EXPAND CAPITAL FUNDING BY ISSUING BONDS IN TASCO JOINT STOCK COMPANY

BARCHELOR’S THESIS IN FINANCE EXPAND CAPITAL FUNDING BY ISSUING BONDS IN TASCO JOINT-STOCK COMPANY... Despite variousweaknesses in the Vietnamese bond market, corporate bonds have much p

BARCHELOR’S THESIS IN FINANCE

EXPAND CAPITAL FUNDING BY ISSUING BONDS IN TASCO JOINT-STOCK COMPANY

From 11th March to 02nd June, I had an opportunity to have an internship in TASCOJoint-stock Company The new environment in a professional workplace was a greatchance for me to prepare for my near future; however, it was also a challenge for anundergraduate student Despite some difficulties I was really lucky to receive the helpsfrom many people and I really appreciate their kindness

I wish to thank my parents for their tremendous support and advice which are reallyhelpful since I did not have any experience in a real work

I would like to express my greatest gratitude to my supervisor Mr Dang Ngoc Ducbecause without his help and guidance this report cannot be completed There are notmany supervisors who give advices and spend time talking with their students withcare just like his family members, and I sincerely appreciate his understandings andempathy toward our problems

I also want to give a special thank to my internship guide, Mr Tran Huy Hoang,Manager of Financial Department and all the department’s staffs in TASCO JSC Ihave been inspired by their enthusiasm and professional working style

TABLE OF CONTENTS

ACKNOWLEDGEMENTS 1

TABLE OF CONTENTS 2

ABBREVIATION 4

LIST OF TABLES 5

LIST OF FIGURES 5

Chapter 1: Introduction 6

1.1 Rationale 6

1.2 Objective 6

1.3 Methodology 7

1.4 Scope 7

Chapter 2: Overview of Joint-stock company’s capital mobilization and bond issuance9 2.1 The concept of joint stock companies and joint-stock company's capital structure 9

2.1.1 The concept of Joint-stock company 9

2.1.2 Joint-stock company’s capital structure 10

2.2 Raising capital in Joint-stock companies 11

2.2.1 Issuing bonds 11

2.2.2 Selling common stocks 14

2.2.3 Issuing preferred stocks 15

2.2.4 Borrowing from banks 16

2.2.5 Using retained earnings 18

2.3 Raising capital through issuing bonds 19

2.3.1 The reasons why companies issue bonds 19

2.3.2 The advantages and disadvantages of issuing bonds 20

2.3.3 Types of bonds 22

2.3.4 Offering methods: Public offering vs Private placement 24

2.3.5 Evaluate the costs of raising capital 26

Chapter 3: The issuance of bonds at TASCO JSC 27

3.1 Vietnamese bond market and the situation of issuing bonds in Vietnamese enterprises 27

3.2 Overview of TASCO JSC 31

3.2.1 History and Structure 31

3.2.3 Capital structure 38

3.3 Raising capital through the issuance of bonds at TASCO JSC 39

3.3.1 The issuing of bonds in 2010 39

3.3.2 The issuing of bonds in 2011 40

3.3.3 The issuing of bonds in 2012 40

3.3.4 The plan of issuing bonds in the near future 41

Chapter 4: Analysis and evaluation of the bond issued at TASCO JSC 42

4.1 The advantages and disadvantages of TASCO JSC when issuing bonds 42

4.2 Evaluate the type of bond: Convertible bonds 44

4.2 Evaluate the method of offering: Private placement 45

4.3 Evaluate the costs 46

4.4 A number of proposals to improve the issuance of bonds at TASCO JSC 47

4.4.1 Issue mortgage-backed bonds 47

4.4.2 Issue long-term bonds 48

4.4.3 Using public offering 49

REFERENCES 52

APPENDIX A 53

CDs Certificate of deposits

HNX Hanoi Exchange

LIBOR London Interbank Offered Rate

MOF Ministry of Finance

ROE Return on equity

TASCO JSC TASCO Joint-stock Company

LIST OF TABL

Table 2 1 Bond ratings 12

Y Table 3 1 Business results 38

Table 3 2 Capital structure 39

Table 4 1 Costs of bonds 46

LIST OF FIGURES Figure 3 1 the proportions of government bonds and Corporate bonds in some countries 28

