Armenian Eurobonds Pave the Way for Further Financial Development

Investment Banking Director of Ameriabank Arno Mosikyan

YEREVAN (Arka)—On September 19, Armenia completed its first issuing of Eurobonds. The volume of the issue was $700 million, with a maturity period of 7 years, and yield of 6 percent. The main underwriters of the issue were Deutsche Bank, London Branch, HSBC Bank and J.P.Morgan Securities. According to the Ministry of Finance of the Republic of Armenia, the demand for Armenia’s first US dollar-denominated Eurobonds crossed $3 billion during the very first days of their issuing. In his interview with Arka News Agency, Investment Banking Director at Ameriabank Arno Mosikyan talked about the Armenia’s pioneering Eurobonds.

ARKA: What is your evaluation of Armenia’s first issue of Eurobonds?

ARNO MOSIKYAN: The decision to enter the Euro-market was a right one and we do hope that the market terms of the attracted funds will help manage public finance and debt more effectively.

Both teams, the team of underwriters and our country’s team at road shows in New York, Los Angeles and London, were quite representative. Overall, the executive part of the project was very well planned.

Ameriabank kept a finger on the pulse from preparation stages until the closing of the transaction. Our friends and colleagues from JP Morgan and other investment banks, as well as investors attending the road show, were quite impressed by our team. According to one of our partners, a famous institutional asset manager who had attended the road show in New York, the team of our Ministry of Finance and Central Bank was able to adequately answer even the most scrutinizing questions from investors.

However, in our opinion there were two major factors adversely affecting the yield of bonds: certain geopolitical developments which were information-wise not well planned. We believe we could have saved dozens of basis points if we had done the media planning more efficiently and organized the underwriter/lead manager selection process more transparently.

As for maturity and volume, they depend on the yield. Note that the volume of subscription to these first Eurobonds of Armenia shows that investors are interested in our debt papers and we can attract another 2-3 billion from international debt capital market.

ARKA: How will the issue of Eurobonds influence Armenian stock and financial markets and the economy as a whole?

A.M.: The impact on Armenia’s stock market cannot be efficiently assessed since the market itself is in a nascent stage and there is no apparent correlation between the issuing of Eurobonds and our stock market. But there are certain indirect factors which can influence our market. Just the fact of the issuing of Eurobonds and appearance of the name “Armenia” in the international debt capital market can increase investors’ awareness of our country and there is a chance that they will more frequently than before consider Armenia for other potential investments.

The influence on the financial sector will be more tangible. By issuing Eurobonds, the government set a minimum threshold for those corporate issuers, including banks and credit organizations, which attract debt from international markets. This means that the limit of attracted IFI loans for banks is now closely connected with the current and future yield of sovereign Eurobonds: the lower the yield, the lower the interest rates for attracted loans and hence the lower the rate for funds on-lent to economy.

As regards overall impact on economy, all our hope is that government will use the attracted funds efficiently and pursuant to the same reasonable logic which has been helping developed countries for well over 300 years: credit funds should only be invested in those projects, the return of which is higher than the interest rate of the credit. If the attracted funds are “locked” in inefficient projects such as asphalting the streets in Yerevan, we will drive ourselves into a debt pit whence there is only one way out – default and loss of sovereignty.

Note that 2014-2017 will be rather hard years for Armenia in terms that the peak of external public debt payments falls upon these years. Therefore if we use the attracted funds correctly we will be able to mitigate this huge outflow of funds, achieve multiplier effect of added value in economy and stimulate GDP growth.

ARKA: In your opinion, will Armenia’s Eurobonds be attractive and competitive on international markets?

A.M.: This maiden issue of Eurobonds was an important step towards the development of practice and public debt management systems. Until now, Armenia was working with IFIs which had mandates for assisting sovereign member states in achieving economic development and gave loans under subsidized non-market terms.

Now we have to deal with investors from Wall Street and City, who have purely commercial interests and who are emotionally more neutral. Key criteria for them are stable credit risk (not worsening at least until maturity) and the credit rating of the issuer, efficient public finance management systems, transparent budget policy, and liquid, deep and wide secondary market of bonds.

Our government has done a huge job, but there is much to be done yet to improve this and further issues with respect to quality, in order to make them more attractive for investors.

We expect, among other things, for subsequent issuings to build the yield curve at least for a 10-year period and cooperation with rating agencies to develop and obtain sovereign credit ratings from S&P. We also expect road shows and meetings with investors to be conducted regularly during key events in international debt capital markets.

In addition, we must strive to have our bonds included in top indexes oriented to developing countries, such as J.P. Morgan Emerging Markets Bond Index Global (EMBI Global), create liquid, deep and wide secondary market of bonds, and try and rid ourselves of the nickname “Kardashian Bonds.”

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