Mongolia: Credit rating, institutional investors and lower funding cost

By Zulbayar B

As a consequence of a number of global financial crisis originated by the U.S. sub-prime mortgage crisis, followed by a credit crunch crisis and European sovereign debt crisis, now the world’s economies, regardless of their size and maturity, are suffering from low growth, if they are not in fact shrinking.  Therefore, U.S. led developed nations have taken a number of measures to support businesses and one of them was to provide low cost financing.

In order to so, those governments have implemented (experimented) with an unconventional monetary policy called Quantitative Easing which was intended to boost the liquidity of capital markets without affecting the inflation level and interest rates. Businesses that were able to get low cost funding through financial institutions have stabilized their operations and started looking into expansion opportunities.

Companies equipped with favorable credit ratings, sensible business plans and skilled business managers, are being chosen to obtain lower cost funding with favorable terms, and are aggressively engaging in merger and acquisition activities, whether it be a takeover of competitors or suppliers in recent years.

(Picture 1) Worldwide Quarterly M&A and Number f Deals

Source:  Thomson Reuters

By taking over its competitors, a company may well be able to get a bigger market share, save operational costs, and obtain new business knowledge or experience. For instance, let’s imagine that “BOSA”, a supermarket chain, takes over a competitor chain supermarket “Minii Delguur”. As a result of the acquisition, there will be a number of savings and benefits such as a lower delivery costs for more closely located supermarkets, labor cost savings by employing a head manager who can be shared by geographically closely located supermarkets, and savings on overhead, by using the same warehouses. Most importantly, there will be fewer price competitors for goods sold in those supermarkets.

Basically, businesses seek a synergy, which is a benefit simply explained as 1+1=3 or benefits arising from a takeover or merger. Businesses are taking advantage of the merger and acquisition process, and then go to institutional investors for funding.

The latest example is the takeover bid of Anheuser-Busch InBev, producer of world famous Stella Artois, Budweiser and Corona to acquire SABMiller which is also a famous beverage company that produces  Peroni and Grolsch brand beers among others.

Currently, Anheuser-Busch InBev and SABMiller own 20% and 10% of the world beverage market, respectively. If the deal is successfully closed, then, a USD 180-250 billion company will be created. No single company in the world is able to finance such a big deal by itself. Accordingly, institutional investors step in and provide financing by issuing direct loans or by purchasing their bond.

  Even though those companies’ bonds are not as reliable as U.S. T-bills, banks and investment funds will decide whether to buy them or not once they have evaluated associated risks and returns.

If Mongolia is able to improve its current credit rating soon, we have many potential high growth economic sectors such as energy, transportation and infrastructure which may attract institutional investors.

Mongolia

	S&P	Moody’s	Fitch
Rating	B+	B2	B+
Outlook	Negative	Negative	Negative

 Source: http://www.tradingeconomics.com/mongolia/rating

As mentioned in the previous article, if the Mongolian government pays closer attention to its current debt management situation, and improves its current credit rating, it would benefit the country greatly and attract outside investors which would provide real support for our country’s private sector, and lead Mongolia to an economic growth model which is independent from China.

Zulbayar Badral is a Chevening Scholarship recipient currently pursuing MSc in Global Finance at the University of Westminster in the UK. Previously, he was CEO of a consultancy firm in Mongolia and has worked in marketing, business development, and accounting in Mongolia and abroad. You can find him as @ZulbayarB on Twitter.