International bond market the current situation of vietnam s international bond issuance to the international market and the solutions

I.INTRODUCTION1 Rationale of study

Vietnamese capital markets are getting more and more contractionary despitethe high developing rate of the economy Both government and entrepreneurs areseeking for new method of raising capital The source of capital from internationalmarkets seems to be more abundant than domestic one However, the more rewardingit is, the more challenges it has One of the way government and entrepreneurs aretrying to exploit this source is by issuing international bonds.

Although being known for quite a period of time in the world financial market,up till now international bonds still gain very humble attention by both Vietnamesecompanies and government Since 15 years from the first issuance in 2005, there arestill very few Vietnamese corporate players in the market, Vietnamese governmentonly issued three times with very limited amount compared to other form of capitalraising.

Thus, gaining more insight on why issuing international bonds have not gainedmuch attentions as well as how Vietnamese companies and entrepreneurs are findingways to do it more efficiently can be really helpful to solve the puzzle of raisingcapital for Vietnamese market

2 Objectives of study

The main purpose of the paper is to shed the line on how the “new” capitalraising method – the issuance of international bonds, applied by Vietnamesegovernment and entrepreneurs Did the empirical evidences in Vietnam show that it isprominent? Should government and companies make it an important capitalmobilization tool as other existing ones? If possible, how can governments andentrepreneurs do better at this new capital raising game? The paper will try to answerthose questions

3 Methodology of study

The overview of research performed is based on the basis of collecting andanalyzing statistics on the Vietnam’s international bond in particular and theinternational bond market in general We combined references and observation so that

we could finish our task professionally and apply the knowledge and lessons we havelearnt into the real life While references gave us a reliable source of informationhelping to understand the the topic better, we took advantages of observation fromreality to be able to have a practical overview of the international bond market

II.LITERATURE REVIEWS

1 Definition, types and characteristics of international bond market

Figure 1 – Market Capitalization of International bonds (Total: USD 17.6 trillion)

1.1 Definition of international bond market

According to the basic classification, the international bond market includes theForeign bond market, the European bond market (Eurobond Market) Simply, theinternational bond market is where issuers and investors come from many differentcountries When a bond is issued by a non-resident into a country that is valued in itscurrency, the bond is called a foreign bond and creates a foreign bond market When abond is issued by a non-resident into a country that is valued in a currency other thanthe local currency, it is called a European bond and creates the European bond market.Global bond is a bond issued simultaneously in many different countries, priced inmany currencies, the local currency of the issuing countries Therefore, there is adocument that classifies Euro Bond as part of a Global bond.

1.2 Types of international bond market

1.2.1 Eurobond market

The Eurobond market is a market for the purchase and sale of bonds issued bynon-residents (companies, banks, governments and international organizations) outsidethe country that issue the currency stated on the bonds.

Eurobonds are sold in countries other than the country in which their currenciesare used to measure the value of bonds Although the center of the European bondmarket is in Europe, it has no national boundaries For example, a French companyissuing bonds in pounds in Switzerland, Luxembourg and Frankfurt are all calledEuropean bonds European bonds are sold at the same time in many differentcountries, it has become an overarching bond to mobilize capital simultaneously fromworld economies.

Normally, European bonds are sold at the same time in many financial centersthrough multinational guarantee banking groups and bought by internationalinvestment organizations These organizations are operating beyond the borders of theissuing countries Unlike foreign bonds, the issuance of European bonds allows for achoice of currency whereby the creditor may request to be repaid in one of thedifferent currencies and thus reduces the risk on foreign currency exchange containedin foreign bonds issued in a single currency However, in reality, interest and principalare often paid in US dollars (USD).

1.2.2 Foreign bond market

A bond trading market issued by non-residents (governments, foreigncompanies) in a country denominated in the currency of that country to attract capitalfrom domestic investors For example, BP (UK) issued Yen bonds at the Tokyo StockExchange, or as the Chinese Government had two times of issuing government bondson the New York Stock Exchange in 1994 with a total issuance of more than $ 1billion, or if Denmark decides to issue Sterling bonds on the London Stock Exchange.All of the above bonds are foreign bonds.

