Kazakhstan: Building new financial frameworks for a better future

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Nur Sultan (Astana), Kazakhstan






Author: Ilias Tsakalidis, CEO and Head of Capital Markets, Tengri Partners Investment Banking (Kazakhstan)


December 17, 2021

Formerly known as Visor Capital, Tengri Partners Investment Banking (Kazakhstan) JSC (Tengri Partners) was founded in 2004 with the aim of creating the best regional investment bank in Central Asia. Tengri Partners provides a full range of investment services and products in Kazakhstan including, but not limited to, investment banking, securities trading and brokerage, industry analysis and investments. The company’s activities have been recognized by World Finance, which awarded Tengri Partners the honor of “Best Investment Bank in Kazakhstan” in 2019 and 2020.

Paving the way for development
In 2018, Tengri Partners made its debut bringing AAA-rated development finance institutions (DFIs) into the Kazakhstan capital market. Thus, the company was the first to place International Finance Corporation (IFC) tenge-denominated bonds on the Kazakhstan Stock Exchange (KASE) for a total volume of KZT 8.6 billion ($ 25 million). For the first time, DFI bonds have been included in the basket of government securities, which increases the attractiveness of the instruments for investors and subsequently strengthens market activity. The transaction has become a milestone in the history of the development of capital markets in Kazakhstan. After IFC, Tengri Partners has successfully placed international bonds in tenge with DFIs such as the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB). The total issued volume of DFI AAA-rated tenge bonds in Kazakhstan currently stands at KZT 722.5 billion ($ 1.83 billion) – all placed by Tengri Partners.

Presentation of ESG financing
Although the topic of green finance is gaining popularity in developed markets, it is too early to compare the performance of a given asset class to conventional instruments as it is at an early stage of development in Kazakhstan. The first green bonds in Kazakhstan were placed by the Entrepreneurship Development Fund “DAMU” JSC on the Astana International Stock Exchange (AIX) in August 2020.

In turn, the first green bond issue on the KASE platform is awarded to the ADB placement in November 2020 with Tengri Partners acting as sole arranger. ADB tapped into the market with two medium term bonds totaling nearly KZT 14 billion ($ 32 million). The proceeds were directed to projects aimed at reducing or eliminating greenhouse gas emissions, as well as reducing the vulnerability of anthropogenic or natural systems to the consequences of climate change and improving resilience and adaptability.

Newly introduced green bonds showed strong appreciation from market participants, reflecting an oversubscription of 283% and 179.5% and a negative spread of 10-12 basis points against government bonds despite a very competitive environment with the Ministry of Finance and competition from blue chip public companies for liquidity at the time of placement.

Along with green bonds, AfDB also launched the first gender bond placement in Kazakhstan aimed at achieving gender equality and promoting women’s empowerment. Tengri Partners participated in this agreement as sole arranger by placing approximately KZT 8.4 billion ($ 20 million) of ADB bonds on KASE. The proceeds went to the project “Promoting Gender Equality in Housing Finance”, which aims to increase the lending operations of Otbasy Bank House Construction Savings Bank JSC and promote affordable residential mortgages for female borrowers. in predominantly rural regions. Globally, the ESG bond market in Kazakhstan today stands at KZT 43.4 billion ($ 102.4 million), which already presents good opportunities for the development and stimulation of sustainable financing in the region. region.

Make securitization work
Until recently, there was no precedent in the history of Kazakhstan for a multi-tranche securitization of a mortgage portfolio based on the principle of “real sale” in accordance with local law. This is explained by several legislative and regulatory provisions which not only implied an additional risk of loss of value for investors – in particular in the event of a SPV default – but also made it impossible to faithfully reflect the economic viability of the operation and the quality of the transaction. bond credit risk in international credit rating.