Figure 3 2 Sizes of bond outstandings 29

Figure 3 3 Size of bonds issued in USD 30

Figure 3 4 Charter capital of Tasco through years 32

Figure 3 5 Tasco's structure 35

Figure 3 6 Product structure 36

CHAPTER 1: INTRODUCTION

1.1Rationale

Vietnamese economy, in general, has been dominated by the banking system for a longtime In the last few years, the difficulty in accessing capital markets through bankingchannels has made many companies suffer the situation of lacking working capital Inthis situation, some companies have found their method to raising funds by issuingbonds and gained some considerable achievements

Corporate bond market has been born along with the introduction of stock market inVietnam firstly in July 2000 However, until the first half of 2012, the corporate bondsaccounted for only 8% of the total bonds value in Vietnam Despite variousweaknesses in the Vietnamese bond market, corporate bonds have much potential togrow and become a main method for raising company’s capital

Understanding the advantages and disadvantages of issuing different types of bondswill help people find the attractiveness of the corporate bonds and also the challenges

of issuing them

In order to make a clearer illustration and give some suggestion to improve theissuance of corporate bonds, particularly construction and real estate companies, thetopic “Improve the efficiency of raising capital through the issuance of bonds inTASCO Joint-stock Company” was chosen to be analyzed in this report

1.2Objective

There are several objectives of the report, specifically

- Give some overview about Joint stock companies and their method of raisingcapital especially the method of issuing bonds

- Give more information and understandings about corporate bonds and theiradvantages as well as disadvantages compared to other method of raisingcapital.

- Introduce TASCO JSC and their issuance of bonds

- Analyze and evaluate the bonds issuances at TASCO JSC

Finally, from the analysis some suggestions will be proposed in order to improve thecompany’s issuance of bonds in the future

1.3Methodology

Firstly, the data from the company official website and other information collectedwhile attending internship program is gathered and then selected to make a range of themost suitable and valuable information relating to the research topic The numbers andfigured collected then will be used to give illustrations when necessary

In Chapter II, several opinions and secondary data that were selected from differentsources will be review to make a theoretical framework for the research Finally, based

on the concept and theory in Chapter II, the case of TASCO JSC will be analyzed

1.4Scope

While introducing the Vietnamese bonds market, only the corporate bonds will befocused The government bonds will not be deeply mentioned since they are not themain topic Another limitation is that the suggestion will be made especially for thecase of Construction and Real Estate Company so there would be limitations whenapplying for other companies in different industries

In Chapter 2, the theoretical framework of the research will be reviewed The basicconcepts of a company’s capital structure, especially which of Joint-stock company,will be given Then the definitions as well as the disadvantages and advantages of

several methods to raising capital in companies will be introduced Particularly, theconcepts of raising capital through issuing bonds will be focused further in the thirdpart of the chapter.

In Chapter 3, there is an overview about Tasco JSC as well as its performance in theindustry The bond issuances of Tasco from 2010 to present are also introduced in thischapter

Chapter 4 gives the detail analysis and evaluations to the issues of bonds in Tasco JSC.They will be evaluate based on some given indicators; and from the analysis, someproposals will be suggested to the company

CHAPTER 2: OVERVIEW OF JOINT-STOCK COMPANY’S CAPITAL MOBILIZATION AND BOND ISSUANCE

2.1The concept of joint stock companies and joint-stock company's capital structure

2.1.1 The concept of Joint-stock company

According to Article 77 in Vietnamese law on Enterprises 2005, a Joint-stock company

is defined as follow:

A joint-stock company is an enterprise where:

1) Its charter capital is divided into equal portions known as shares;

2) Shareholders may be organizations and/or individuals; the minimum number ofshareholders shall be three and shall not be restricted to any particular maximumnumber;

3) Its shareholders shall be liable for debts and other property liabilities of suchenterprise within the limit of the value of their capital contribution to theenterprise;

4) Shareholders shall be entitled to freely transfer their shares, except the casespecified in Clause 3 of Article 81 or Clause 5 of Article 84 of this Law

Briefly, a joint-stock company is “An organization that falls between the definitions of

a partnership and corporation This type of company issues stock and allows forsecondary market trading; however, stockholders are liable for company debts.”1

Joint-stock companies have several characteristics:

The charter capital of a joint stock company is divided into equal portions calledshares The equity owners are called shareholders Each shareholder can buy one ormore shares

1

A joint-stock company may issue multiple classes of shares, including common shares.