There are fifteen foreign bond markets in the world, such as Yankee BondMarket of the United States, Samurai of Japan, Bulldog of United Kingdom These arebonds on the public bond markets of the above countries There are also unlistedmarkets where bondholders do not need to register with the exchange and can be solddirectly to investors However, this market is small in scale and smaller in number ofparticipating investors.

1.3 Characteristics of international bond market

1.3.1 Eurobond market

The main benefit of the Eurobond market is that it is relatively unadjusted, itsincome is largely non-taxable and the issuance of securities is more flexible than thedomestic market.

In terms of payment currency, Eurobond issuance in dollars was the largest (in1996, Eurobonds denominated in USD accounted for 43.78% of total issuance),followed by GBP, JPY, and ECU

Most Eurobonds are issued by high credit institutions The most activeEurobond issuers are governments, international organizations such as the WorldBank, European Investment Bank and multinational companies Some Eurobondpublishers record money that is not used for the final purpose, but convert to othernecessary currencies through the Swap operation Eurobond interest rates depend on:market conditions and the credit rating of the issuer.

1.3.2 Foreign bond market

The characteristic of a foreign bond is that it is paid in the currency of thecountry where it is issued However, there are also countries where bonds can bebroken down into other currencies In this case, the name of the foreign bond will bedifferent For example, in Japan, bonds issued in Yen are called Samurai, issued inUSD called Shogun.

The largest foreign bond markets are the US and Japan bond markets The USbond market is very diverse Yankee market is a public market, providing medium andlong-term capital to foreign investors The Japanese bond market also includes apublic market called the Samurai market Publishers in this market have a prerequisiteto be rated from the BBB upwards The left Samurai votes are mostly sponsored byJapanese unions and companies In the unlisted Japanese market, issuers do not needto declare any documents under securities trading laws However, the number of bondsis small and few investors.

2 Process of issuance

Figure 2 - International Bond Tombstone

Bonds are issued by public authorities, credit institutions, companies andsupranational institutions in the primary markets The most common process forissuing bonds is through underwriting When a bond issue is underwritten, one or moresecurities firms or banks, forming a syndicate, buy the entire issue of bonds from theissuer and re-sell them to investors The security firm takes the risk of being unable tosell on the issue to end investors Primary issuance is arranged by bookrunners whoarrange the bond issue, have direct contact with investors and act as advisers to thebond issuer in terms of timing and price of the bond issue The bookrunner is listedfirst among all underwriters participating in the issuance in the tombstone adscommonly used to announce bonds to the public The bookrunners' willingness to

underwrite must be discussed prior to any decision on the terms of the bond issue asthere may be limited demand for the bonds.

In contrast, government bonds are usually issued in an auction In some cases,both members of the public and banks may bid for bonds In other cases, only marketmakers may bid for bonds The overall rate of return on the bond depends on both theterms of the bond and the price paid The terms of the bond, such as the coupon, arefixed in advance and the price is determined by the market.

In the case of an underwritten bond, the underwriters will charge a fee forunderwriting An alternative process for bond issuance, which is commonly used forsmaller issues and avoids this cost, is the private placement bond Bonds sold directlyto buyers may not be tradable in the bond market.

Historically an alternative practice of issuance was for the borrowinggovernment authority to issue bonds over a period of time, usually at a fixed price,with volumes sold on a particular day dependent on market conditions This was calleda tap issue or bond tap.

2.1 Approach to operation

First, the company talks to the bank and explains its need for financing Thebank analyzes the company’s financial situation, determines whether a bond issue isappropriate and if the company meets the essential requirements for the market.

2.2 Rating analysis and documentation preparation

In order to issue a bond on the market, it is recommended that the companyhave a rating from a rating agency If it does not yet have one, the bank examines thecompany’s credit and, based on its sector, tells the company which rating agencieswould be the most appropriate.

