There may be differing opinions about the size of Vietnam’s domestic bond market, but one thing no one doubts is the government’s determination to make it an effective channel to finance the country’s development.
The enactment of Decree 163 and forthcoming securities law will help the market to move to the next stage of development, encouraging more issuers and investors.
Top domestic brokers are also actively trying to encourage foreign participation. This week, for example, Techcom Securities has embarked on its first international roadshow, promoting liberalisation measures to asset managers in Hong Kong and Singapore.
Yet, if it is successful, it will be because foreign institutional investors decide to re-engage with a market they fled en masse 11 years ago. Back in 2008, the Vietnamese debt and equity markets both witnessed a dramatic expulsion of hot air after too many foreigners piled in too fast, too soon.
For example, in the space of two years, foreign investors had gone from zero to roughly 55% ownership of both the domestic corporate and government bond market according to IMF estimates.
Government bond outstandings consequently jumped from 8% of GDP at the beginning of 2006 to 14% by early 2008, equating to roughly $9.2 billion. Corporate bond outstandings quadrupled from VND9 trillion ($387 million) to VND36 trillion over the same period.
Together that meant that foreign investors ended up owning about $5.4 billion in dong-denominated debt.
Today, they own a much reduced 1% of the government bond market, which equates to just $478 million based on VND1.1 quadrillion in outstandings at the end of last year.
Ownership of the corporate bond market looks optically the same at roughly $470 million. Holdings are, however, almost wholly concentrated in transactions that carry a triple-A wrapper from the Asian Development Bank (ADB).
Yet, if foreign investors were to re-engage properly with the domestic bond market again, things would be a lot different this time around.
First, they would be buying the bonds of private sector companies such as Vingroup and Masan rather than state-owned entities like Vinashin and Vietnam Electricity (EVN), which dominated issuance a decade ago.
Second, the government has realised that the market needs much stronger foundations. Until recently, it had adopted a measured pace, which was not to everyone’s liking. The first piece of legislation that started to up the ante was Decree 163, which was enacted in December.
The decree draws a clearer distinction between private placements and public offerings. This was needed because of the huge growth of the retail investor base over the past few years.
Techcom Securities, in particular, had done a very effective job of whipping up retail enthusiasm to fill the investor void that domestic institutions should have been occupying.
"Issuers liked the private placement format because it was quick and simple but the government realised it needed to safeguard non-professional investors,” said Nguyen Ba Son, head of debt capital markets at BIDV. “Decree 163 forbids issue managers from offloading private placement bonds to more than 100 retail investors for one year after pricing.”
In a recent FinanceAsia interview, Nguyen Hoang Duong, deputy director general of banking and financial institutions department at the Ministry of Finance, said that the new securities law would enforce the separation even more strictly.
This law is expected to pass through National Assembly by the end of this year for implementation in 2020. At that point, all bonds sold to retail investors will need to be in a public format.
Some of the country's leading issuers have already switched to this, which is changing the market's dyanamics. Since last summer, there have been public bond offerings for Agribank, BIDV, Vietinbank and Vingroup.
BIDV’s Nguyen says that his own bank’s VND4 trillion public deal had a 60%/40% split between bank and retail investors. The retail component was high because BIDV engaged its branch network to sell paper.
Vingroup has also come to the market twice, with identical VND1 trillion two-year public offerings in December and March. Both were priced with a fixed 10% coupon for the first year, before switching to a floating rate at 4% plus the average 12-month deposit rate of the four state-owned banks for the second year.
Combined, the two Vingroup deals had a split, which saw 70% placed with securities companies, 17% with retail, 7% funds and 6% insurers.
Techcom Securities chief executive Nguyen Thi Thu Hien states that issuer numbers may temporarily drop over the short-term because of the length of time it is taking to get approval for public offerings from the State Securities Commission (SSC), which has taken over from the Ministry of Finance as the main regulatory body. Then there is the fact the issuers will also need to get used to the new requirements.
However, she and her all-female DCM team (not an unusual feature in Vietnam) believe that volumes will remain the same. She says that transaction sizes will increase and/or issuers will seek approval for larger amounts, then space transactions as Vingroup did.
“It will take a while for the new approval process to bed down so companies will raise more money when they come to market to compensate for that,” Nguyen said. “But disclosure requirements aren’t that onerous because most bond issuers are already listed,”
She hopes that the approval process will contract to about a month compared to the 2.5 months it took to approve Vingroup's first public bond. And once a company has gone through the process once, she notes that the second time should be far quicker.
The second big change, which Decree 163 is accelerating, concerns disclosure. This is a big issue since a lack of transparency is one of the reasons why the ADB publishes data which shows that corporate bonds account for 1.8% of GDP, or $4.29 billion of outstandings.
According to the government, the correct figure should have been 8.5% at the end of last year. It plans to rectify this by creating an information and data hub on the Hanoi Stock Exchange.
“Public disclosures will really help us to understand issuance patterns and give our clients much better advice,” said Pham Xuan Anh, head of investment banking at MB Securities (MBS).
Dragon Capital portfolio manager Dan Svensson, however, flags the vague wording of the decree, which has confused market participants.
“Some interpretations suggest that the investor roll call needs to be publicly disclosed,” he commented. “If that happens, it would make secondary market sales even more difficult because we could easily get cornered.”
Svensson notes that secondary market liquidity for corporate bonds is very thin and says that Dragon typically only invests in the primary market. It tends to hold deals until about a year before maturity, when it offloads chunks, mainly to bank investors.
BUILDING THE INVESTOR BASE
Dragon's options are primarily limited by a lack of other institutional investors.
The asset manager's Irish Stock Exchange-listed Vietnam Debt Fund has about $100 million assets under management (AUM). But the other only large domestic private institutional fund is the Techcom Bond Fund, which has $300 million AUM.
