Investors explore risky frontier with Tajikistan's debut bond

By Sujata Rao and Alexander Winning

LONDON (Reuters) - With an economy reliant on migrants' remittances, a president in power for a quarter century and a business plan hinging on power exports to Afghanistan, Tajikistan's $500 million bond placement this week may prove even riskier than the usual frontier market offering.

The Eurobond, the first from the poorest country in the former Soviet Union, was placed on Thursday with a yield of 7.125 percent, about 200 basis points above the average paid by other developing countries on their dollar bonds.

Funds put in bids of more than $4 billion for the 10-year paper, bringing yields down from the 8 percent that was originally signalled.

The deal is the latest indication of the undiminished thirst for high-yield debt, even from frontier markets - so called because of their poverty and rock-bottom credit scores.

Investors who attended Tajikistan's roadshow presentations had predicted the deal would fly, thanks to attractive yields, the rarity of new entrants to bond indices and Russia's tacit backing for the small central Asian country.

Proceeds from the debt are earmarked to build the world's tallest hydropower dam, Rogun, which is meant to boost and diversify the $7 billion Tajik economy.

"The country comes from such a low base that it is easy to improve," said Lutz Roehmeyer, director at Landesbank Berlin Investment, who bought the bond.

"And they don't want to splash out the money on any nonsense, they want to build a dam and produce electricity which would be a massive boost for the local economy."

The return for investors compares favourably with Belarus which, with the same B- credit rating, has 10-year dollar bonds that currently yield 6.1 percent.

Tajikistan, which lies between four countries including Afghanistan and China, suffered a devastating civil war following the collapse of the Soviet Union. President Imomali Rakhmon has ruled since 1992 and last year, around 95 percent of voters approved constitutional changes allowing him to run for an unlimited number of further terms.

Mikhail Volodchenko, an emerging debt analyst at Old Mutual Global Investors, acknowledged Tajikistan was "on the exotic end, even by frontier standards," but saw it as "an improving story" compared with many similarly rated countries.

Tajikistan's investor presentation, seen by Reuters, trumpeted its 6.9 percent economic growth rate as well as lower debt levels and smaller budget deficits than similarly-rated peers.

In July 2016, the government signed a $3.9 billion contract with Italy's Salini Impregilo to build the Rogun dam. The project would provide an extra source of revenue by enabling power exports to Pakistan and Afghanistan after 2020.

But investors may be overlooking important risks.

Neighbouring Uzbekistan, for instance, has repeatedly urged Tajikistan not to build Rogun - a project conceived in the Soviet era - due to the effect on river flows over their mutual border.

RISKY ROGUN

Another frontier economy, Mozambique, had lured investors in 2013 to its maiden bond, promising to invest proceeds into a fleet of fishing boats. That bond is now in default.

Rogun would in theory be a boon for Tajikistan which suffers frequent power blackouts. Electricity exports would also provide extra income to a country which sells aluminium and cotton abroad but relies on remittances from Tajik workers in Russia and Kazakhstan for a third of its gross domestic product.

But the bond, along with further planned borrowings for the project, will raise the country's external debt to 84 percent of annual economic output by the end of 2018, estimates Alexander Golinsky, an analyst at Russia's Sberbank.

Debt servicing costs will eventually rise above 10 percent of annual government revenue due to Rogun, Golinsky reckons.

Most significantly, Tajikistan is issuing a high-cost bond when it could plausibly have tapped multilateral organisations such as the World Bank, which is involved in many projects in the country but appears not to be financing Rogun.

Privately, Tajik government officials said the government was "unhappy" with conditions attached to a World Bank loan.

The World Bank declined to say what discussions, if any, had taken place but a spokeswoman said its involvement was "focused on supporting technical and economic studies that recommend international best practices".

In a transcript of an interview with a senior World Bank official posted on its website, the development lender said its involvement did not imply "any financial commitment to support construction of the proposed dam".

"These types of project usually cost more and take longer than expected," said Claudia Calich, a fund manager at M&G Investments. "What if something happens with the transmission grid that Pakistan or Afghanistan are building inside their borders? What if there are also delays on the completion of the grid or sabotage? This is very tough to predict."

The Eurobond launched on Thursday is far costlier than the 1.6 percent average interest rate Tajikistan currently pays on its foreign debt to the World Bank, other multilateral lenders and China, according to its investor presentation.

"They said they think this will be transformational, which it may well be, but the question is why borrow so much from the private sector when there are the (institutional lenders)?" said Richard Segal, a strategist at Manulife Asset Management.

(Reporting by Sujata Rao, Alexander Winning, Karin Strohecker, Claire Milhench and Marc Jones in London; Nazarali Pirnazarov in Dushanbe; editing by David Stamp)