The Government of Mongolia accessed the offshore renminbi bond market for the first time when it priced on June 24 a CNH1 billion offering - the second non-China sovereign to tap this market after the UK.

The Reg S three-year deal was priced at par with a similar coupon and re-offer yield of 7.50%, which was an attractive outcome compared with Mongolia's outstanding US dollar bonds, according to a banker familiar with the transaction.

"It was a good outcome for Mongolia in terms of pricing and in the diversification of their funding sources as well as investor base," the banker adds. "It was also pretty natural for them to tap the CNH market as they conduct a lot of business with China."

The Trade and Development Bank of Mongolia priced the country's first offshore renminbi issue in January 2014 amounting to CNH700 million. The three-year deal was priced at 99.367% with a coupon of 10% to offer a yield of 10.25%.

The sovereign deal was announced in the morning of June 24 and the book built steadily throughout the day with the final order book amounting to CNH1.5 billion from 44 accounts. "Investors were already familiar with Mongolia as they've tapped the bond market in the past," the banker says. "While the three rating agencies have negative outlook on the sovereign, investors were focusing on the recent developments in the country."

In terms of geographic distribution, 93% of the bonds were sold in Asia and 7% in Europe. By type of investors, fund managers accounted for 46%, banks 42% and private banks 12%.

Proceeds from the bonds, drawn from Mongolia's US$5 billion global medium-term note programme, will be used for liability management purposes, restructuring of existing debt or refinancing local and foreign currency-denominated loans used to fund infrastructure and other industrial projects in the country.

China CITIC Bank International, CITIC CLSA Securities, HSBC and ING were the joint bookrunners for the deal, as well as joint lead managers together with TDB Capital. Ulaanbaatar Capital acted as co-manager.

The transaction, the banker points out, is a good indication that investors' appetite in the CNH market is back. The first quarter of 2015 was challenging for the market due to the negative outlook for the renminbi. The currency had been depreciating against the US dollar between November 2014 and mid-March this year.

In the addition, the CNH market experienced both liquidity and funding squeeze, which saw the yields rising by between 100bp and 150bp. "Mid-March was the turning point for the market," the banker notes. "If you look at the CNH-US dollar FX rate, it started to stabilize around that time and during the past 3-1/2 months, it was steady and traded within a small bandwith.