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The Azerbaijani government announced its intention to enter the world borrowing market by way of floating Eurobonds eight years ago. Since then there have been appraisals of the situation on the financial markets, consultations and doubts and then it all finally came to an end on 10 March 2014 when the Finance Ministry announced the floating of the first Azerbaijani Eurobonds which immediately aroused huge interest among investors.

The results of the floating of Eurobonds reflect the attitude of international investors to the current economic and political situation in Azerbaijan. At the same time, the successful attracting of financing abroad could increase the level of confidence in the country, which will please investors and make them more active, including on the stock markets.

First time lucky

The main reason for the government's hesitancy in taking the first step was the unfavourable situation on the world's financial markets. Now the crisis has more or less passed and Azerbaijan's economic strength has increased and it has not been particularly difficult for a country which possesses investment-grade ratings from Moody's and Fitch and world recognition (as a player in global energy projects) to attract funds for a lengthy period and at an acceptable rate of interest.

The debut issue of Eurobonds was preceded by a visit by a government delegation, headed by Finance Minister Samir Sarifov, to Germany, Britain and the US for a road-show of the issue of sovereign Eurobonds for investors in Europe, Britain and the US. The investment banks Barclays, Deutsche Bank AG London and Citygroup Global Markets Limited were selected as the government's managers to carry out the first issue of Eurobonds.  

The first set of Azerbaijani Eurobonds to the sum of 1.250bn dollars was therefore floated on 10 March with a 5 per cent APR and maturity in 2024. Investors from 160 countries became interested in Azerbaijani bonds. The real purchasers were investors from the US (47 per cent), Britain (25 per cent) and Germany (18 per cent), whilst the remaining (10 per cent) were sold to buyers from other countries, including Singapore and Israel. The demand for the bonds exceeded supply four times.

The profitability of the issue was 222 basis points (b.p.) to US Treasuries. By way of comparison, the yield on similar bonds of the Russian Federation, which has a higher credit rating and experience in the securities issue, is 241 b.p. and Turkey's 274 b.p. That said, it should be borne in mind that the lower the profitability for purchasers, the higher the confidence in the country floating the bonds. For example, in the USA yield is at a level of 3-4 per cent, so Azerbaijan's raising of funds of 5 per cent may be considered fairly advantageous.

"The placement has offered investors big opportunities for diversification of resources by investing funds in an economically strong and stable country, especially in view of the current tense geopolitical situation," Financial Times states, quoting Vasiliy Tengayev, senior manager in the debt capital markets at Citi.

What will this give?

Basically, the decision to enter the international capital market and float bonds on it was the correct one and ties in with the general direction of development of the civilized countries. Virtually all the developed states borrow money on the capital market by floating bonds. This is the second most important type of securities after shares which can obtain borrowed funds not in the form of a loan but by floating one's own bonds on the stock exchange. The big players on the world bonds market, and it is a huge one, are states, regions or cities, corporations, and also financial institutions, such as banks. For them this is a means of beneficially obtaining money for their development. After all, it is substantially cheaper to float bonds than to take out loans.

Besides, a bond, since it is an exchange security, can be sold at any time. In other words, a bank can sell this bond on the market if it suddenly encounters problems. It is impossible to demand a loan back because of an emergency situation.

For Azerbaijan, obtaining funds by means of floating Eurobonds is not the primary objective because currently the assets of the Azerbaijani State Oil Fund stand at 49 per cent of GDP, and the current transactions surplus is 17 per cent of GDP. This step is to a large extent aimed at increasing the level of international recognition, taking into account Azerbaijan's involvement in such mega-projects as the construction of the Trans-Anatolia and the Trans-Adriatic gas pipelines and Azerbaijani gas supplies to Europe.

The floating of Eurobonds on foreign markets also opens up broader opportunities for funding the state budget deficit and simplifies the possibility for companies to attract additional funds from foreign capital markets.

The result is that the degree of openness of the country's economy increases, information flows on the state of affairs within the country are assessed more precisely and, as a consequence, investment appeal becomes more specific. 

The country's Finance Ministry believes that the floating of sovereign bonds among the many investors from various parts of the world, as well as a substantial excess of demand over supply, shows that the country is being perceived by the world's capital markets as an economically and politically strong and stable state and is a shining example of the increase in Azerbaijan's role in the world economy.

Generally speaking, the move to issue Eurobonds could be considered from the point of view of shaping a "yield curve" in Azerbaijan's sovereign debt. The issue of Eurobonds is a credible indicator for other types of borrowing, too, and important in helping individual companies to enter the market and borrow funds taking into account this "yield curve".

Benchmark

The successful floating of Eurobonds is therefore a kind of benchmark of Azerbaijan's appetite for risk. In other words, the starting point from which banks and companies will build both their domestic corporative market and their foreign market has been defined. This also emerges in the amount of securities investors are prepared to invest and, in addition, sets the rate at which international players assess the prize for the risk of investing in Azerbaijan. A successful flotation serves as a kind of additional proof that Azerbaijan is an interesting area for investing funds and is perceived by international players as a country with moderate risks of investment.

According to Rufat Aslanli, chairman of the country's State Securities Committee (SSC), the floating of the first set of Eurobonds is seen as quite satisfactory. "It was quite advantageous for the country from a financial point of view, and in terms of timing. I think that this event extends Azerbaijani's companies' opportunities to draw high-quality and low-cost resources," he said.

The successful placement and timely handling of the Eurobonds also helps to enhance the country's rating, which, of course, will attract the interest of investors even more. And if the state succeeds in earning a reputation as a reliable debtor, which always fulfils its obligations, this will pave the way to the international financial market for Azerbaijani companies. So in this sense the significance of the Eurobonds is very great for the whole country, its economy and its prospects on the international financial market.

WHICH AZERBAIJANI COMPANIES HAVE ALREADY FLOATED EUROBONDS?

Before sovereign Eurobonds some national companies had used this method of attracting funds. Among these were Azerbaijani Railways who, in 2011, attracted 125m dollars for five years at 8.25 per cent APR.

The State Oil Company of Azerbaijan carried out two issues. The debut issue was in 2012 for 500m dollars with a yield of 5.45 per cent and maturity in February 2017. The second placement was in March 2013 on the CEEMEA (Central and Eastern Europe, Middle East and Africa) market for 1bn dollars with a 10-year term and a yield of 4.75 per cent. Demand for them exceeded the amount of the emission threefold.

Of the state-run companies "Azerenerji" also has similar plans.

Of local banks, the International Bank of Azerbaijan (IBA), which has held four emissions with a total of 600m dollars, has today had the most experience in this area. In 2014 the IBA plans to carry out another placement of 500m dollars, which is based on an increase in the bank's capital.

Pasha Bank is also preparing to issue Eurobonds in the next two-three years. According to Taleh Kazimov, a member of the board of this bank, the issue of sovereign Eurobonds is a long-awaited step of the Azerbaijani government. "This will enable us to set a starting point from which we can build both our own domestic corporative market and overseas," he said.