Junk Fever Returns to Silk Road as Uzbekistan Plans Roadshow

(Bloomberg) -- In a flashback to the giddy days of yield hunting in 2017, the ex-Soviet republic of Uzbekistan has hired banks for a debut Eurobond sale.

The landlocked exporter of natural gas, gold and cotton has mandated JPMorgan Chase & Co., Citigroup Inc. and Gazprombank JSC to test investor appetite this week in the U.S. and the U.K. for a possible benchmark sale of dollar-denominated debt, according to a person familiar with the matter, who was not authorized to speak publicly and asked not to be identified. Five-year or 10-year debt is being considered and both maturities may be sold, the person said.

Rated at BB- by S&P Global Ratings and Fitch Ratings, the same junk rating as Bolivia, Brazil and Bangladesh, Uzbekistan is joining a parade of emerging-market sovereigns seizing on increased appetite after dovish signals from the U.S. Federal Reserve.

In September 2017, neighboring Tajikistan tapped the market in a successful benchmark sale that became a byword for the risks investors were prepared to shoulder as record-low global interest rates sent them scrambling for higher yields. The bonds, rated three levels below Uzbekistan at S&P, have since returned 1.1 percent, compared with an average loss of 0.2 percent for emerging markets.

“It will round out the Eurobond universe for all possible central Asian economies,” said Richard Segal, senior analyst at Manulife Asset Management in London. “It’s a large and diverse economy, and has made many strides since its relatively recent currency reform. It could be the best Silk Route trade.”

By opening up to foreign investment with looser currency controls and fewer travel restrictions, the country is betting it can boost the local economy by setting an example for local companies and encouraging them to borrow and expand their businesses. Uzbekistan has moved to free up the exchange rate and allowed its currency to devalue, with the soum stabilizing after losing over 60 percent in 2017 against the dollar, the worst performance globally that year.

“In 2017 they were liberalizing the economy and in 2018 they had to digest the shock of the devaluation,” said Lutz Roehmeyer, a Berlin-based money manager at Capitulum Asset Management, who said he will seek to buy the bonds. “Now, in 2019, they’ve done their homework and the mood for emerging-market investments is better than last year, so it’s good timing.”

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