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Asia-PacificDecember 4 2006

Subtle growth in the bonds arena

Nick Freeman in Ho Chi Minh City reports on Vietnam’s widening spectrum of domestic bond issuers and investors.
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Institutional investor interest in Vietnam has continued to climb. Hanoi’s hosting of the 2006 Asia-Pacific Economic Cooperation (Apec) summit in mid-November, and Vietnam’s impending accession to the World Trade Organization (WTO), have served to increase appetites for exposure to the country.

Much of this new-found interest has focused on Vietnam’s burgeoning equity market, and relatively less attention has been paid to the country’s bigger – and burgeoning – bond market. Unlike equity securities, Vietnamese regulators do not impose any ceiling on the proportion of domestic bonds held by foreign institutions.

Until now, the dominant issuer of bonds has been the ministry of finance, with tenors of two to 15 years. Traditionally, the major buyers (and long-term holders) of these bonds have been the state-owned commercial banks, as well as local and foreign insurance companies seeking dong-denominated assets in which to invest. Consequently, trading had been relatively limited.

Investor spectrum

However, this is beginning to change as the spectrum of bond investors widens to include foreign banks and local securities companies, primarily for trading purposes, and as a repo market gradually takes shape.

There are also more issuers. Vietnam Development Bank, Electricity of Vietnam (EVN), and the Bank for Investment and Development of Vietnam (BIDV) have issued bonds as a source of long-term funding. Some of the state-owned commercial banks have used bonds to increase their Tier 2 capital. In May, HSBC assisted BIDV in a VND2200bn ($137m) subordinated bond issue for this specific purpose.

A few of the country’s larger municipalities have also issued bonds to finance infrastructure projects, with yields close to those of government bonds. And a handful of large, state-owned corporations seem destined to follow, given their considerable financing needs in a number of strategic areas such as energy, telecommunications and transport.

As some state-owned enterprises come up against borrowing limits, and banks come up against credit ceilings for specific clients, corporate bond issuance seems destined to grow.

Foreign assistance

Deutsche Bank has announced that it assisted EVN in conducting a VND1000bn, 10-year bond, in conjunction with a local private bank. Lawrence Wolfe, chief country officer at Deutsche Bank, notes that it is a ground-breaking deal for Vietnam because it is the first corporate bond issued with a tenor of 10 years, and the first dong-denominated bond to be sold to offshore, as well as onshore, investors in the primary market.

“This transaction is an excellent example of how Deutsche Bank can bring value to Vietnamese corporates by applying our global expertise in debt capital markets to the Vietnamese bond market,” says Mr Wolfe.

Notwithstanding recent progress, for Vietnam’s domestic bond market to really take off, several things must occur. The government must be more flexible in allowing the market to set the coupon rate on its benchmark paper, so that a real domestic yield curve can emerge. Liquidity must be increased, partly through expanding the average size of issues, and partly by offering a greater range of tenors. To date, most issues have typically been $15m-$50m in size.

With specific regard to the corporate bond market, a greater appreciation of alternative sources of funding also needs to evolve, with less reliance on bank credit. Joshua Matthews, associate director at HSBC, emphasises the “important role that foreign banks with extensive bond experience can play in assisting Vietnam in developing this important element of its capital market”. Aside from introducing international practices to the primary bond market, HSBC recently signed a memorandum of understanding with the ministry of finance to assist on several issues pertaining to the bond market.

International bonds

And what of Vietnam’s international bonds? After the successful $750m debut sovereign bond issue of 2005, there were expectations of a second issue sometime in the latter half of 2006. But with WTO accession and hosting the Apec summit stretching resources at present, it is anticipated that the next sovereign bond may have to wait until the first quarter of 2007.

Having established a benchmark with the sovereign bond, it is possible that one or more of Vietnam’s larger state-owned corporations may also seek to enact an international bond.

However, a wave of corporate issuance does not appear to be imminent, given the need to ‘cut their teeth’ in the domestic market first, gain a rating, and prepare the kind of documentation that foreign institutional investors will demand.

Nonetheless, informed observers anticipate the next six months will see Vietnam’s bond market make further strides forward.

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Read more about:  Asia-Pacific , Vietnam