In addition, the Company may issue preference shares, including voting preferenceshares, dividend preference shares, redeemable shares and others according to thecompany’s charter

The shares of a joint-stock company are easily transferable from one person to anotherexcept the voting preference shares and the shares of founded shareholders Thischaracteristic allows investors changing their investment objectives and methods in aflexible manner

The liability of the members of a company is restricted to the extent of the unpaidvalue of the shares held by him The personal asset of a shareholder cannot be used topay the company's liabilities (unlike the unlimited liability of the partners in apartnership or business owners in private businesses)

The company may issue securities to the public for funding This feature shows thestrong ability to raise capital from the public Since huge amounts are collected ascapital, the operation of the business will generally be on a large scale basis

The company has to have at least three shareholders and there is no limit for thenumber of shareholder (Unlike the limited liability company with two members ormore, the number of member should not exceed 50) In the operating process,shareholders are free to transfer their shares (except otherwise provided by law) Thus,the number of shareholder of joint stock companies is usually very large

2.1.2 Joint-stock company’s capital structure

The capital structure of a joint-stock company is a combination of its long-term debt,specific short-term debt, common equity and preferred equity In other words, thecapital structure is how a firm use different source of funds to finance its overalloperations and growth Bonds, loans and commercial paper are examples of debt, whileequity is classified as common stock, preferred stock or retained earnings Short-term

debt such as working capital requirements is also considered to be part of the capitalstructure

2.2 Raising capital in Joint-stock companies

Companies have various ways to raise their capital; here are some methods that arecommonly used and their advantages as well as disadvantages for the companies usingthem

2.2.1 Issuing bonds

Corporate bonds are the means by which private firms borrow money directly from thepublic; they typically pay semi-annual coupons and return the face value of the bond atmaturity

When corporation issues bonds, they create one master loan agreement and offerinvestors a chance to participate in the loan The company offers the identical deal toall investors regardless of whether the individuals interested in buying just one bondeach or corporations buying 1000 bonds The master loan agreement between thecorporation and the investors is called a bond indenture The indenture containsinformation that you would expect in any loan agreement such as:

- The amount of money the company is borrowing

- The interest rate the company will pay

- The collateral for the loan (if any)

- When the company will make its interest payments

- Whether the company will pay off the loan, that is, when the bonds will mature

- Whether the company and/or the investors will have the choice of shortening thebond's original maturity

There are some characteristics that associated with bonds:

Face value/ Par value

The face value (also known as the par value or principal) is the amount of money aholder will get back once a bond matures A newly issued bond usually sells at the parvalue However, the par value is not the price of the bond A bond's price fluctuatesthroughout its life in response to a number of variables When a bond trades at a priceabove the face value, it is said to be selling at a premium When a bond sells belowface value, it is said to be selling at a discount

Coupon (The interest rate)

Coupon is the amount the bondholder will receive as interest payments Sometimesthere are physical coupons on the bond that can be torn off and redeemed for interest.However, records are more likely to be kept electronically

Most bonds pay interest every six months, but it's possible for them to pay monthly,quarterly or annually The coupon is expressed as a percentage of the par value Forinstance, if a bond pays a coupon of 10% and its par value is $1,000, then it'll pay $100

of interest a year A rate that stays as a fixed percentage of the par value like this is afixed-rate bond Another possibility is an adjustable interest payment, known as afloating-rate bond In this case the interest rate is tied to market rates through an index,such as the rate on Treasury bills

