Nur Sultan (Astana), Kazakhstan & nbsp
Author: Ilias Tsakalidis, CEO and Head of Capital Markets, Tengri Partners Investment Banking (Kazakhstan)
December 17, 2021
Formerly known as Visor Capital, Tengri Partners Investment Banking (Kazakhstan) JSC (Tengri Partners) was founded in 2004 with the aim of creating the best regional investment bank in Central Asia. Tengri Partners provides a full range of investment services and products in Kazakhstan, including – but not limited to – investment banking, securities trading and brokerage, industrial analysis, and investments. The company’s activities were recognized by World Finance, which awarded Tengri Partners the honor of the ‘Best Investment Bank in Kazakhstan’ in 2019 and 2020.
Paving the way for development
In 2018, Tengri Partners made its debut in bringing AAA-rated development financial institutions (DFIs) to the capital market of Kazakhstan. Thus, the company was first to place bonds of the International Finance Corporation (IFC) denominated in tenge on the Kazakhstan Stock Exchange (KASE) with a total volume of KZT8.6bn ($ 25m). For the first time, DFI bonds were included in the basket of government securities, which increases the attractiveness of the instruments for investors and, subsequently, bolsters the market activity. The transaction became a landmark event in the history of the development of capital markets in Kazakhstan. Following the IFC, Tengri Partners has successfully placed international bonds in tenge with such DFIs as the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB). The total issued volume of the AAA-rated DFI bonds in tenge in Kazakhstan currently amounts to KZT722.5bn ($ 1.83bn) – all of which were placed by Tengri Partners.
Introducing ESG financing
Although the topic of green financing is gaining widespread popularity in developed markets, it is too early to compare the performance of a given asset class to the conventional instruments as it is at an early stage of development in Kazakhstan. The first green bonds in Kazakhstan were placed by the ‘DAMU’ Entrepreneurship Development Fund JSC on the Astana International Exchange (AIX) in August 2020.
In turn, the debut issue of green bonds on the KASE platform is attributed to the ADB placement in November 2020 with Tengri Partners acting as a sole arranger. ADB tapped the market with two medium-term notes in the total amount of almost KZT14bn ($ 32m). The proceeds went to projects aimed at lowering or eliminating greenhouse gas emissions, as well as lowering the vulnerability of anthropogenic or natural systems to the consequences of climate change and enhancing resilience and adaptability.
Newly introduced green bonds demonstrated high appreciation by market participants reflecting oversubscription of 283 percent and 179.5 percent and negative spread of 10–12 bps to the government bonds despite a highly competitive environment with the ministry of finance and competition of high-grade SOEs for the spare liquidity at the time of placement.
Along with green bonds, ADB also launched the debut placement of gender bonds in Kazakhstan aimed at the achievement of gender equality and the promotion of women’s empowerment. Tengri Partners participated in this deal as a sole arranger placing about KZT8.4bn ($ 20m) worth of ADB bonds on KASE. Proceeds were directed to the ‘Promoting Gender Equality in Housing Finance Project,’ which focuses on increasing the lending operations of the Otbasy Bank House Construction Savings Bank JSC and promoting affordable residential mortgage loans for female borrowers in predominantly rural regions. Overall, the ESG bond market in Kazakhstan today amounts to KZT43.4bn ($ 102.4m), which already exhibits good opportunities for the development and stimulation of sustainable financing in the region.
Making securitization work
Until recently, there were no precedents in Kazakhstan’s history of a multi-tranche securitization of a mortgage portfolio based on the principle of ‘true sale’ adhering to the local law. That was due to several legislative and regulatory provisions that not only implied additional risk of loss of value for investors – especially in the event of SPV default – but also impeded fair reflection of the economic viability of the transaction and the quality of bond credit risk in the international credit rating.
