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Ardshinbank returns to the market: Second time lucky?

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    21 January 2020
    Published byTellimer Research

    After a roadshow late last year, the bond issue from Ardshinbank (ARBANK) was postponed. The bank has now returned to the bond market. Guidance for a US$-denominated 5Y bond was published on January 20.

    The IPT for Ardshinbank's planned US$300mn 5y bond is 6.5-6.75%. This equates to 5y US$ MS+485-510bps (approx. only). To put this in context, indicative levels for the ARMEN 2025 and 2029 bonds are shown in the table below. The IPT for the new ARBANK bond places it over 300bps wider than the ARMEN 2025 bond. The indicative ARBANK/ARMEN 2025 spread multiple is more than 3x.

    Table 1: Republic of Armenia US$-denominated bonds 
    Bond nameDurationMid YTM (%)Mid z-spread (bps)
    ARMEN 7.15% 2025
    ARMEN 3.95% 20298.053.80204
    Source: Bloomberg. Indicative levels only.

    In 2019, Ardshinbank bought back a eurobond that was due to mature this year. We note also that the Republic of Armenia (ARMEN) bought back some of a short-dated security – based on Bloomberg data, the ARMEN 2020 security now has less than US$100mn outstanding, following at least two buybacks. In addition, the Armenian government issued a US$500mn 10-year bond last year. Both Armenia and Ardshinbank were upgraded at Moody's in 2019. Armenia was also upgraded at Fitch. Armenia is now rated Ba3/BB- (Moody's/Fitch) and Ardshinbank is rated Ba3/B+ (also Moody's/Fitch).

    In the table that follows, we have shown where select bank bonds are quoted versus the relevant sovereign securities. This may provide some context when assessing the ARBANK new issue. We note that the DBKAZ 2026 bond has less than US$107mn outstanding. Further, the IBAZAZ 2024 bond was issued post-restructuring and is primarily held by an Azerbaijan state-owned entity.

    Table 2: Banks vs. sovereigns 
    Bond pairSpread difference (bps)Spread multiple (x)
    DBBYRB 2024 vs. BELRUS 2023821.35
    VEBBNK 2023 vs. RUSSIA 2023632.02
    EXCRTU 8.25% 2024 vs. TURKEY 2024791.27
    EXCRTU 6.125% 2024 vs. TURKEY 2024661.23
    DBKAZ 2026 vs. KAZAKS 20252305.82
    BNDES 2024 vs. BRAZIL 2024842.41
    DBMMN 2023 vs. MONGOL 2023691.24
    IBAZAZ 2024 vs AZERBJ 2024.3213.74
    SQBN 2024 vs. UZBEK 20241822.36
    Source: Bloomberg, Tellimer Research. Based on indicative levels.

    Unlike the banks whose bonds are listed in the table above, ARBANK is not state owned. This is important to bear in mind when looking at the bank-sovereign bond pairs in the table. Ardshinbank is ultimately controlled by Karen Safaryan, who is also the chairman of the board. Safaryan has occupied this position since 2003, when the lender was established. Given this ownership, there are likely to be questions about related-party exposures. June 2019 disclosures show the ratio of related party exposures was 9.5%, compared with the regulatory limit of 20%.

    The table that follows shows key figures for Ardshinbank and for select lenders in Georgia, Azerbaijan and Kazakhstan that have bonds outstanding. Ardshinbank is smaller than these entities, but the ratings are not too dissimilar.

    Table 3: Ardshinbank vs. select CEEMEA banks 
    9M 2019, US$mn/%ArdshinbankBank of GeorgiaTBC BankInt'l Bank of AzerbaijanHalyk Bank
    Ratings (Mdys/S&P/Fitch)Ba3/NR/B+Ba2/NR/BB-Ba2/NR/BB-B1(+ve)/NR/B-(+ve)Ba3(+ve)/BB/BB+(+ve)
    Operating revenue562882971881,039
    Pre-provision profit35181180233781
    Net income14124137190659
    Total assets1,4105,8986,1105,48323,162
    NPL ratio3.7%2.9%2.9%n/a8.2%
    NPL coverage86.9%85.3%97.7%n/a131.9%
    Tier 1 ration/a13.3%14.7%28.7%20.0%
    Source: Company statements. Balance sheet figures converted at end-September 2019 exchange rates versus US$. Income statement figures converted at average exchange rates versus US$. ARBANK CAR is at end-June 2019.

    Given total assets of less than US$1.5bn at Ardshinbank, there may be questions about the target size of US$300mn. We think it is likely that index considerations played a role in the target size. Further, we note that two-thirds of the new bond is to be used to repay existing obligations, resulting in a lower (but still significant) net increase in liabilities. Whether or not the bank will decide to place the full US$300mn remains to be seen.