Azerbaijan has postponed plans to issue Eurobonds to the next year, Deputy Finance Minister of Azerbaijan Azer Bayramov said last week. According to him, now the situation on the world market is better than before, but nevertheless, it remains not as favorable as we would like, because "dear money" is present on the market. So this year, Eurobond issuance is also unlikely.
The first issuance of Eurobonds had been scheduled for September-October 2007. The country was ready for this step. In order to organize issuance, Azerbaijan first got two sovereign ratings. The first - from Fitch Ratings, giving the country the rating at BB +, which is one step below than investment rating, and second - from Moody's Investor Services - Ba1 that is also one step below than investment rating.
Then the managers were selected to implement the first issuance of government bonds and place them in the international financial markets. They were the investment banks Deutsche Bank AG London and Citigroup Global Markets Limited. Deutsche Bank AG London has won the open tender to identify the leading manager on the Eurobond issuance. The tender was attended by 11 leading international investment banks. But Citigroup first gained the right to select manager in accordance with the agreement signed between the Ministry of Finance and Citigroup Global Markets Limited agreement on rating consultations on Sept. 30, 2005.
The Dublin Stock Exchange was selected as a site for placement of Eurobonds. The list also included Luxembourg and London stock exchanges. A week before the expected release, the Ministry of Finance planned to conduct presentations (road show) of Azerbaijani eurobonds in London, New York, Frankfurt, Tokyo and Singapore, to whet the interest of the market
The first issuance of sovereign bonds with a term of 5 years and the interest rate of 5 percent is expected to reach $300 million, which was later revised upwards to $500 million. The Presidential decree on the approval of state budget for 2007 envisaged implementation of the Eurobond issuance at 249 million manat.
Then for three years, the government retained the state budget limit of external debt at 2.5 billion manat compared to 1.2 billion manat one year earlier. Doubling the borrowing was associated with plans to place Eurobonds, but because of the situation on world markets, these plans were postponed until the stabilization of the situation. In the same year, because of postponing issuance of Eurobonds, Azerbaijan reduced the amount of its budget deficit.
The only thing that now and then was uncertain was the plans to identify spheres to use funds to be attracted from the debut issuance of Eurobonds. It is expected that the directions to use the funds will be considered only after determining the parameters of issuance and potential revenue.
In the world practice, this kind of long-term securities are usually issued by governments of countries, corporations, international organizations to obtain additional funds from outside for a long-term period (7 to 40 years). The funds obtained in this way are usually used to solve debt problems, patching of the budget deficit, invest in certain investment projects. For example, Russia issued Eurobonds in order to exchange commercial debt of the former Soviet Union.
Given the uncertainty of the Government plans to access the global capital markets, business entities of the country also have not implemented the plans to place Eurobonds on international markets, waiting for the issuance of sovereign bonds.
However, Azerbaijan Railways became the first state-owned company that issued its first Loan Participation Notes eurobond, totaling $125 million. Their maturity date is scheduled for Feb. 18, 2016.
Earlier the State Oil Company of the Azerbaijan Republic (SOCAR) announced its plans hold a eurobond roadshow. As SOCAR Economic Affairs Vice President Suleyman Gasimov told Trend earlier, the company's legal adviser has already been tasked with preparing a contract and a legal avenue for investors. Afterward, the company will hold presentations on various markets. The debut bond placement is expected to reach $500 million, which will be available in five tranches of $100 million each over a five-year period.
In addition, several Azerbaijani banks including the International Bank of Azerbaijan ($200 million), Unibank ($150 million) and Bank Standard ($150-200 million) have also postponed their plans.
World practice shows that governments need to issue Eurobonds before the market for corporate Eurobonds strengthens. The problem is that if a country has not issued government bonds, it is difficult to attract foreign investors. Placement of the first government Eurobonds defines the basic conditions for the further accession of Azerbaijani securities to foreign markets. For example, the rates on Eurobonds, which the Ministry of Finance plans to issue will become the base for Azerbaijani corporate Eurobonds.
Besides the Eurobond issuance is available for a small number of large Azerbaijani institutions. First of all, because on the international markets, the risk of the country is more important than the risks of the companies, only large companies with relatively high ratings are able to attract foreign investors into emerging markets. Usually it is more difficult for companies, known only in the domestic market, to enter the European market.
According to statistics, on the global market, about 2/3 of Eurobonds are issued by transnational corporations, the rest - equally by government, governmental organizations and international organizations.
Thus, the plans of banks, as well as governments depend on the situation on foreign markets, since currently the value of funds is very high.
"Assessing the situation on the markets, we are forced to postpone launch of sovereign Eurobonds, and the time shows that this is the correct decision. We observe all transactions in the market not only with the Azerbaijani issuers, but in the whole CIS and Eastern Europe and we understand that under these conditions, the issuance of Eurobonds would not be successful," the Finance Ministry of Azerbaijan stated.
For example, the ADB representatives indicated that the negative costs of the global liquidity crisis in the banking systems of Kazakhstan and Georgia were linked to the issuance of Eurobonds. Instead of effectively working with sources of funding, the commercial banks in these countries continued to actively attract funds from abroad. Thus, the Eurobonds market has been declared closed for the Kazakh banks and no investor is interested in these products. According to ADB, today the value of Eurobonds will be more expensive, because the attitude of investors towards this tool has changed and today this method of borrowing remains an expensive source. Only after stabilizing of the situation, the rates will drop and Azerbaijani eurobonds will be able to be placed on international capital markets upon acceptable terms.
Yes, it does not need to be in hurry, given that Azerbaijan does not need to attract funds from world markets. High oil prices make it possible for several years to collect a high budget surplus. And if oil prices remain high, the government will not need to attract funds in capital markets. Most likely, the country wants to create a benchmark for the Azerbaijani securities in the world markets. This guideline will operate for many years, and therefore, the Ministry of Finance seeks to maximize profitable spread. In this regard, the Ministry of Finance intends to closely monitor the situation, so that to enter the markets under those interest rates that are favorable for Azerbaijan.
By the way, there is a high interest in the debut Eurobonds of the country in the international capital markets. Thus, the State Securities Committee of Azerbaijan has conducted a study, which showed that compared with competing countries, Azerbaijan has advantages in such areas as macroeconomic stability, a stable international position, the positive economic dynamics. If the ratings of the majority of countries who were able to compete with Azerbaijan have been reduced or have a negative outlook, then Azerbaijan's rating remained unchanged. These advantages provide the possibility for Azerbaijan's receiving investments from the placement of securities in international markets, which also suggests the possibility of raising funds on the most favorable interest rates.