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Uzbekistan Emerges From Isolation with $1 Billion Bond Sale

15 February 2019

Uzbekistan sold $1 billion of Eurobonds in its first foray into international debt markets as the ex-Soviet republic opens its economy to foreign investment after more than two decades of isolation.

The placement is a key milestone for Uzbek President Shavkat Mirziyoyev, who aims to set a benchmark for corporate issuers as he steers the country of more than 30 million people down a more market-friendly route following the death of long-time ruler Islam Karimov in 2016. With developing-nation issuers rushing to market this year, the Uzbek offering is reminiscent of the successful 2017 sale by neighboring Tajikistan, which became a byword for the hunt for yield that year.

The deal priced with a yield of 4.75 percent on five-year paper and 5.375 percent on 10-year notes, according to a person familiar with the matter, who isn't authorized to speak publicly. Investors bid for more than $5.5 billion of the bonds. Uzbekistan is rated three levels below investment grade at BB- at S&P Global Ratings and Fitch Ratings, the same as Bolivia, Brazil and Bangladesh.

Read More: Learning to Embrace Debt Starts at Top With Uzbek Bond Debut

The sale by the natural gas, gold and cotton exporter is a "positive, transition story," according to Anders Faergemann, a fund manager at PineBridge Investments in London, which has $90 billion in assets. "We were impressed with the presentation and the marketing of the credit, backed by what seems to be very strong fundamentals."

While Tajikistan needed to put a map at the start of its bond prospectus to locate the country for investors, Uzbekistan is much more of a known quantity. Its steps to lift currency controls and ease some travel restrictions were well-publicized as it seeks to catch up with the economic transformation that's swept across the former Soviet Union since the end of communism.

Still, for Roman Bernatskiy, head trader of FFF Asset Management in Cyprus, who oversees more than $1 billion of fixed-income investments, investors may be getting ahead of themselves.

"The feverish demand automatically reminds me of Tajikistan's debut," he said. "There could be a case of deja-vu, with trading in the first days at 101 percent of face value and higher, followed by the subsequent acknowledgement that it's expensive and a drop well below face value."

The Tajik bonds, due in September 2027 and rated three levels below Uzbekistan at S&P, have returned 0.3 percent since their sale, compared with an average loss of 0.4 percent for emerging markets in the period. Bonds of ex-Soviet Georgia, which shares Uzbekistan's rating, returned 2.9 percent in the period.

Economic Data

Even after steps to lure investors and the "polished" presentation, there's still plenty of ground to cover, according to PineBridge's Faergemann.

"You would like to confirm the story and the data," he said. "But there is a lack of transparency in the frequency of domestic data releases available in English."

In an interview with Bloomberg TV on Thursday, Uzbekistan's Deputy Prime Minister, Jamshid Kuchkarov, said the government is working to translate more if its economic statistics. He predicted that some of the biggest commercial banks in Uzbekistan will also tap the bond markets in the wake of the sale.

The Uzbek delegation held more than 100 meetings in the course of the four-day roadshow, which took more than a year to prepare, according to Denis Shulakov, first vice-president of Gazprombank JSC, which helped organize the deal. About 300 investors took part in each of the tranches, he said.