be energy, infrastructure, transportation, and some export-related sectors. We want to improve the country’s export capacity, energy capacity, and energy independence,” the deputy CEO said.
In terms of sources of funding, the US dollar remains the most attractive and suited to DBM’s requirements for medium and long-term funding. Renminbi costs are attractive, Atarbaatar said, but the Dim Sum bond market remains concentrated on shorter tenors, which could lead to duration mismatch as the bank will be financing long-term projects.
DBM will also test foreign investor appetite for local currency bonds with a debut tugrik bond planned for late July or early August, hoping to fill a gap once occupied by the sovereign. Mongolia was a regular issuer in the local bond market until it shifted its focus to liability management in 2017.
“There was actually a market developing in terms of offshore investors investing into local currency government bonds … DBM can act as an option for investors who want to buy tugrik bonds, including funds that specialise in frontier market currencies,” Atarbaatar said.
“Shifting from funding 100% in US dollars into some local debt will eliminate forex risk and be appreciated by the International Monetary Fund and the rating agencies,” he said.
