The corporate dong market continued to grow by about 30% annually in both 2017 and 2018, with its size at the end of last year totaling D99tr, or the equivalent of more than $4bn. That size is remarkable, considering that the market reached just $1.6bn at the end of 2014, when the Credit Guarantee & Investment Facility (CGIF) guaranteed its first dong-denominated bond.
CGIF’s foray into the dong market, signing on to a D2.1tr 8% transaction, issued by retail group MasanConsumer Holdings (MCH) in December 2014, was a landmark for Vietnam. With CGIF’s guarantee, MCH was able to sell a 10-year bond, making it the first non-bank corporate issuer to do so, as Vietnam’s market is dominated by tenors of five years or less.
“Initially it was very difficult,” said CGIF chief executive officer Kiyoshi Nishimura of the MCH bond sale. “Even we weren’t quite sure there would be bond investors,” he recalled. But in the more than four years since, conversations around corporate bond issuance in Vietnam are becoming easier to broach and bring to fruition, he said. Following MCH’s bond sale, CGIF has so far supported six issuers altogether, to sell a total of eight bonds with CGIF guarantees, raising the equivalent of $532m. That makes Vietnam the largest recipient of CGIF guarantees among the ASEAN+3 countries.
The growth has been exponential, and the opportunity for more is rampant. Many of CGIF’s clients in Vietnam were first-time issuers, and the opportunity for more first time borrowers to raise dong-denominated debt is significant.
Unlisted companies, like Hoan My Medical Corp, face hurdles in finding investor interest when they do attempt to sell a bond. “Without CGIF’s support, it [would have been] very difficult for us to issue a bond,” said the group CFO Nguyen Phi Long. “A lot of unlisted companies are currently getting the funds from the banks. They don’t know how to get funds from other investors, like by issuing bonds.”
This gap is a huge opportunity for the Vietnamese bond market to develop exponentially, said Nguyen Phi Long. He reckons that his company can sell future bonds without a CGIF guarantee, now that they have broken the ice and proven themselves to investors. He believes that other unlisted companies can follow suit. “In order to help the bond market develop further, there should be more support from international agencies like CGIF to help bond issuers,” he said.
Vietnam’s bond market undeniably faces an uphill battle to success. Lacking key infrastructure, Vietnam’s market has been stymied from developing further. Only about 30 companies have ever sold bonds.
In part, the bond market’s development is hindered by the structure of the country’s economy, which has been historically centered around bank loans. “The bond market itself was only introduced in the latter part of the last decade,” pointed out Boo Hock Khoo, vice president of operations at CGIF. Vietnam’s economy has floundered many times in the last 15 years, as it has battled a property bubble and collapse, and a bad debt problem. But in more recent years, banks have been cleaning up their act, and there seems to be a realization that new sources to fund investments with longer dated funding are needed, said Khoo.
As banks shift to become more encouraging of bond market development, attention turns to the lack of market infrastructure necessary for Vietnam to truly boom. For instance, “one of the biggest problems is that there is not reliable data about the size of the bond market,” pointed out Nishimura. While other countries have a centralized bond market association or exchange to keep track of all of the data, Vietnam does not.
Similarly, the country lacks a credible rating agency. In 2017, the Sai Gon Phat Thinh Joint Stock Company became the first firm to be licensed by the Ministry of Finance to provide credit rating services in Vietnam, but the company is taking some time to establish itself. In the meantime, without a way to properly gauge the quality and value of a credit, it’s nearly impossible for most investors to participate in the market, creating a dearth of interested buy side parties. It does not help that there is little transparency in Vietnam, and data sharing is limited.
“Bond investors struggle to get information from different issuers,” something that could be remedied by a local rating agency, said Dong Woo Rhee, chief financial officer at CGIF. “Without a local rating agency providing guidance to investors, it’s very difficult for investors to judge the value of the bonds they are buying,” he said. Finding a fair price for bond trades is also difficult, he added.
In a true chicken-and-egg conundrum, it is difficult to develop a market without investors, just as it is hard for issuers to raise funds from a non-existent investor base. But Khoo is optimistic about the potential for the market. “Earlier there wasn’t much of an investor base,” he said, “but now one is clearly emerging.”
While Vietnam waits for a rating agency to establish itself as a viable market participant, CGIF guarantees have helped attract new investors to the market. For instance, prior to 2014, insurance companies rarely bought corporate bonds in Vietnam, and instead favoured government paper. But the validation of some issuers’ credit worthiness, and ability to sell longer dated notes has opened up opportunities for insurer money to flow in. For example, insurers bought 62% of MCH’s 2014 bond in the primary market. Now insurance companies are an important investor group in the corporate market. When Mobile World Investment Corp sold a 6.55% 2022 bond in November 2017, insurers were allocated 97% of the deal. In September 2018, insurance companies took the entirety of The PAN Group joint stock company’s 6.8% five year bond sale. The allocations for more recent CGIF-backed dong bonds were also given entirely to insurers. “These insurance companies continue to have more and more comfort in the bond market with CGIF’s assistance,” said Khoo.
“Our role since 2014 has really been to encourage these types of investors to buy corporate bonds,” said Nishimura. CGIF’s efforts seem to be taking off, as large investors are also starting to buy more corporate bonds that do not come with a CGIF guarantee.
Companies agree that without CGIF’s support, their initial bond endeavours likely would not have gone far.
“It would be challenging,” said Binh Nguyen, CFO of Refrigeration Electrical Engineering Corporation, noting that CGIF’s guarantee of his company’s bond is what helped secure quality investors. “If we don’t do a bond like this, we’d normally just go to the banks.”
“[Bonds are] quite practical for us,” added Bihn Nguyen, noting that the long tenor helps with funding plans, as does having a fixed rate. But without a CGIF guarantee, it’s difficult to say that REEC would have attracted quality investor money. With the guarantee, “we can broaden the appeal to not just banks, but different types of investors,” said Bihn Nguyen.
Like insurance companies, other institutional investors are finding the corporate bond market more attractive. “Government bond yields have come down significantly, which has led to these real money investors looking for alternative investments, and higher yields,” explained Khoo. Banks are already the biggest investors in Vietnam, and their involvement in the corporate bond market is growing, as they recycle more bank loans into bonds to buy and hold. Additionally, retail investors will emerge as a third pool of investors in the future as they seek higher returns compared to bank deposits.
Moving in tangent with the development of the investor base, CGIF is working to encourage new issuers to sell dong-denominated bonds, as companies need funds for increasing working capital and restructuring capital components, as just two examples. Infrastructure companies, for instance, will be a source of future issuance, as these firms tend to be strong credits, and they are naturally in need of long term, fixed-rate financing. “Potential is huge,” said Nishimura. “But bond financing is still a very new financing technique for most of Vietnamese companies.” CGIF will work with banks in Vietnam to introduce more possible borrowers to the benefits of the market, and a CGIF guarantee.
“You need a lot of education to convince a company to issue a bond and to understand the benefits of bond finance,” said Nishimura.
About CGIF
CGIF is a multilateral facility established by the Association of Southeast Asian Nations (“ASEAN”) members, China, Japan, Korea (“ASEAN+3”) and Asian Development Bank (“ADB”). It is established as a trust fund of ADB with a paid-in capital of USD 859.2 million from its contributors. As a key component of the Asian Bond Markets Initiative, CGIF was established to develop and strengthen local currency and regional bond markets in the ASEAN+3 region. CGIF commenced its guarantee operations on 1 May 2012 and seeks to provide credit enhancements, mainly in local currencies, issued by credit worthy ASEAN+3-domiciled bond issuers.