Considering the amount of work and energy costs associated with initiatives to change legislation, a specific deal is often needed to clearly determine the ineffectiveness of certain provisions. Such a deal is the debut securitization of the mortgage portfolio for the largest mortgage organization in Kazakhstan – the Kazakhstan Housing Company JSC (KHC). It was initiated in 2019 in the amount of up to KZT26bn ($ 65m), and structured by Tengri Partners.
The preparation of the deal made it possible to identify the main barriers to the development of the market, gave impetus to a broad discussion of the issue at the legislative level, and served as a pretext for introducing key amendments to the legal infrastructure to bring it in line with global best practices.
The main limitation in Kazakhstan today, in comparison to more developed jurisdictions, is the lack of a full-fledged concept of subordination when registering several SPV bond issues within one bond program. Although it is possible to prioritize the allocation of funds to investors from the proceeds on the underlying assets during the life of the SPV, the observance of such priority in the event of a default of the SPV contradicts the following provision of the law.
The second limitation is the lack of disclosure of how other parties in a securitization transaction should be treated in case of default: service agent, custody, asset manager, management company, stock exchange, trustee, etc.
If the necessary amendments are adopted, the securitization market in Kazakhstan has a great future
Initiated amendments by Tengri Partners and KHC account for all of these, allowing the trustee the use of cashflows from the remaining performing portfolio and recoveries for payment of third-party fees.
If the necessary amendments are adopted, the securitization market in Kazakhstan has a great future. The reason for this is the growing loan market – the mortgage and car loan market, for example – amid a limited range of long-term funding instruments for local commercial banks and quasi-state-owned companies. In addition, given the high share of non-performing loans and, consequently, the high pressure on regulatory capital, securitization may serve as an effective way to increase the level of banks’ liquidity and to provide capital relief without the need for government as previously observed with additional banks’ capitalization programs.
Global infrastructure practice
In 2021, Tengri Partners became a member of the International Swaps and Derivatives Association (ISDA). Membership in the international professional association will allow Tengri Partners to exploit the developed infrastructure of ISDA in the OTC-derivatives transactions, cooperate with industry experts on the issues of current interest, participate in the discussions of best practices and in the preparation of relevant regulatory documents . Thereby, Tengri Partners has proved that it is striving for active development of the company as a professional participant in the international capital markets and derivative instruments. Today, Tengri Partners is one of the few ISDA members in Kazakhstan.
Tracking the performance of TONIA
Overnight repo market is the most liquid segment of the capital market in Kazakhstan due to the large transaction volumes – about KZT400bn ($ 940m) per day – and many market participants: banks, insurance companies, funds, corporate treasuries. Tenge Overnight Index Average (TONIA) reflects a key short-term risk-free benchmark for the value of money in Kazakhstan’s financial market. In developed markets, government securities, corporate bonds, swaps and loans are linked to the analogous indicators (SOFR, SONIA, etc) to fairly reveal the change in the value of money.
In September 2021, Tengri Partners, in cooperation with EBRD and commercial banks, proposed an introduction of the TONIA compounded rate and TONIA compounded index indicators to the market on KASE. TONIA Index is a big stepping-stone to the development of the financial market in Kazakhstan assisting with liquidity enhancement and a wider range of instruments. TONIA-linked instruments will thus enable a more efficient way of investing in the risk-free money market, in comparison with the traditional rolling of position in the overnight repo market.
Launching the market analysis toolkit
In 2020 Tengri Partners commenced a PMI survey in Kazakhstan in partnership with IHS Markit that provides some of the most closely monitored reports of business activity worldwide. Thorough work has been carried out with IHS Markit in the development of the methodology and approach to calculating the PMI. The launch manifests Tengri Partner’s focus, which is to provide an essential entry point into Kazakhstan’s market for international investors and share vital analysis for investment decision, as well as to gauge market sentiment. Kazakhstan became the 44th country covered by the global PMI series from IHS Markit.
Despite turbulent conditions in capital markets over the course of 2020, and extreme volatility in the exchange rate, Tengri Partners has maintained all of its core business lines and remained focused on serving the needs of major institutional clients to a world-class standard.