In November, utility Electricity of Vietnam sold three-quarters of a debut D1tr bond to foreign investors, and two other large Vietnamese companies followed suit. The dong is in demand, but the dominance of foreign investors in Vietnams local currency bonds is squeezing local investors, possibly restricting the markets development. Steve Garton reports.
Foreign investors got their first taste of Vietnams domestic bond market towards the end of 2006 thanks to two innovative deals for Electricity of Vietnam, the countrys electric transmission and distribution utility. Since then, their appetite for dong issues has far outstripped the modest growth in supply, and there are no signs that this demand for Vietnamese paper will wane.
State owned EVN sold D1tr ($62m) of 10 year bonds at the start of November last year, before repeating the exercise the following month. At least 75% of each deal was sold to offshore investors, marking the first time that foreign investors had participated in new issues in the Vietnamese dong market.
The international market quickly embraced Vietnam, and EVN, to the extent that the company was able to return to the market barely six weeks later with a second D1tr issue that was priced at a flat 9.7% more than 20bp inside the average cost of funds on EVNs first deal.
EVN and its advisers Deutsche Bank and VinaCapital launched the first bond with an unusual step-up coupon that increases from 9.6% in the first year to 9.95% thereafter.
HSBC was bookrunner for the second issue, with local firm An Binh Securities as joint lead manager.
Since that deal, Vietnam Shipbuilding Industry Group better known as Vinashin and Vietnam Machinery Installation Corp known as Lilama have sold dong bonds to offshore investors, and interest in the currency remains robust.
Vinashin launched its D3tr ($180m) 10 year deal in March this year, via Deutsche Bank and Habubank, while Lilama also selected Deutsche to advise on its D1tr 10 year bond, which was priced at 9.2% at the end of May. Vinashin attracted orders from a remarkable 60 accounts a number more often seen in the euro or dollar markets.
"In general there is very good demand for Vietnamese dong," says Jan Wipplinger, head of MTNs and local currency bond syndicate for Asia at Deutsche Bank in Singapore. "The economic story is very strong, underlined by Vietnams accession to the WTO in January this year, and overseas investors have put a lot of cash into the countrys stock market. From a fixed income perspective, foreign investors are bullish on rates and expect a positive carry on the currency relative to dollars and euros. It also offers some useful diversification for some of the big global players."
Further deals are in the pipeline, and competition between the arranging banks is intensifying. Deutsche Bank has a dong bond mandate from Bank for Investment and Development of Vietnam (BIDV) which will give foreign bond investors their first chance to invest in a new issue from the fast growing banking sector. BIDV is also the first Vietnamese issuer other than the sovereign to have received a credit rating of Ba1 from Moodys.
The state owned bank is issuing debt to keep pace with the rapid growth of lending in the country. It is also planning a partial floatation towards the end of 2007, in light of the governments plans to reduce its stake.
"BIDV, as one of the largest banks, has a great opportunity to mobilise funds," Le Dao Nguyen, deputy director general of BIDV in Hanoi told EuroWeek earlier this year. "We are not looking only at equity to increase our financing capacity, but will consider other ways, for example subordinated bonds.
"Last year we increased our tier two capital by issuing long term bonds, which was the first time a Vietnamese company had issued 20 year paper. The debt market here is still not so well developed, but we are very experienced in underwriting and trading bonds and see good opportunities in this market."
The steady flow of mandates has attracted the interest of other international banks. Citigroup announced in mid-June that Vietnam National Coal Mineral Industries Group (Vinacomin), Vietnams largest domestic coal and mining company, had selected it to advise on its debut local bond issue. It will be the first time Citi has advised on any bond deal in Vietnam.
International arrangers are able to market dong bonds to foreign investors through a variety of structures.
While overseas investors are able to buy bonds through a local custodian, credit-linked notes and total return swaps have become a feature of the Vietnamese market.
The credit-linked notes are typically issued by European-based financial institutions and denominated in dollars, while the coupon paid will reflect the performance of the Vietnamese borrower as a credit. NIBC Bank in the Netherlands, for example, issued a $10m five year MTN in Europe that was linked to EVNs credit, in the same week that the Vietnamese utility sold its first D1tr 10 year tranche.
In a total return swap, investors enter into bilateral, floating rate agreements with the arranging bank, which holds the fixed rate dong notes and passes on all credit and foreign exchange risk to the buyer.
The success of these three issues, however, does not tell the whole story in Vietnam. While the participation of global investors and experienced international bookrunners has led to improvements in its infrastructure, the domestic market is still young.
EVNs second deal last December introduced the concept of a constant coupon and Eurobond-style documentation, but bankers say there is still some way to go before international best practices are fully adopted.
Guidelines for bond issues were outlined in principle in 2006 with Decree 52, as it is commonly known, which stipulates that bonds can only be issued after approval from the Ministry of Finance by companies that have been in operation for at least one year and that can produce an audited financial statement showing a profit for the previous year. It is unclear, however, how rigorously the ministry has enforced these rules.
Regulations also prevented EVN from issuing larger amounts that would improve the liquidity of its bonds, and proceeds from any bond issue must be used for a clearly defined project.
"Recent regulations have threatened to put a damper on things, and there is still some uncertainty over the bond market," says Joshua Matthews, head of debt capital markets for Vietnam at HSBC in Ho Chi Minh City. "The market is still relatively illiquid and the government yield curve is very hypothetical, but things are certainly moving in the right direction."
Bankers also point to the disclosure issues that come with any unrated deal.
"We have some concerns over the credits that are being brought to market," says one head of Asia debt syndicate. "Funds are building their exposure, but the deals are certainly more risky given the lack of financials and credit ratings."
Ratings will come as the market develops. Moodys has already rated BIDV, while Standard & Poors was understood to be assessing Vinashin at the time of its bond issue and may issue a credit rating in due course.
Foreign investors continue to invest undeterred by such issues, and the surge of foreign interest in Vietnamese paper has already had an overwhelming effect on domestic bond yields. Borrowers have seen their costs of funding slashed, while bondholders have reaped quick rewards from yields that were sent plummeting earlier this year.
Vinashin, for instance, sold most of its D3tr March 2017 bond offshore and at a coupon of 9%, just eight weeks after it placed a January 2017 bond with domestic investors. That earlier deal was sold at 10.5%.
The local investor base, however, has not developed at the same pace, and the few local insurers and fund managers that are active in the sector have been put off as overseas buyers drive spreads tighter.
"More and more funds are looking at Vietnam as a destination for equity and real estate as well as fixed income investments," says Matthews. "In the debt market, demand for assets has grown faster than the supply of new paper and falling yields have made this market less attractive for many of the local players who have higher funding costs."
"There are some pockets of local cash but liquidity locally is not as great as the foreign demand for assets in such a fast growing economy," agrees Wipplinger at Deutsche.
That will doubtless change as wealth is created in the country and the financial system continues to develop, but Vietnam stands out among its Asian peers as the domestic bond market that is by far the most dependent on foreign investment. And the tastes of offshore accounts are notoriously unpredictable.
|ASIAN CURRENCY BONDS, 2005 2007|
|Currency||Deal value $bn||No.||Deal value $bn||No.||Deal value $bn||No.|
|Hong Kong dollar||11.56||426||11.52||290||5.72||201|
|New Taiwanese dollar||10.89||79||11.27||78||2.58||20|
|South Korean won||44.31||645||45.32||605||22.48||252|