Junk Bond Fever Hits a New High in Tajikistan

  • Yield dropped to 7.125% from initial guidance in 8% area
  • Bond sale is indicative of ‘state of the market’: Bluebay

Just when it looked like appetite for junk debt couldn’t get any stronger, along comes Tajikistan with a successful debut Eurobond sale.

Demand for the $500 million of 10-year amortizing notes of the Central Asian republic was so high it knocked about 90 basis points off the initial price guidance, allowing the government to sell at a yield of 7.125 percent. The nation’s credit rating is six levels below investment grade at S&P Global Ratings, and for perspective, investors were paying the same rate for U.S. Treasuries 22 years ago.

The bond sale has become a popular anecdote among traders to demonstrate how far investors are prepared to go in search of returns in an environment where stimulus is pushing yields ever lower. Bill Blain of Mint Partners described Tajikistan as the icing on the cake in his widely-read morning note on Friday, while Bluebay Asset Management’s Tim Ash wrote late last month that the offering is indicative of “the state of the market.”

Read More: Junk Issuers Happy to Oblige Yield Chasers as Costs Decline

“I am getting compensated for the risks at these spread levels,” said Claudia Calich, a money manager at M&G Ltd in London who bought the bond. “The market remains receptive for lower-quality credits at the moment.”

Tajikistan got more than $3.1 billion in bids for its $500 million bond, according to a person familiar with the matter, who is not authorized to speak publicly and asked not to be identified. More than 60 percent of the new bonds went to investors from the U.S. and U.K., with fund managers accounting for 85 percent.

Investors who attended the roadshow for the bond in London last week said they were attracted by the nation’s intention to use the cash to finance a hydro power plant, which will help diversify the economy away from remittances. The mountainous country has potential to become the eighth-biggest producer of hydro-electric power in the world, according to the bond prospectus.

The document, which begins with a map to help investors locate the country, devotes 10 pages to laying out the risks involved in investing in Tajikistan. These include lack of democracy and potential for social unrest, a banking crisis and economic reliance on Russia. It also notes that “one of the highest-volume illegal drug trafficking routes in the world” runs through the country.

Map of Tajikistan included at beginning of bond prospectus

“We attended the roadshow but were unconvinced that it offers value,” Kieran Curtis, who helps oversee $5 billion in emerging-market debt as a fund manager at Standard Life Investments Limited in London, said. “We thought it was much riskier than other market participants seem to think.”

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