Throughout this process, the company is under the auspices of the bank that isadvising and assisting it, starting from the preliminary meetings with the agencies –which they attend – to the actual preparation of the presentation to be given to theagencies The legal documentation is prepared in parallel in order to ensure that it isready at the time of the operation This includes the contracts that establish the

conditions for the issuer and the banks participating in the operation It is a slow,tedious process, but support is provided by outside attorneys.

2.3 Presentation to invest

Presenting the operation to investors is a key point in the process for newissuers What is known in the industry as a ‘roadshow’ is organized This involvesmeetings with investors in the biggest financial hubs in Europe (Paris, London orFrankfurt); a presentation is given and any questions are addressed It is also key tofind out what the market looks like and how much appetite there is for the company’srisk If the response is not positive, the operation is postponed Thus, the purpose ofthe roadshow is clear: to involve investors and gauge the price range and maturity.

2.4 The bond is placed in the market

Once it has been decided that the bond will be issued because sufficient interestexists, the bank and the company look for a window of opportunity and establish atentative date, which will greatly depend on the market conditions.

When that day arrives, there is an initial call with the team that will carry outthe transaction and the company itself first thing in the morning It’s the “go-no go”call – a key moment in which, based on the market conditions that day, it is confirmedwhether to go ahead with the issuing or postpone it if the circumstances have greatlyvaried.

If no significant changes have taken place in the market that could put theoperation at risk, the bank advises the issuer on the price, they agree on the premiumfor the operation and coordinate a strategy Now is the time when the issuance isannounced to the market and the “book” is opened – a digital archive where thedifferent orders from investors are noted.

After several hours, there is another call to see how the book is doing At thattime the company can decide whether or not to adjust the price, based on the behaviorof the market and investors If there is a change in price, it is announced to the market.There may be investors who decide not to participate.

Finally, there is a third call to complete the operation with the agreement fromthose involved, the issuer and banks At this meeting the banks compare informationand eliminate duplications in orders – in other words, they refine the book.

2.5 Allocation process and bond pricing

When the book has been refined and closed, a decision is made to determinehow much to give to each investor This is based on the quality of the investor and theobjectives of the issuing Banks give the issuer a list with this distribution for theirapproval, and the investors are informed of exactly how much they were allocated.

Then, the price is established by taking the indexes into account Finally, thesales team informs the market of the coupon and the next day, the bond is listed on thesecondary market Its evolution is then monitored from this point on.

Figure 3 - Timetable of a new international bond issue

3 Objectives of bond issuance in international market

 Contributing to supplementing the medium and long-term financial resources,contributing to promoting economic growth and stability of countries

 Meeting the solvency of different entities when participating in national financialactivities

 Contributing to the formation and development of the international financialmarket system

 Investment in socio-economic development falls within the expenditure task of themid-budget budget in accordance with the State Budget Law

 Restructuring debts, debt portfolios of the Government

 Lending to businesses, financial institutions, credit institutions and localgovernments according to the provisions of law; Government-guaranteed bondsare issued to invest in programs and projects: Investment programs and projectsare approved by the National Assembly or the Prime Minister, including the planfor mechanical loading Debt structure of these projects: High-tech programs andprojects, projects in the field of mining energy, mineral signs or production ofgoods and provision of export services provided by the Prime Minister TheGovernment makes decisions in line with the country's socio-economicdevelopment orientation: Programs and projects in the fields and areas encouragedby the State under the Prime Minister's decision; State-targeted credit programsimplemented by the Vietnam Development Bank, Vietnam Bank for SocialPolicies or financial and credit institutions under decisions of the Government orthe Prime Minister

4 The impacts of international bond issuance method

4.1 Internal and external equilibrium for a country's economy

4.1.1 Internal equilibrium

Loans from bonds will be spent by the government on the economy Whengovernment spending increases, the income of the whole economy increases becausethen the productive capacity of the economy increases (if the use of loans is effective).In other words, the economy has grown to a new level Meanwhile, in response to thedemand for commodity trading in the economy, the amount of money in circulationwill increase And with a set interest rate, money markets and commodity markets inthe economy meet at a new equilibrium position This new equilibrium shows thegrowth of the economy when mobilizing capital from the outside through the form ofinternational bond issuance.