Maturity

The maturity date is the date in the future on which the investor's principal will berepaid Maturities can range from one day to 30 years In general, the longer the time tomaturity, the higher the interest rate Also, all things being equal, a long term bond willfluctuate more than a short term bond

Credit rating

The bond rating system helps investors determine a company's credit risk Blue-chipfirms, which are safer investments, have a high rating, while risky companies have alow rating

The chart below illustrates the different bond rating scales from the major ratingagencies: Moody's, Standard and Poor's and Fitch Ratings.2

Definition Moody’s S & P Fitch

Investment Grade

If the company falls below a certain credit rating, its grade changes from investmentquality to junk status Because they are so risky, they have to offer much higher yieldsthan any other debt.

In the next section, the advantages and disadvantages of issuing bonds will be analyzed

in the comparison with the other means

2.2.2 Selling common stocks

Common stocks, also known as equity securities, represent ownership shares in acorporation Each share of common stock entitles its owners to one vote on any matters

of corporate governance put to a vote at the company’s annual meeting and to a share

in the financial benefits of ownership such as the right to any dividends that thecorporation may choose to distribute While the issuing of common stock can providesubstantial benefits, a few disadvantages arise from issuing common stock as well

Advantages

First, the offering of common stock has the potential to raise large amounts of money.

A company can use these funds to invest in improvements, pay off debt or any number

of other things In addition, unlike loans, the funding received from selling common

stock does not have to be repaid in any way.

Second, with common stock the company does not have an obligation to pay dividends As opposed with preferred stock that may stipulate a frequent dividend,

common stock does not mandate such a payment The company is free to reinvest anyfunds that would normally be used for dividends

Disadvantages

Firstly, a primary disadvantage is the dilution of ownership Since common stock is a

share of company ownership, once the stock is purchased the original owners have

other investors that they are responsible to These common stockholders now have aninfluence in the life of the corporation, and management will be held responsible forincreasing the value of the company's stock For business owners that hold a tight grip

on operations, this fact can be a significant disadvantage

Secondly, issuing stock significantly increases the cost of doing business, as companies

must list shares on an exchange, compile and file reports, submit to periodicindependent financial audits and provide a host of shareholder services, such as shareregistration and stock ownership transfer

2.2.3 Issuing preferred stocks

Preferred stocks are nonvoting shares in a corporation, usually paying a fixed stream ofdividends In the other words, preferred stock has features similar to both equity anddebt Like a bond, it promises to pay to its holder a fixed stream of income each yearand it does not give the holder voting power regarding the firm’s management.Therefore, preferred stock is similar to an infinite-maturity bond However, preferredstock is an equity investment The firm has no contractual obligation to pay thedividend to the preferred stockholders Instead, preferred dividends are usuallycumulative; that means the unpaid dividends cumulate and must be paid in full beforeany dividend may be paid to holders of common stock On the other hand, the firmdoes have a contractual obligation to make timely interest payments on the debt.Passing a preferred dividend cannot force the firm into bankruptcy but failure to makethe payments on the debt sets off corporate bankruptcy proceedings

From the company perspective, there are both advantages and disadvantages of issuingpreferred stocks:

Advantages:

Firstly, it is the fixed rate of dividends The rate of dividend is fixed throughout the

lifetime of the stock Thus, regardless of the magnitude and volume of profits made by

the company, a preferred stockholder is always paid dividends at a fixed rate.Therefore, the company knows in advance the exactly the amount of dividends theyhave to pay, so they are able to plan and budget.

Secondly, preferred stockholders do not have the right to vote in the conduct of the

affairs of the company The benefit is that the company can issue preferred shareswithout diluting its ownership structure

Thirdly, the prices of preferred stocks are quite stable that makes the investors more

willing to buy preferred stock since they are confident that they would be able torecover at least the amount that they invested in the company Moreover, they also getdividends as and when the company declares them to recovering their initialinvestment

Disadvantage:

