On November 20, 2023, Freedom Finance JSC placed three-year green bonds by Black Biotechnology (BBT), a producer of organic fertilizer and animal feed supplements under the Al Karal brand, on the Kazakhstan Stock Exchange (KASE). The total amount of the offering was about $4.3 million. ВВТ is going to make coupon payments twice a year at 21.5% per annum. The interest rate is fixed for the entire three-year term of the bond. The DAMU Entrepreneurship Development Fund will subsidize 15.5% of the coupon interest, while the issuer will serve the remaining 6%. In an interview with Kursiv Assem Kenzhebek, the founder of the Al Karal brand, revealed details of the deal.
– When Black Biotechnology announced its plan for the bond placement the demand was 150% higher than the $2 million offering. Did you expect that?
– This information refers to Freedom Finance, our underwriter that has placed 75% of all our bonds. More generally, our floatation was about $4.3 million. Halyk Finance and BCC Invest have also taken part in the deal. Freedom was supposed to offer bonds for $2 million, while the remaining brokers were responsible for the second part of floatation.
As a result, Freedom was the first company that offered our bonds on KASE and we received applications for $3.2 million instead of an initial offering of $2 million. They called us and asked whether we were ready to satisfy this demand. Of course, we said yes and placed 75% of floatation on the very first day.
– The first Kazakhstani ESG bonds linked with renewable energy in Kazakhstan were placed in 2020. Even though energy tariffs were quite low then and raising money through issuing bonds wasn’t yet a popular tool, all securities were bought within 30 minutes at the time. In your opinion, what is the reason for such high demand and is it okay to say that this story is happening once again?
– I don’t think that this is a good idea to compare these two examples. If you take a look at ESG bond issuers on the KASE website you will see big quasi-public entities. If we talk about classic corporate business, there were other offerings. As far as I know, two weeks ago a company that is engaged in wind power business in the Mangystau region also issued ESG bonds. I don’t know any details because that deal was quiet; there was probably only one buyer. I mean, we are the second. Our brokers told us that the market had a big appetite for such projects from the real sector because almost all the current bonds were issued either by state-owned companies or by microfinance organizations and construction businesses. In other words, this was the first case when a three-year-old manufacturing project from the sphere of biotechnologies and with exporting ambitions had issued ESG bonds. It is worth noting that Yerbolat Dossayev, the current mayor of Almaty and former chair of the National Bank, was the first highly-ranked official who promoted the idea of supporting businesses through ESG bonds. As a result, our project has been implemented in Almaty with the help of the Social-Entrepreneurial Corporation Almaty (SEC). I think this is a very important move in supporting small and medium-sized businesses. The SEC Almaty has also shown a good example of how new opportunities can be used to support entrepreneurs.
– Are these green bonds popular because of efficiently prepared financial offers? I mean, is it the result of a mix of attractive interest rates subsidized by the national development institution and solidary guarantees that cover the principal debt? If so, does it mean that social factors and responsible financing are just contributing factors rather than the key point?
– I think that the social factor was a very important part of our case because, at the end of the day, more than 50% of our bonds were bought by individuals. Our underwriters told us that almost every client liked that our story is about biotechnologies and ESG. They were happy that the green agenda had emerged in our country.
– Last year, KASE held a special ESG conference where experts talked about obstacles that prevent ESG practices from being introduced in the day-to-day routine of Kazakhstani businesses. Among these obstacles are an insufficient institutional environment, lack of knowledge, absence of regulatory mechanisms and single taxonomy, focus on traditional energy and mining industry, lack of economic incentives, weak interest among issuers and so on. What kind of obstacles can you see in your business?
– You are talking about the conference, while I recall an interview with Kursiv two years ago. At the time, I shared with your colleague my vision of what must be done to develop biotechnologies in our country. At the time we were just a startup. I think that we are still pioneers in this sphere. Of course, these are not the first ESG bonds for the exchange, but this is just the second such deal for small and medium-sized businesses. We were among the first such pilot projects for our underwriters, the SEC Almaty, DAMU and the stock exchange. We had a crystal-clear understanding that they were using our case to put the finishing touches on their product. We were lucky because we have former corporate bankers in our financial team and they are familiar with all tools for capital markets. We had a clear understanding of what was going on at every stage of interaction with our partners and what every requirement, like getting approval from the ARDFM, was designed for. Legal experts from White&Case, who are real professionals in capital markets, had our back during the pilot ESG bond project. This new experience in issuing green bonds was important for every participant in the deal. I wouldn’t say that it was hard for us. It was just a process we had to go through to get state support from the DAMU fund and as an issuer to have a low interest rate in the tenge within three years. This opportunity for the development of business is incredible. When we finished the placement, I got lots of phone calls from businessmen. They all were sincerely surprised that the tool of bond issuing was working. Even big businessmen wanted to talk with me. They asked me to share my experience with them, which I think is a good sign. Our case helped the SEC Almaty to issue its new product of guarantees for entrepreneurs in the region. Given that the SEC Almaty is the leading organization among all social and entrepreneurial corporations in Kazakhstan, I am very glad that they have shown these financial instruments to the market.