4.1.2 External equilibrium

When the government borrows foreign debt in the form of internationalbond issuance, this capital inflow into the economy causes a capital balance surplus.To balance the balance of payments, the current capital balance and account have anadditional relationship As we all know, when there is a capital inflow into the

economy, the income of the economy will increase (if the use of capital is effective).This increase in income is the level of income needed to balance the current accountdeficit by capital inflows into the economy, and then the balance of payments willbalance In other words, international capital inflows into the economy by issuinginternational bonds will bring the balance of payments to a new equilibrium positionhigher than the old equilibrium This is the position to say the growth of the economy.

Both new equilibrium positions for internal equilibrium and externalequilibrium are only achieved when capital use is effective If the use of this loan isineffective, then the pressure to repay the debt increases, causing the government tocut spending on investment This cut will make the economy more stagnant.

Moreover, the interest payments will make the current account deficit and thecapital payment will make the capital balance deficit As a result, the balance ofpayments will exceed the surplus it was initially reached In other words, in this case,if the new equilibrium point is reached, this equilibrium position will be lower than theold equilibrium position And so the economy has fallen back from before borrowingcapital by issuing international bonds.

4.2 Supply and demand of foreign currencies

Bonds are different from loans Bonds put up and traded in the market.Whoever buys money to buy bonds today, they need money tomorrow to sell Not aloan Lending, how to debt? Here buy bonds, tomorrow if the secret is sold, someonebuys immediately Because he or she is in need of investment, this interest rate (bond)is more attractive than the US Treasury bond interest rate Or suppose you wanted todiversify your portfolio, buy bonds, etc.

Bonds are not debt but debt instruments, can be traded The liquidity in listingis much higher than the loan.

4.3 Safety threshold of foreign loans

For example, our country, the value of bonds issued is too small Our countryborrowed billions of dollars, bonds only a few hundred million Moreover, borrowingfor economic purposes in general, in this case, is to issue bonds for specific projects

with income in dollars So the issuance of bonds by some experts does not affect thesafety threshold of foreign loans.

However, bond mobilization means the government borrowed abroad Havingborrowed, they have to pay but also pay with high interest rates A loan can only bepaid when the rate of return it makes is at least equal to the interest rate The firstproblem for this loan is to use it effectively That is, the use of this capital must not fallinto the footsteps of ODA loans when borrowing only interest rates that represent afew percentage points of a year, but we must bear the constraints that real interest ratesmust be paid many times higher Or fall in the current state of wasteful investmentwith an incalculable rate of loss.

generation borrows,the next generationwill pay Debts canonly be paid when astrong foundation is

Otherwise the burden

of debt for the next generation is very terrible

Looking at the chart above, it can be seen that the bond market plays a veryimportant role This shows that countries all over the world make the most of externalcapital to promote the development of the domestic economy.

The main reason why these countries take advantage of external capital topromote investment in developing their domestic economy?

Figure 4 - Bond market size compared to other countries in the region

China KoreaThailandMalaysiaVietnamSingapore

Bond market size (ratio of GDP) compared to other countries in the region.

Bond market size

5 Advantages, disadvantages of international bond issuance method

5.1 Advantages of international bond issuance

5.1.1 Advantages of international bond issuance for the issuers

 Achieving the rights to use the gearing

The biggest advantage that we can see from international bond is that theissuers are entirely entitled to use gearing and have no binding connections betweenthem and the investors This is an outstanding advantage compared to stock issuance.If the shareholders have the rights to make investment decisions, or sometimesbecause of the conflicts from investment decisions, they will stop or reject the projectsregardless of their profits for the companies However, bondholders shall not have anyright to make these decisions.

 Calling for and capital, promoting brands in international market, achievingthe rights to decide the amount and maturity of bonds

Moreover, the issuers have the rights to decide the amount of capital raised andmaturity of bonds, which seems efficient, especially for mid-term and long-term bondsand helps firms finance their business demands In addition, firms can spread theirbrands around the world Firms themselves will grow up and get more attractive fromthe view of the investors thanks to conforming to international standards We can saythat one firm with the interest of international investors shall have no difficulty havinginterest of investment community.