The main minus of issuing preferred stocks is that the company has to pay taxes on the

amount of dividends paid to the stockholders since the dividends are paid after taxes Inaddition, although preferred dividends can be passed, investors expect them to be paidand firm intend to pay the dividends if conditions permit Therefore, preferred

dividends are considered a fixed cost which increases the firm’s financial risk just like

that of debt

2.2.4 Borrowing from banks

A bank loan is an extension of credit, to a consumer or business, in the form ofborrowed funds which has to be paid back with interest A bank loan has many termsand conditions and can be used for a number of different purposes There are manydifferent types of loans and they have different qualifications To get a loan, thecompany must be qualified to the bank’s credit granting criteria Each bank has theirrules, guideline and qualifying factors Bank loans are available to finance the purchase

of inventory and equipment as well as to obtain operating capital and funds forbusiness expansion These loans are a time-honored and reliable method of financing asmall business, but banks often only finance firms with substantial collateral and a longtrack record, and the terms they offer are often very strict Borrowing from a bank hasadvantages and disadvantages, all of which the company owners should considercarefully before making their move.

Advantages

Firstly, getting loans from banks is one of the simplest and most flexible ways to get the

needed funds Bank loans offer a wide array of terms, fees, application requirementsand interest rates These variables often differ from bank to bank, and usually can benegotiated and adjusted By offering a building or assets as collateral, the company canoften get low interest rates Plus, the interest is often tax deductible as a businessexpense If the company is a sole proprietor, it typically gets the loan based on itsqualifications, such as income and credit history For partnerships or corporations,banks loans are generally based on business debt-to-income ratios and other financialconsiderations

Secondly, unlike other forms of loans and financing, the bank does not assume any sort

of ownership or influence in the way the business run This is different from equity

financing, for example, through which investors take part ownership of the business

Disadvantages

Bank loans bring a longer-term commitment than shareholder investment The

company only has to pay back investors if the business earns money Banks expecttheir principal and interest payments every month, on time, whether the companymakes money or not Failure to make timely payments can result in business creditrating slipping, limiting the company’s borrowing power in the future Having bankloan commitments on the balance sheet increases the debt-to-asset and debt-to-equity

ratios, making the company less attractive to new creditors as well as potentialinvestors.

In addition, banks normally require a lengthy and thorough application process beforethey will approve a business for a loan Especially in the case of small businesses,which often fail, banks want many details about the business plan before they areconfident about lending money This can be a hassle and an obstacle to funding

2.2.5 Using retained earnings

Retained earnings are the portion of net earnings not paid out as dividends, but retained

by the company to be reinvested in its core business or to pay debt In most cases,companies retain their earnings in order to invest them into areas where the companycan create growth opportunities, such as buying new machinery or spending the money

on more research and development Advantages to retained profits are that there ismore capital available for growth and higher returns on investments and shareholderequity One of the disadvantages is that the company will not pay as many dividends

Secondly, the company or business has self dependence and when it needs funds it has

its own available rather than having to ask anybody for loans The business wouldtherefore save on interest as there is no interest to be paid off The business is able tokeep certain information secret, which they may not want to let out to other companies.This is not something that is possible when paying loans

Thirdly, higher retained profits signal that the company is doing well and attracts

shareholders When the demand for shares increases, the price and the overall value ofthe company also increase

2.3Raising capital through issuing bonds

2.3.1 The reasons why companies issue bonds

Corporations issue bonds for several reasons Firstly, it is a way to raise capital withoutdiluting the current shareholders' equity Secondly, with bonds, corporations can oftenborrow at a lower interest rate than the rate available in banks By issuing bondsdirectly to the investor, companies can eliminate the banks which act the role of the

“middlemen” in the transactions Therefore, the borrowing process becomes moreefficient and less expensive Thirdly, by issuing bonds, corporations can often borrowmoney for a fixed rate for a longer term than it could at a bank Most banks will notmake fixed rate loans for longer than five years because they fear losing money if theircost of funds (raised by selling CDs, savings accounts, etc.) rises to a higher rate thanlong-term loans Most companies want to borrow money for long terms and so elect toissue bonds Moreover, the bond market offers a very efficient way to borrow capital

By issuing bonds, the borrower is spared the task of undergoing numerous separatenegotiations and transactions in order to raise the capital it needs

