Vietnam tightens bond with global economy
Published: 7 July 2008
HSBC lends helping hand to country's capital markets
Last year saw local currency corporate bond markets in East Asia expand 20 per cent despite the turmoil in international credit markets. The Asian Development Bank sees continued bond market growth in 2008, albeit at a slower pace. Corporate yields are higher than in mid-2007 and some borrowers have delayed bond issues, relying instead on short-term bank finance.
Vietnam's nascent corporate bond market led the pack recording a strong 251 per cent growth in 2007, with over USD1.1 billion in new corporate bond issuances mostly by listed state-owned enterprises (SOEs) involved in infrastructure projects. These issuers were a diverse group representing industries such as electricity generation, shipbuilding, transportation, textile manufacturing and banks. One private sector bank, Vietnam Technological and Commercial Joint Stock Bank (Techcombank), raised the equivalent of USD108 million, or seven per cent of the total market outstanding as at end-2007.
The very first corporate bond issuance was made by the state-owned PetroVietnam in September 2003. Both private investors and institutions bought into the issue.
HSBC helping borrowers during a difficult period
HSBC acted as sole lead manager and sole bookrunner for Techcombank's debut five-year domestic bond offering in August 2007. The deal, the first public onshore bond to emerge from the private sector, came amid the volatility in domestic rates markets and turmoil in the international credit markets. Still, the issue priced with a coupon of 8.6 per cent, an exceptionally tight credit spread of just 60 basis points (bps) over the government benchmark, ie five-year Vietnamese Treasury.
"Such tight pricing was achieved due to the rarity of the issuer and the credit quality of the bank (HSBC has a 10 per cent stake). Also, such a spread redefined the pricing rationale between government and private risk. The borrower's preference for a five-year maturity saw demand largely from the onshore banking sector, with just over 10 per cent sold to offshore investors," said Joshua Matthews, Head of Debt Capital Markets, Vietnam.
HSBC's strength in covering both onshore and offshore investors ensured success for the borrower despite the dislocation of the international credit markets. "Moreover, the large issue size and attractive pricing proved the viability of the bond market for private sector funding, providing further support for Vietnam's growing private sector and economy," he said.
Bank's active role in professionalising the market
With this transaction, Techcombank also became the first private sector bank and private sector enterprise in Vietnam to bookbuild a benchmark bond issue, leading the continued development of the Vietnamese market.
"Unlike its main joint stock competitors, Techcombank then was not listed on any exchange, trading instead through the over-the-counter or OTC market. This offering proved Techcombank's ability to offer professional securities to investors, setting a good example for other corporate issuers to follow," said Joshua.
The bookbuilding technique, used to gauge market-driven pricing so the issuer gets the best pricing and structure for its bond offer, is only one of the many practices found in international markets introduced by HSBC to the fledgling domestic market.
The previous year, HSBC accomplished a feat by being the first foreign bank to lead-manage a local securities offering – Bank for Investment and Development of Vietnam's (BIDV) debut Tier 2 VND2.2 trillion bond issue in May 2006 (see sidebar story). "The transaction introduced Vietnamese issuers and investors to what is accepted as the most efficient form of Lower Tier 2 capital," according to Joshua. Previously, the only Tier 2 bond had been a convertible bond issued prior to the listing of the issuer.
BIDV, a state-owned commercial bank, was the first Vietnamese entity (after the sovereign) to receive a credit rating, another new concept introduced by HSBC to the local market. While the bonds themselves were not rated, the announcement of a rating for the issuer boosted the momentum of the transaction and attracted considerable attention from international investors as well.
"BIDV's offering was also pioneering from a regulatory point of view as all earlier bond offerings required underwriting," noted Joshua. "Having received an approval from the Ministry of Finance, BIDV's bonds were effectively a trial offering ahead of the Ministry's Decree 52/2006, which subsequently dropped the requirement for underwriting of domestic bond offerings."
The EVN issue highlighted HSBC's powerful distribution network and the value of our advice in execution and pricing.
The decree, in effect since 1 July 2006, is designed to ease the issuance procedures for corporate bonds. Eligible bond issuers are joint stock companies, restructured state-owned enterprises and foreign invested companies operating in Vietnam. This decree also cites the need for credit rating agencies in Vietnam.