Banks are the dominant force. “They effectively think and act like one investor,” Svensson said. “What the market desperately needs are other types of investors with a contrarian view to sit on the opposite side of trades. That will help to build liquidity.”
Those investors are coming and the pace appears to be quickening, relative though that is. The country also has one giant domestic investor, the Vietnam Social Security Fund (VSSF), which has roughly $27 billion AUM, or 12% of GDP.
It has just reached an agreement in principle to broaden its mandate from government to corporate bonds, not least because it needs to boost returns as the population starts to age.
The government is also reviewing applications for a handful of private pension funds. Svensson says it will take another couple more years before they start to make their presence felt, but he remains optimistic.
The other promising investor constituent is the domestic insurance industry, which had $17.2 billion AUM at the end of last year according to Ministry of Finance figures. By 2020, the government wants 11% of the population to have a life insurance policy, rising to 15% by 2025.
“Insurance companies are still primarily focused on the government bond market,” commented Techcom Securities deputy chief executive, Pham Dieu Linh. “There’s some participation in the corporate bond market, but they generally wait to see which banks participate first.”
MBS's Pham and BIDV’s Nguyen agree.
“In Vietnam, banks have a CIC system which enables them to track the credit ratings of documented corporates,” Pham said. “But other institutions, like insurers, are held back by the lack of a domestic ratings agency.”
This should change once the new securities law comes into force since corporate issuers will be required to get a rating before they tap the public bond market.
“This will be a huge growth driver,” BIDV’s Nguyen added. “There was no financial incentive for anyone to set up a ratings agency before. Now there is.”
The ADB has also tried to encourage greater foreign participation by wrapping corporate debt with guarantees through its Credit Guarantee Investment Facility (CGIF). In January, it guaranteed a VND2.32 trillion deal for Refrigeration Electrical Engineering Corp (REE), arranged by Standard Chartered.
Its first deal was a VND2.1 trillion issue for Masan Consumer Holdings in December 2014. Group deputy CEO and CFO Michael Nguyen said the guarantee enabled the group to lock in 10-year funding in a market where two-year funding is the norm.
“I guess it helped to diversify the investor base,” he acknowledged. “But it didn’t create much liquidity since investors took it on a buy-and-hold basis.”
Local bankers say that the investor base for CGIF deals is exclusively foreign insurers, tempted by very juicy 7% to 8% yields for what is effectively triple-A rated debt. What Masan’s bond and the ones that have followed really represent are giant carrots to tempt foreign investors into the market in the hope that they will stay.
As HSBC’s Vietnam chief executive Pham Hai Hong says, “the central bank is curbing banks’ credit growth so companies need bond market access.”
The State Bank of Vietnam (SBV) is also forcing them to recognise non-performing loans.
Masan’s Nguyen says that both measures are good for the economy’s long-term development notwithstanding the fact that it makes life more difficult for even the best borrowers over the short-term. “Right now there are lots of restrictions even to refinance debt,” he commented.
Masan itself is currently in de-leveraging mode but hopes to raise up to VND3 trillion from the bond markets this year.
“In the past, we executed private placements and more recently we completed a retail-targeted bond issue,” he said. “We still favour the domestic bond market over the US dollar market because we’re not fully comfortable with the foreign exchange risk given the swap market isn’t developed beyond three years.
"It’s hard to get a fixed rate for debt beyond one year,” he added.
Nguyen says the overall bond market will take a big step forwards once there is a liquid government yield curve to price corporate debt off. Dragon Capital’s Svensson agrees.
“Good corporate issuers have to pay 500bp to 700bp over government debt,” he explained. “That’s double other Asian domestic markets and mostly boils down to a liquidity and transparency premium.”
The lack of live corporate bond prices on either Bloomberg or Reuters also makes it very difficult for IFRS-compliant funds to set up shop in Vietnam because they know they will not be able to value their holdings. They may understand the opportunities and the diversification benefits, but are bound by formulaic processes and procedures that Vietnam does not yet meet.
“We’re IFRS-compliant too, so calculating the fund’s net asset value is a huge challenge for us as well,” Svensson continued.
But the situation does provide an opening for a player like Dragon, which has learned to read the market’s runes. Svensson says the fund averages a 60% allocation to government bonds, varying from 80% when the market looks positive to 0% when it does not.
Earlier this year, it re-invested in the government bond market when it noticed that banks were starting to pile up cash, for example. It sold again one month later.
“There is limited downside because economic fundamentals are still strong and the SBV is keen to control credit growth and cap inflation,” Svensson elaborated.
However, he says that Dragon is not comfortable with the slim cushion between February's 2.64% inflation rate and two-year government bond yields around the 3.3% mark.
He also notes that while there are live prices for government bonds, they could very easily trip up the uninitiated since many bonds are very illiquid. Consequently, Dragon formulates an interpolated curve based on generic end-of-day rates published by the Vietnam Bankers Market Association (VBMA).
But Svensson believes liquidity and price discovery will improve as banks gain in confidence and he notes that some are working very hard to improve both. “Market makers have had an electronic trading system for a few years now, but they lack the confidence to publish live bid and ask prices on Reuters or Bloomberg,” he explained. “But that will change.”
Svensson and other participants conclude that Vietnam is moving in the right direction and note that the development gap can be partly explained by the fact that it gained World Trade Organization access 12 years after ASEAN countries like Indonesia and the Philippines.
But change is speeding up and the government hopes that the next step will be index inclusion for government bonds. Foreign investors will also come back if they feel confident that the currency will remain stable enough to facilitate positive US dollar-adjusted returns.
As Svensson concludes: “It’s an evolution, not a revolution and that’s good for long-term development.”