Mongolia gets Japan guarantee for bonds

Japan is guaranteeing samurai bonds sold by Mongolia, offering China's resource-rich neighbour financial and military aid as tensions rise in East Asia.

Backing by a state-owned Japanese lender is allowing Development Bank of Mongolia, rated junk by Moody's Investors Service, to market yen notes this month at a yield premium of 60 to 65 basis points over yen swaps, according to a person familiar with the matter. That compares with an average spread of 46 basis points for all samurais and 122 for global corporates, according to the Bank of America Merrill Lynch indices.

Japanese Prime Minister Shinzo Abe is bolstering ties with Mongolia, signing a strategic partnership pact in September, as he seeks to counter China's growing presence in the region and tap resources in the East Asian nation. Last month, China declared an air defence identification zone in the East China Sea that overlaps with territory claimed by Japan, escalating tensions between the two countries.

"Mongolia is rich in resources such as copper and gold and in addition it's investing in building up its infrastructure," said Chikako Horiuchi, a Hong Kong-based analyst at Fitch Ratings. "Mongolia's banks are dependent on overseas funding, predominantly bilateral borrowings from international agencies or overseas organisations, as deposit growth is insufficient to fund rapid credit growth."

In September, Abe and his Mongolian counterpart signed a pact in Tokyo that included Japanese commitments to help build up Mongolia's army and support for a samurai bond issuance by Japan Bank for International Co-operation.

Mongolia planned to sell as much as US$1 billion of samurai bonds this year, Prime Minister Norovyn Altankhuyag said in September.