2.3.2 The advantages and disadvantages of issuing bonds

The following are some advantages and disadvantages of issuing bonds

Advantages

The first advantage is that debt issuance can also be advantageous from a governance

point of view Creditors have no influence on the board or company policy—unlike

stockholders, who often have the right to vote on policies and the appointment ofdirectors Thus, financing through debt can be very useful for companies that do notwant to change who is running the company or the general operations of the business.Second, when company issues a bond, the bondholder knows exactly when he can cash

in the bond The company also sets the rate of interest they will pay Thus, the repayment of the loans obtained via bonds is very predictable This enables corporation

to estimate what the company's financial obligations will be at a specific point to somedegree, and the operating plan will be made easier

Another advantage is that taking on debt by issuing bonds is usually cheaper than

either a bank overdraft or the cost of raising equity through a share issue A majoradvantage is that the return on debt (interest) is tax-deductible, while the return onequity (dividends) is paid out of a company’s profits, which are taxed before dividendpayments can be made to stockholders Overall, this means that bonds have a lowerafter-tax cost

Forth, when a company issues bonds, they are not obligated to share the profits

generated by using the loaned funds The company only has to pay the face value of thebond, plus the interest If the company does well, this means they can get a very largereturn for the money they have to pay out

In addition, companies can improve their credit rating by issuing a small, manageablenumber of bonds If a firm is struggling with cash flow and performance issues, issuing

a few bonds can work wonders for lifting the company's credit rating on the bondmarket This will increase the attention and investment from the public.

Disadvantages

Fixed rate bonds are subject to interest rate risk, meaning that their market prices willdecrease in value when the generally prevailing interest rates rise If interest rates rise,and the bond is not a fixed-interest loan, the company is also in trouble, having to payboth the principle and an ever-growing amount of interest Variable rates mean that thebond has to look out for the market and the fluctuations of interest rates If there is nofear of inflation or interest-rate spikes, all bond forms are advantageous But if acountry is not economically stable, then issuing bonds might be a bad idea Bonds arealso subject to various other risks such as call and prepayment risk, credit risk,reinvestment risk, liquidity risk, event risk, exchange rate risk, volatility risk, inflationrisk, sovereign risk, and yield curve risk

When companies issue bonds, they can't avoid increasing their overall debt and taking

on debt risk The company must pay the interest even in years where they arestruggling, and when the bond matures, they have to pay the full face value The

inability to meet this obligation can force the company into bankruptcy, which has its

own host of negative ramifications

Although the public may perceive the acquisition of debt positively when the companyissue bonds since they generally like to see that a company has some cash or cash

equivalent on hand, they might see that action as a sign that the company is strapped

for cash, particularly when the company does not have a good bond rating On top ofthat they might walk away from the company’s stocks and products as well

2.3.3 Types of bonds

There are many different types of bonds which can be divided based on different ways

of classification The following are some bond-classification often used

Coupon rates

Zero-coupon bonds do not pay any coupon Instead of paying coupon they are issued at

a deep discount and pay the full value at the maturity

Fixed-rate or straight bonds pay an absolute coupon rate over a specified period oftime When it reaches maturity, the last coupon payment is made along with the parvalue of the bond

Floating rate bonds or floaters pay a coupon rate that varies according to the movement

of the underlying benchmark However, they are set to be a fixed percentage above,below, or equal to the benchmark They typically follow some benchmark such as thethree, six or nine-month T-bill rate or LIBOR

Inverse floaters pay a coupon rate that changes in the opposite direction of short-terminterest rates An inverse floater subtracts the benchmark from a set coupon rate Forinstance, if an inverse floater uses LIBOR as the underlying benchmark it might pay acoupon rate of a certain percentage minus LIBOR

Features

Callable bonds give the bond issuer the right, but not the obligation, to redeem theirissue of bonds before the maturity of the bond After calling its bonds, the companycould refinance its debt by reissuing bonds at a lower coupon rate Callable bondstypically come with a period of call protection, an initial time during which the bondsare not callable Such bonds are referred to as deferred callable bonds The option tocall the bonds is valuable to the firm since it allows it to buy back the bonds andrefinance at a lower interest rates when market rates fall To compensate for the

bondholders, callable bonds are issued with higher coupons and promised yields tomaturity than non-callable bonds.