Given the amount of work and energy costs associated with initiatives to change legislation, a specific agreement is often necessary to clearly determine the ineffectiveness of certain provisions. Such an agreement is the first securitization of the mortgage portfolio of the largest mortgage lending organization in Kazakhstan – Kazakhstan Housing Company JSC (KHC). It was initiated in 2019 for an amount of up to KZT 26 billion ($ 65 million) and structured by Tengri Partners.

The preparation of the agreement identified the main obstacles to market development, gave impetus to a broad discussion of the issue at the legislative level and served as a pretext to introduce key changes in the legal infrastructure for the ” deliver in accordance with global best practices.

The main limitation in Kazakhstan today, compared to more developed jurisdictions, is the lack of a full-fledged concept of subordination when registering multiple SPV bond issues within one program. ‘obligations. Although it is possible to prioritize the allocation of funds to investors from the proceeds of the underlying assets during the life of the SPV, compliance with such a priority in the event of failure of the SPV contradicts the following provision of the law.

The second limitation is the lack of disclosure of how the other parties to a securitization transaction should be treated in the event of default: service agent, custodian, asset manager, management company, stock exchange, trustee, etc.

If the necessary changes are adopted, the securitization market in Kazakhstan has a bright future

The changes initiated by Tengri Partners and KHC take into account all of these elements, allowing the Trustee to use the cash flows of the remaining performing portfolio and the recoveries for the payment of third party fees.

If the necessary changes are adopted, the securitization market in Kazakhstan has a great future. The reason for this is the growth of the loan market – the mortgage and auto loan market, for example – amid a limited range of long-term financing instruments for local commercial banks and quasi-public companies. In addition, given the high share of non-performing loans and, therefore, the high pressure on regulatory capital, securitization can be an effective means of increasing banks’ liquidity level and relieving capital without need the state as previously observed with the additional capitalization programs of the banks.

Global infrastructure practice
In 2021, Tengri Partners became a member of the International Swaps and Derivatives Association (ISDA). Membership of the international trade association will enable Tengri Partners to leverage ISDA’s developed infrastructure in OTC derivative transactions, cooperate with industry experts on topical issues, participate in discussions on best practices and the preparation of relevant regulatory documents. . Thus, Tengri Partners has proven that it strives to actively develop the company as a professional participant in the international capital and derivative markets. Today, Tengri Partners is one of the few ISDA members in Kazakhstan.

TONIA performance monitoring
The overnight repo market is the most liquid segment of the capital market in Kazakhstan due to the large transaction volumes – around KZT 400 billion ($ 940 million) per day – and many market players: banks , insurance companies, funds, corporate treasury. The Tenge Overnight Index Average (TONIA) reflects a short-term risk-free benchmark for the value of money in the Kazakhstan financial market. In developed markets, government securities, corporate bonds, swaps and loans are linked to similar indicators (SOFR, SONIA, etc.) to faithfully reveal the evolution of the currency’s value.

In September 2021, Tengri Partners, in cooperation with the EBRD and commercial banks, proposed to introduce the TONIA compound rate and TONIA compound index indicators to the market on KASE. The TONIA index is a great stepping stone towards the development of the financial market in Kazakhstan by helping to improve liquidity and a wider range of instruments. The instruments linked to TONIA will thus make it possible to invest more efficiently in the risk-free money market, compared to the traditional rollover of positions in the overnight repo market.

Launch of the market analysis toolkit
In 2020, Tengri Partners launched a PMI survey in Kazakhstan in partnership with IHS Markit which provides some of the most closely watched reports on business activity in the world. Extensive work has been carried out with IHS Markit in developing the methodology and approach for calculating the PMI. The launch manifests Tengri Partner’s goal, which is to provide a critical entry point into the Kazakhstan market for international investors and to share analysis vital to the investment decision, as well as to assess market sentiment. Marlet. Kazakhstan became the 44th country covered by the IHS Markit PMI World Series.

Despite turbulent conditions in the capital markets during the year 2020 and extreme exchange rate volatility, Tengri Partners maintained all of its core businesses and remained focused on meeting the needs of major institutional clients to a standard of world class.

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