Just before 2006 ended, HSBC arranged a 10-year VND1 trillion bond offering by Vietnam Electricity (EVN), which carried a coupon of 9.70 per cent and was 85 per cent placed to offshore accounts in Asia and Europe. HSBC was successful in repricing the issuer's credit by 20bps following EVN's issuance in November, which had an average coupon of 9.91 per cent. As EVN is the blue-chip corporate credit in the country, HSBC's repricing of EVN's 10-year benchmark effectively reset the benchmark for the entire corporate market.
"Despite the small size of the offering, the approaching holidays and the volatility in credit markets, EVN priced a full 20bps inside where the previous bonds were priced just weeks before. This highlighted HSBC's powerful distribution network and the value of our advice in execution and pricing," said Joshua.
Reforms in line with country's integration with global economy
Decree 52 is part of the government initiative to boost the development of the country's capital markets in line with Vietnam's transition to a market economy. The state has become aware that capital markets serve as a vital source of funds for key projects of both the government and the private sector. Bonds issued by the government include government bonds (eg treasury bonds and notes), government-guaranteed bonds (ie issued by state-owned enterprises to raise capital for investment projects appointed by the Prime Minister) and municipal bonds (ie obligations guaranteed by municipal receipts).
In 2007, the local currency government bond market surged by 83 per cent as a result of significant changes to the issuance process.
| 2005 | 2006 | 2007 | 2005 | 2006 | 2007 | ||||
|---|---|---|---|---|---|---|---|---|---|
| US$ billion | % share | US$ billion | % share | US$ billion | % share | % growth | |||
| Total | 4.30 | 100.00 | 4.93 | 100.00 | 9.79 | 100.00 | 14.52 | 15.57 | 98.11 |
| Government | 4.20 | 97.52 | 4.50 | 91.28 | 8.28 | 84.54 | 12.24 | 8.17 | 83.48 |
| Corporate | 0.11 | 2.48 | 0.43 | 8.72 | 1.51 | 15.46 | 466.67 | 306.16 | 251.33 |
Source: ADB Asian Bond Monitor, April 2008
As for the corporate bond market, SOEs have emerged as key issuers of corporate debt. More bonds are expected as the 'equitisation' of SOEs progress. In line with government reform, SOEs that achieve certain performance targets will be equitised. The newly equitised enterprises are expected to issue securities for their financing needs.
The State Securities Commission (SSC) is currently drafting an amendment to a 2005 regulation on foreign ownership limit in Vietnam's securities market. The revision seeks to give clear regulations on the extent of foreign participation in equitised SOEs, and foreign ownership limit in listed and unlisted public companies. In certain industries where controls are not required, the foreign ownership limit can be opened up to 100 per cent.
This move is seen as a significant step towards Vietnam's commitments to World Trade Organization (WTO) on market liberalisation policy. Aside from the specific commitments made, foreign investors took Vietnam's accession to WTO in January 2007 as a sign of the government's commitment to market-oriented reforms and deepening integration into the global economy.
Raising the bar for markets
As part of its leading role in the continued development of the domestic bond market, HSBC recently helped organise the 'Bond Market Forum', soon to be renamed the Fixed Income Association, according to Joshua Matthews, Head of Debt Capital Markets, Vietnam. "The purpose is to have a forum to create a consensus on market conventions between market players, and then give advice to regulators where possible."
Bloomberg, most other foreign banks in Vietnam, some local firms and other market participants are also involved in the forum.
"We are committed to helping improve the standards for doing bond transactions in Vietnam. We've set the bar quite high for market participants, including competitor banks, to follow," says Joshua.
2008
- Best Foreign Commercial Bank in Vietnam (FinanceAsia Country Achievement Awards)
2007
- Best Foreign Bank in Vietnam (FinanceAsia Country Achievement Awards)
2008
- Best Foreign Bank in Vietnam (FinanceAsia Country Achievement Awards)
- Best Bank in Vietnam (The Asset Asian Awards - Triple A)
- Best Sub-Custodian Bank in Vietnam (The Asset Asian Awards - Triple A)
- Local Currency Bond Deal of the Year - Bank for Investment and Development of Vietnam VND2.2 Trillion Tier 2 Bond (FinanceAsia )
- Best Deal in Asia - Bank for Investment and Development of Vietnam VND2.2 Trillion Tier 2 Bond (Emerging Markets Magazine)
- Best Local Currency Bond House (FinanceAsia )
- Domestic Bond House of the Year (IFR Asia Awards)
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