Vietnam’s third trip to the international bond markets in a decade became one of the most oversubscribed Asian bond offerings ever.

When Vietnam made one of its infrequent visits to the debt capital markets recently, it was rewarded with one of Asia’s most oversubscribed bond issues ever. Standard Chartered was joint lead manager and sole ratings adviser to the bond issue and switch/tender offer, continuing a relationship with the country that, one way or another, goes back more than 100 years.

It was 1904 when Standard Chartered opened its first branch in Vietnam’s largest city, then called Saigon, now Ho Chi Minh City. After 1975 and the end of the Vietnam War – or the American War, as they call it in Vietnam – there was no place in the reunified one-party communist state for western banks.

This hiatus in the relationship began to fade in 1990, when Standard Chartered became one of the first international banks allowed to open a representative office in Ho Chi Minh City. In 2008, as the economy began to pick up speed, Standard Chartered and HSBC were the first overseas banks to receive State Bank of Vietnam approval to incorporate locally, effective the following year.

Today, the bank has three branches and more than 850 staff in Vietnam, offering a full suite of commercial and retail banking products and services for corporates, financial institutions, smaller businesses and retail customers. Well, almost a full suite. Investment banking needs are covered out of Singapore, where the team that worked on the sovereign issue is based.

Relationship building

Vietnam has only called on the international bond markets twice before. The first time was in 2005, when it issued a $750m bond with a 6.875% coupon, maturing in January 2016. The next was in 2010, with a $1bn issue paying 6.75% and maturing in 2020. Both were to play a role in its most recent outing.

Standard Chartered was not involved with either of the earlier transactions, but it decided after the 2010 deal that it really wanted to be a part of the next one. It has, however, led a number of issues from neighbours such as Indonesia and the Philippines in recent years, which helped to burnish its credentials.

“We were consistently speaking to [Vietnamese officials] about advisory, about changes and developments in the markets, demonstrating our consistent coverage, knowledge and market share,” says Aaron Gwak, Standard Chartered’s Singapore-based head of debt capital markets for Association of Southeast Asian Nations.

These efforts eventually paid off in 2012 when the bank was awarded a mandate as Vietnam’s sole sovereign credit ratings advisor for all three international rating agencies. The government was in need of some ratings help, because its boom had since turned to bust. A bout of economic volatility was attended by spiking inflation, a falling currency and a spate of bad bank loans. The local stock market gained the unwelcome accolade of being the most volatile in the world. Moody’s cut its rating to B2, five notches below investment grade.

The government has since reformed the financial sector, reined in the influence of some big state-owned enterprises and allowed more foreign participation in the economy. It has brought inflation back under control, from more than 18% in 2011 to 6.6% in 2013. “We helped the government to tell its macro turnaround story, in the light of what it wanted to share and what the agencies are interested in,” says Mr Gwak. “And we helped Vietnam to stabilise its ratings by Standard & Poor’s at BB- in 2012.”

The good work continued on all levels, and in July 2014, Moody’s restored its sovereign rating to B1. It noted that the country was in its third year of broad macroeconomic stability. As Vietnam continued to attract manufacturing as a low-cost alternative to China, its balance of payments was benefiting from export diversification away from commodities and towards manufactured goods such as mobile phones and electronics. Finally, the banking system had stabilised, limiting the risks to the government’s balance sheet.

Looking for a window

Even before this piece of good news, the sovereign was contemplating how it could manage its liabilities to take advantage of its renewed health, at the same time as raising additional funds. It called for submissions from aspiring investment banks in 2013, and awarded mandates to Standard Chartered, Deutsche Bank and HSBC. In April of that year it launched a non-deal roadshow, visiting Singapore, London and the US. It seemed that a new issue was just around the corner.

“We were looking for a window,” says Mr Gwak. “But then spreads blew out and emerging markets lost their momentum.” Emerging markets were sold off again at the start of 2014. “But they came back strongly in the second quarter. We monitored the situation throughout. There was a lot of discussion over whether it would be more cost-effective to raise funds in the domestic market, but then yield levels in the international market came down to the low fives indicative for 10-year, so we looked at it again.”

Coming out of the summer, the pace stepped up. “The government now wanted to move quickly, so we used September and early October to push forward with our preparations,” says Mr Gwak. These were more demanding than might otherwise have been the case, partly because Vietnam had not been in the market for four years, and partly because this was going to include a switch transaction.

Making the switch

The main focus of the switch tender offer was the 2016 issue, so as to reduce its more imminent refinancing risk. On both this and the 2020 bonds, bondholders had the option of selling for cash, or switching into the new, lower-yielding issue. To compensate for the yield they were giving up, bondholders were offered a cash price of 107 cents for the 2016 issue and 114 for the 2020.

Many of them were sufficiently taken with Vietnam’s story to switch into the new issue. “We talked to investors about the macro backdrop, and how Vietnam continues to be one of the best-performing economies from a [gross domestic product] growth perspective,” says Mr Gwak. “As the results showed, the credit story was taken up well.”

The new issue was finally launched in the first week of November last year. As the roadshow rolled out, Fitch helpfully upgraded Vietnam’s sovereign rating by one notch to BB-, citing improvements in the economy and stronger finances. It pointed approvingly to a tightened monetary stance from the central bank, leading to a slowdown in credit growth, as well as a gathering pace of economic growth and moderate inflation.

Investors were told that what was on offer was a 10-year bond of “benchmark” size, “not inconsistent” with what Vietnam had done in the past. Without saying so in quite so many words, that suggested a $1bn issue. It was launched with initial price guidance in the 5.125% area. “That was where we saw fair market value on the curve, on interpolation of existing bonds,” says Mr Gwak.

Demand was quickly apparent across all regions. “There was a tremendous following in Asia and great interest in the US,” says Mr Gwak. “We also saw some quite chunky investors based in Europe. We saw more investors out of Asia in unit numbers, but the bigger ticket orders came mostly from the US.”

On the back of this demand, the coupon was revised down to 4.8%, making this the lowest coupon bond ever issued by Vietnam and the deal size was finalised at $1bn. It had attracted new money orders of $10.6bn, one of the largest order books ever for a single-tranche Asian sovereign issue.

The liability management exercise was also a success. Switch orders totalling $662m across both maturities were accepted, at a cost of $727m. “A key objective of this transaction was to switch out the expensive, shorter dated bonds, particularly the 2016s, with cheaper and longer-term financing, something that Vietnam achieved,” says Mr Gwak.


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