 Having lower cost

In long-term, cost of issuing international bonds will be lower The interest ratecould be lower when the market believes the issuers Issuing international bonds is notonly the way to call for capital, but it is also the way to emphasize the reputation of theissuers in international capital market.

The more important thing is that if loans and borrowings’ payment are madebefore the due date, which means efficient gearing and brings outstanding profits forcompanies, the companies will get more reputation and higher credit rating, animportant rate that investors usually consider as reference when thinking of investing

in a company Once the company has been appreciated, the interest rates for the nextissuances will be lower.

 No mortgage

Issuing bonds does not require the issuers to have mortgages or guarantee theirassets, which enables the companies to actively use their assets in doing business.

 National debt management tool

When it comes to the countries that have developed financial markets, surplusstate budgets, international bond is a tool to launch national debt management policies.Issuing bonds to international market, government can adjust governmental loansportfolio to launch financial and monetary policies.

5.1.2 Advantages of international bond issuance for the investors

From the view of the investors, when buying international bonds, they alsousually need credit rating of the qualified issuers for references To identify creditrating, these issuers have to rely on many factors such as financial status, revenue,current projects, etc of the companies, which means these issuers have just guaranteedthe safety of the investors when the investors invest in companies.

5.2 Disadvantages of international bond issuance

5.2.1 Disadvantages of international bond issuance for the issuers

When firms want to issue international bonds, consultancy costs are notinexpensive, information clarification and procedure requirements are quitecomplicated Moreover, firms have to bear forex risks because of foreign currencyborrowings when VND tends to depreciate If there is no future income in foreigncurrency or insurance tools are implemented, firms may suffer losses due to exchangerate fluctuation.

It is not simple to issue bonds to international markets The issuers are entitledto conform strictly to international rules, issuance procedures and bond paymentmethods These procedures are quite complicated, requesting careful preparation oflegal and economic bases, complex business techniques such as market selection,

currency selection, issuance form, guarantor selection, payment and legal adviceagencies All these specialist skills are required to be carried out carefully byexperienced experts.

International bonds are usually mid-term or long-term bonds The longer thebonds’ maturity, the riskier they are When investing in these bonds, the investors haveto face with the risk of economic crisis, interest rate fluctuation, exchange ratefluctuation or credit ability of the issuers, which forces the issuers to have more carefulguarantee with stricter terms to make the investors believe them.

In order to issue the international bonds, it is required to have a company thatranks the credit rating of the issuer The cost of inviting this company is usuallyexpensive and this company is usually a foreign company, which takes a long time torank the issuer.

There is a risk that government and domestic companies could be moredependent on foreign borrowings, to avoid more difficult decisions but it is essential toenhance national financial system If companies do not use these borrowing amountefficiently, all the firms that join international capital market risk paying expensiveamount for the borrowings that do not make a lot of returns Besides, even in favorablemarket, government still has to keep borrowing under control to avoid future economicand financial crises.

Interest rate in international finance market will be decided by internationalmarket and it will reflect real capital cost compared to other countries With openeconomy policies and international economic integration, domestic products are inneed of competing against international products in international market Interest rateof bonds will reflect real capital cost of one country and help government, companiesthink of investing in project efficiently, ensuring products can compete against otherproducts in the market This is a strategic move ensuring the efficiency andcompetitiveness of Vietnam economy in economic integration period

When it comes to borrowing amount, importing – exporting credit andborrowings through foreign banks, real interest rate can be higher than nominal

interest rate However, ODA is expected to decrease in the future Calling for gearingby issuing international bonds will diversify borrowing sources, creating gearing midor long-term channels if they manage carefully It also limits negative effects onnational finance, this new form of calling for gearing will create motivation to promoteinternational economic integration.

