Vietnam: once, twice, three times a bond issuer

The Socialist Republic of Vietnam returned to the international bond markets for the third time in its history on Thursday with a $1 billion 10-year issue accompanied by a switch and tender offering.

Under the lead management of Deutsche Bank, HSBC and Standard Chartered, the B1/BB-/BB- rated sovereign priced its new benchmark bond at par on a semi-annual coupon of 4.8% to yield about 243bp over Treasuries. This represented 32.5bp through initial guidance around the 5.125% level, which was tightened to 5bp either side of 4.85% after the leads had built up an order book of $7.5 billion.

Sources close to the deal said that the final order book closed at $10.6 billion, with participation from 450 accounts and one of the most successful tender ratios in Asian debt capital markets history. 

When it set out on roadshows, the country initially targeted a 50/50 ratio between switch money and new money. In the end, it achieved a 73%/27% ratio on the back of a 100% acceptance ratio for its outstanding 2016 bonds and a 50% acceptance ratio for its 2020 bonds.

In terms of face value, the country accepted $436.44 million of its $750 million 6.875% 2016 bonds, which Vietnam had offered to buy back at a price of 107. At Asia's open on Thursday these bonds had been trading on a bid/offer spread of 106.75/107.5.

Where the sovereign's $1 billion 6.75% 2020 bonds are concerned, the country accepted $290.18 million in face value. The offer price for these bonds was 114 compared to a secondary market bid/offer price of 113/114.5 at Asia's open on Thursday.

Vietnam chose an opportune time to return to the markets following the late summer/early autumn sell-off in the global high yield markets. The offer prices for its two outstanding bonds were set at their earlier year-to-date highs and they soon snapped back to those levels after news of the new offering became public.

In early November, for example, the 2016 bonds were bid around the 105 mark, while the 2020 bonds were bid around the 111 mark. As well as positioning themselves in Vietnam's old bonds, investors have also seen making space for the new issue over the past few days by trading out of Sri Lanka's 2022 bond. 

This has softened from a bid price around the 104.5 level in late October to 103.88 on Thursday. 

Philippines and Indonesia point the way forward

In terms of relative value, Vietnam's new bond has priced about 50bp tighter than Sri Lanka without accounting for the curve. 

However, more interesting for long-term investors is the pick-up Vietnam offers over other sovereigns such as Indonesia and Philippines and how this compares to its first bond outing back in 2005. The difference a decade can make not only shows just how much work Vietnam still has to live up to its long-vaunted potential, but also how far Indonesia and Philippines have progressed since then.

When Vietnam made its international bond markets debut in October 2005, its deal's huge rarity value resulted in pricing 95bp through the Philippines' curve and 65bp through Indonesia. Back then, Vietnam was rated Ba3/BB-, some notches higher than Indonesia on B2/B+ and roughly in line with the Philippines on Ba2/BB-.

However, since then the Philippines has achieved investment grade status and now has a Baa3/BBB rating, which has enabled it to significantly wind in its borrowing costs. On Thursday, its 4.2% 2024 bond was bid at 107.75 to yield 3.21% or 88bp over Treasuries. 

At this level, it is trading 159bp tighter than Vietnam.

Indonesia meanwhile has climbed out of the Asian financial crisis and partially achieved investment grade status with a Baa3/BB+ rating. On Thursday, its 4.35% 2024 bond was bid at 100.38 to yield 4.3% or 197bp over Treasuries.

This means it is trading 50bp tighter than Vietnam.

During the past decade, Vietnam has made no ratings progress and has slipped backwards where Moody's is concerned. In 2010, the US ratings agency downgraded the sovereign rating from Ba3 to B1 and then again in 2012 to B2. 

However, in late July, the country was upgraded back to B1 again on the back of improving economic fundamentals. Given the number of times overenthusiastic investors have been tripped up in the past it would not be surprising if renewed optimism failed to yield much progress this time round as well.

Yet this is just what the country has achieved in the past couple of years. The government has already beaten its 2014 inflation target of 7%, achieving 4.6% in September compared to a peak of 18.6% in December 2011.

A decade of current account deficits have also been turned around. This year the government is targeting a 4.1% surplus.

At the beginning of the month, Fitch upgraded Vietnam from B+ to BB-. In its rating release, it said more progress needed to be made restructuring the moribund SOE sector.

Here again, there are signs of a quickening pace. The number of SOE's have been cut from 1,406 in 2009 to 857 as of June. Over the first nine months of the year, 71 companies were equitised, compared to 74 for the whole of 2013 and just 12 in 2011 and 13 in 2012.

During roadshows, Finance officials also argued that the country's debt profile is sound. Vietnam has a government debt to GDP ratio of 44%, but 94% of the sovereign's external debt is in the form of concessionary loans, with an average interest rate of less than 3%. 

The country now hopes it has positive ratings momentum behind it. And the bonds secondary market performance certainly made a good start.

At the open on Friday, they opened on a bid/offer price of 101.625/102.