Convertible bonds give bondholders an option to exchange each bond for a specifiednumber of shares of common stock of the firm at predetermined dates prior to thebond’s maturity Convertible bondholders benefit from price appreciation of thecompany’s stock Therefore, convertible bonds offer lower coupon rates and stated orpromised yields to maturity than non-convertible bonds

Puttable bonds give bondholders the right but not the obligation to sell their bonds back

to the issuer at a specified price and date These bonds generally protect investors frominterest rate risk If the interest rates are higher than the bond's coupon rate, it isoptimal for investors to sell their bonds back to the issuer and reinvest their money at ahigher interest rate

Collateral trust bond is a bond backed by other security such as stocks or other bondsthat is deposited and held by a trustee for the bondholders They are backed bycollateral trust certificates and are usually issued by parent companies that areborrowing against the securities of wholly owned subsidiaries The securities aredelivered to the corporate trustee to hold for the benefit of the bondholders However,the issuer maintains voting rights that are granted by the securities If the issuer

defaults, then the voting rights are transferred to the trustee and the trustee may alsosell the securities to pay the bondholders

Debentures, which constitute most of the corporate bonds issued, are bonds that are notsecured by physical assets or collateral Debentures are backed only by the generalcredit worthiness and reputation of the company However, the bondholders do have aclaim over all of the property of the issuer as a general creditor

Guaranteed bonds are bonds whose payments and/or principal repayment areguaranteed by a company which is not the issuer Most guarantors are the parentcompanies of the issuing subsidiary In the event of a default, both companies areresponsible to make good on the bonds, so the credit quality of the bonds is generallyhigher than non-guaranteed bonds

Issuers

Another criterion used to classify corporate bonds is the type of the company thatissues them Corporate bonds are mainly sold by firms in five areas First is publicutilities which are usually issue bonds considered low risk Second are conglomerates,industrial and transportation companies Next are financial services companies whichdepend heavily on the bond market to raise capital and their bonds are more likely tohave high yield and high risk

2.3.4 Offering methods: Public offering vs Private placement

Public offering Private placementDefinition The sale of securities by an

organization to the public inorder to raise funds for businessexpansion and investment

The sale of securities to a relativelysmall number of select investors as

a way of raising capital

Advantages The company can approach a

large number of investors and

The company does not need toprovide much disclosure to

that also help their bonds have awider market.

The winning bidder(s) is the onewho has offered the lowest totalinterest costs, so the companycan sell their bonds with lowercost

The bonds may be moreattractive because their market iswide and they are more liquidcompared to private-offeringbonds

investors because they usuallyhave a long-standing relationshipwith the investors, or the investorsare a close-knit group that ofteninvests together

A typical private placement willnot require an underwriter whocosts some fee for their services Private placement is useful if thecompanies wish to keep their bondoffering confidential or if theyhope to raise money from only afew people

The services of an underwriterare often used to conduct apublic offering and theseservices charge some fees

Private placement significantlynarrows the range of investors thecompany can reach

The company may need to expendmore effort and expense to sellbonds than in the typical publicoffering because they cannotadvertise on a wide scale

Investors may also demand moreequity in the company to protecttheir investments because thecompany’s bonds do not have widemarket

2.3.5 Evaluate the costs of raising capital

The cost of raising capital includes the interest expenses and non-interest expenses.The interest costs account for the majority of the cost of raising capital When raisingfunds in the form of bonds, the company has increased its debt, and at the same time,they have to pay interest payments to bondholders The interest rate is dependent on theterm, strategic goals of the company, and bank’s interest rates during the release, etc.Besides, the company also suffers other costs when raising capital: operating costs,advertising costs, marketing to attract investors, insurance costs, management costs andother costs related to capital raising activities.