Concerning obstacles. Yes. We had many bureaucratic obstacles two years ago. However, we got a call from the Almaty Prosecutor’s Office and they told us that they were going to supervise our project. It turned out that President Tokayev had ordered prosecutors to ensure that public agencies do not bother investment projects.
– Does it pertain to biotechnologies only?
– No. This new practice pertains to any investments. This is about the investment climate in our country. Investors often report problems with state bureaucracy. We were once in a situation when one public agency made us flip back and forth between Astana and Almaty because no one wanted to take responsibility. We complained about this to prosecutors when we met with them for the first time. They wore uniforms and our conversation was recorded. As a result, our issue was solved within a week. Now, I always say to investors that this is a new tool of state support. At least in the Almaly district of Almaty prosecutor’s office, this works for real.
– Biotechnologies and prosecutors are an interesting combination. The influence of non-financial indicators on the decision-making process during investing or the impact of ethics on economics are some of the key principles of ESG. However, this can lead to not getting enough investments. Investors still have no information beyond traditional models, while green bonds are not traditional models. What do you do to cope with this problem? How do you make your business more transparent?
I agree with you. Lack of transparency is the main obstacle preventing businesses from going to ESG. When you are going to issue securities on an exchange, you are supposed to be transparent. However, apart from strict requirements by the exchange, we also have to prove our ESG verification, which is based on corporate ethics, as you call it. There are lots of documents that were issued within corporate governance and we have to follow them. For instance, we can’t spend a dime on anything that can hurt the environment. From an investor’s point of view, this is good. He knows that there is comprehensive control over such companies. This is why the decision-making process for him is much easier now. For example, we are under constant control by the exchange, ESG auditors, the SEC Almaty, DAMU and bondholders. There are at least five different agencies that are going to oversee our activities. Some will do so once per month and some once per year.
– Let’s proceed with the issue of transparency. Talk to me a bit about sustainable agriculture, an industry where you are engaged.
– This is not just sustainable agriculture but also the livestock business because we are engaged in the entire agricultural sector. All our products are 100% organic. In terms of animal raising, we improve the quality of either meat or milk products. We can help to boost productivity, get rid of antibiotics and keep animals healthy. In other words, we keep up with all global trends such as public health, product safety, development of organic products, etc. In terms of agriculture, we have conducted a set of experiments on 20,000 hectares with cucurbits, cotton, rice, soybean and beet-root in conjunction with our clients. More than 90% of these experiments have proved to be successful as the yield index rose from 10% to 30% and the resilience rate of plants to different climate situations has also risen. Moreover, with the help of our technologies, melon growers managed to reach harvest ten days earlier than usual, which plays a huge role in the pricing of these products. Also, sanitary inspections showed that all those melons and watermelons produced with the help of our organic fertilizers met all sanitary requirements. This means that farmers can label their products as organic.
– The notion of ESG includes not only green bonds but also social bonds. Green securities used to be the number one priority but after the COVID-19 pandemic, the focus has shifted from E to S or social bonds. In your opinion, are they competitors?
– I don’t think so. We could go either way because social bonds also cover topics such as public health, product safety and the agrarian sector. However, we have chosen green bonds because the vast majority of money allocated for development goals is green money. This is a huge amount of money. After the deal, we received additional offers from international green funds as they wanted to know whether we needed money. This is an important move for the development of a company’s potential and investment strategy. Often foreign investors decide to invest in a project when they see that local investors have already done so. This approach is called a helicopter view. I think that many local businessmen miss this opportunity. I mean, when you float bonds, you can raise cheap funds but you must also be able to foresee how the situation will look in the future. In the end, it will serve as a strong leverage for attracting foreign investors.
– ESG is about being able to play the long haul, and the wave of criticism of this topic is gradually growing. For instance, Larry Fink from BlackRock said that he won’t use this term ever again due to tons of political speculations around this word. Anyway, in your opinion, what will the green economy look like in Kazakhstan in the immediate future?
– On the one hand, our potential as an agrarian country is huge. We have a lot of resources and we need to develop a bio-economy. On the other hand, don’t forget that we have tons of resource companies. For instance, one of the foreign companies operating in our country has included us on its shortlist because our fertilizers increase the carbon content in the soil. Usually, these companies have to follow environmental requirements and because we are engaged in the agricultural industry, our products help resource companies fulfill their carbon offset obligations.
– Have political realities, I mean Western sanctions against Russian-made fertilizers, affected your business?
– No. This situation has nothing to do with us because those sanctions have targeted chemical fertilizers whereas our products are organic.