The issuers have to make a plan to use income from issuing international bondsefficiently, with the method of calling for gearing through international bond market, agreat amount of bond will be received in a short period

Consequently, the issuers need to make a specific plan to disburse forinvestment, avoid capital stagnation, which increase costs and cause waste ininvestment.

The issuers have to make a specific plan for payment when bonds are inmaturity, which means government need to plan to adjust cash inflow and prepareproper foreign currency source to make payment If payment is not completed, thereputation of Vietnam will be negatively affected and next issuances.

5.2.2 Disadvantages of international bond issuance for the investors

International bonds are usually mid or long-term bonds, the longer the maturity,the risker the bonds When investing in these bonds, investors risk facing witheconomic crisis, interest rate fluctuation, exchange rate fluctuation or creditability ofthe issuers.

From the analyses above, we can see that issuing international bonds haveparticular pros and cons, if bonds are issued strategically and gearing is used properly,they will give efficiency to whole economy, stimulate the economy to grow stronger;if they are used improperly, they will have negative effects on economy, limit thegrowth of economy Consequently, issuing international bonds are consideredcarefully based on objective factors such as market condition at the issuance time andsubjective conditions such as bonds’ attractiveness, firms’ preparation in meetingdemand of international investors.

III.FINDINGS & ANALYSES

1 Current situation of Vietnam’s international bond issuance to the international market

Figure 5 - LIDC: Changing debt composition and international bond issuance

1.1 International bond issuance of Government

1.1.1 First issuance in 2005

In 2005, it was the first time Vietnam issued sovereign bonds to theinternational market Although that was the first release, it had brought unexpectedresults creating a buzz in the international capital market by attracting great attentionof European, Asian and American investors.

7 other banks participating in the guarantee contract include: Citigroup (USA),Nomura Securities (Japan), J.P Morgan, Dutch Bank, Merrill Lynch, Morgan Stanleyand HSBC Bank Bank of New York was the bank chosen as the bond payment agentfor the Ministry of Finance under the payment agent contract signed between theMinistry of Finance and the Bank of New York on November 3, 2005.

The number of Vietnamese sovereign bonds planned to be issued was US $ 500million initially, but on the first day, the number of investors ordered was about US $ 1billion, which is double compared to the number of sovereign bonds Vietnam wasabout to release.

So the Government had decided to increase the issuance volume by US $ 250million, bringing the total issuance to US $ 750 million and bonds with a term of 10years The fixed interest rate was 6,875% / year based on the nominal value (realinterest rate is 7.125%) The interest would be paid once every 6 months on January 15and July 15 in USD, the first interest payment period would be on January 15, 2006.

International investors are confident in the bright future of Vietnam's economyafter witnessing more than 10 years of innovation earlier Investors are optimistic thatVietnam is considered to be the second highest and most stable economy in Asia afterChina Besides, the investors' trust in the similar bonds of Indonesia and thePhilippines must be reduced due to the unstable political and economic situation ofthese countries during that period By 2005, the opportunity to issue Governmentbonds for the first time in the international capital market was really good First of all,overdue commercial and government debts due to historical factors have beensuccessfully handled through the London and Paris Clubs National debt is at 32% ofGDP, is considered safe (Philippines is 72%, Indonesia 80%)

If compared with the interest rate of foreign currency loan in the country withshort loan term, the lending volume is very limited, then the mobilization ofinternational bond issuance is effective After 1 year of issuance, the Government ofVietnam's international bonds were evaluated as the most successful bonds issued in2005 by the International Finance Magazine and Asian investors Jon Pratt, AsiaCapital Market leader of Credit Suisse First Boston Bank (CSFB), said that this is aninternational bond issuance, creating a special turning point and creating an importantfoundation for the issuance After the success of this issuance, it has implications forinternational investors to build credit lines for investment in Vietnam in the future.

At the beginning of 2007, the world economy was developing at a high speedand the Vietnamese economy was also growing rapidly leading to the high demand forcapital to promote economic development Specifically, the project of Dung Quat OilRefinery No.1 had been started since 2005 and was lacked investment capital.However, by the end of 2007, due to unfavorable international market condition, the