T h e average cost of raising capital= Costsof raising capital

Total capital raised

The ratio between The costs of capital raising / Total capital raised was used toestimate how many unit of cost to raise one unit of capital Thus the funding need toconsider the cost of a capital in order to make sure that their income can offset this cost

as well as create some profit for the company The lower the average costs of raisingcapital, the more efficient the funding activity

In addition, to calculate the cost of equity, two methods can be used, including Gordongrowth model and CAPM In this report, Gordon model will be used to calculate thecost of issuing new shares

The equation for Dividend discount model:

r e=g+ D1

P0

re: cost of issuing new share

g: expected growth of dividend

g = (1-k)*ROE, k: payout ratio, ROE: return on equity

D1: dividend per share at the end of the first year

P0: actual amount received from a share (Price of one share – Average transaction cost)

CHAPTER 3: THE ISSUANCE OF BONDS AT TASCO JSC.

3.1 Vietnamese bond market and the situation of issuing bonds in Vietnamese enterprises

The formation process of Vietnamese bond market

3/1991 The Ministry of Finance decided to issue treasury bills and treasury

bonds to raise capital for the state budget for investment anddevelopment It was the time that marked the introduction of thegovernment bond market

1991-1994 Bonds are issued directly by the State Treasury system in two forms:

short-term treasury bills (3-6 months) and medium-term treasury bonds(1-3 years)

Funds raised from the Bills, bonds are primarily used to offset the statebudget deficit

17/9/1994 After the government issued the decree 120/CP of issuing shares and

bonds of state-owned enterprises, the corporate bond market startedforming

1996 The corporate bond market had a breakthrough initiated by the issuing

of $5 million worth of bonds by Corporation Refrigeration ElectricalEngineering (REE)

1995-1999 Government bond market had a significant development because of the

introduction of treasury bill auction through the SB’s exchange officewith the participation of commercial banks and financial institutions.2000-2006 Government bond market entered a period of strong growth after the

issuance of Decree 01/2000/CP which changes the releasing mechanism

of government bonds

New forms of bond issue began to operate, including bidding throughthe STC, underwriting and selling bonds at discount prices

During that period, the bond market has prospered However, it was stillconsidered a very young market where the commodity was mainlygovernment bonds.

The total value of bonds issued was approximately 70,000-80,000billion VND, of which 80% are bonds issued by the Government

2007-2009 9/2008, the Ministry of Finance decided to list and trade all the

government bonds on HNX This decision (86/2008/QD-BTC) was anattempt to increase the size and the depth of the market for governmentbond segment

6/2009, the bond trading system EBT was introduced, and this network

is the only electronic trading system on Vietnamese bond market

Characteristics of Vietnamese bond markets, particularly corporate bond market

Compared to other countries in the region and the world, the ratio between theoutstanding corporate bonds and the total bonds outstanding of Vietnam to reach 0.091,

while the corresponding figure is 0.192 in Thailand, Malaysia 0.402, China is 0.251,etc According to the Saigon Securities Incorporate SSI, only 30 enterprises registered

to issue corporate bonds in 2011, with the bond values much lower than that of 2010

80.8 59.8

85.2 87.2

62.5 90.9

25.1

58.5 46.3

Figure 3 1 the proportions of government bonds and Corporate bonds in some countries

The size of bond outstanding in VND has increased considerably; however, they stillaccount for a relative small amount compared with the GDP of Vietnam (less than20%) The enterprises, which successfully issued bonds, were mostly the state ownedbig economic groups, listed companies and the companies which had attractiveinvestment projects

Not many enterprises want to issue bonds, despite the great potentials because theycannot meet the requirements to issue bonds They have backward productiontechnologies, lack a qualified labor force, and do not have high prestige to mobilizecapital Especially if they do not have experience in keeping the accounts in atransparency; while transparency of accounts and enterprise prestige are the two mostimportant factors which ensure successful bond issues

Mar

-12

Dec-12 0

Figure 3 2 Sizes of bond outstandings

The types of bond are undiversified There are only two types of corporate bond whichare convertible bonds (issued by joint-stock companies and limited liability companies)and non-convertible bonds (issued by joint-stock companies)

The size of bonds issued in foreign currency is really limited

Institu-Figure 3 3 Size of bonds issued in USD