The FINANCIAL -- The European Bank for Reconstruction and Development (EBRD) has broken new ground on international capital markets with the first issue of a local currency Eurobond linked to the three-month consumer price index (CPI).
The EBRD took the step of issuing the 34 billion tenge index-linked bond following the National Bank of Kazakhstan’s introduction of inflation targeting aimed at creating conditions for sustainable economic growth in an environment of low interest rates.
With this new bond, institutional investors and pension funds will be able to better match their liability profile without compromising on credit quality. Kazakh borrowers will benefit from having a transparent source of long-term funding. By indexing assets and liabilities to the domestic CPI in a market where no alternative and credible interest-rate indices are available, the EBRD has devised a successful new concept for developing flexible lending in local currency in markets that are not working efficiently.
The new bond has a five-year maturity and pays a spread of 10 basis points a year over the three-month CPI rate, according to EBRD.
The issue will settle on 21 November 2016 and is lead-managed by Citigroup Global Markets Limited.
Amaury Gossé, Global Head of MTN Trading at Citigroup Global Markets Limited, said: “Citi was delighted to work with the EBRD on this ground-breaking transaction, the first of its kind. This new private placement, issued under the EBRD’s euro medium-term note (EMTN) programme, offers a unique pay-off to investors. This trade perfectly illustrates the flexibility and the sophistication of the EBRD as an issuer.”
Janet Heckman, Director for EBRD operations in Kazakhstan, said the tenge funding was important to meeting the EBRD’s strong investment plans for 2016. “In Kazakhstan this year the EBRD expects to sign in excess of 30 projects worth more than €750 million in total. In order to meet the demands of our borrowers we have to be able to provide funding in the local currency,” she said.
The EBRD is both a significant lender and borrower in tenge and has taken an active part in developing local capital markets. It issued its first tenge-denominated bond in February2009.
The bonds will be cleared through Clearstream in tenge and listed in London. The EBRD will also apply to the Kazakhstan Stock Exchange to seek a domestic listing of the notes and will then ask the National Bank of Kazakhstan (NBK) to accept them for the NBK’s repurchase operations with domestic banks, making the bonds highly liquid instruments.