IFR Asia debt capital markets report: Vietnam
Vietnam is much the youngest local currency debt capital market covered in this report, and the most vulnerable to external shocks. After a promising 2007 in which D10.5 trillion was raised, issuance almost completely dried up in 2008, totalling less than a tenth of that, according to ThomsonReuters.
In that context, 2009 was something of a return to form. By November 19 D7.3 trillion had been raised by local issuers, including the country’s biggest corporate bond to date, an important, market-reopening D3.5 trillion issue for electricity utility EVN.
Still, both locally and internationally, bankers vary on their opinions about the market’s development and prospects. “I think the market has huge potential,” says Terence Chia, vice president, Asia debt syndicate, capital markets origination at Citi. “It is still at the developing stage but the sorts of sizes we have been seeing getting done are pretty amazing for a market that is so new.”
Since the EVN deal, these have included D1.5 trillion of issuance for Vinacomin, the coal and minerals mining conglomerate; D2 trillion for Sacombank; D1.362 trillion for another bank, BIDV; and most recently D2.1 trillion for a third, Techcombank, in October.
Citi led the Vinacomin and (with ANZ and Sacombank Securities) Sacombank deals; Chia says Vinacomin could have gone well over D2 trillion had it wanted to. “Vietnam certainly has the potential to develop a pretty robust local currency market,” he says. “I think issuance will remain sporadic for the time being because of the interest rate environment, which has been volatile this year. But if we see the rate environment stabilise we should see more deals getting done in the local market.”
Certainly, many of these deals have been impressive in any context, and not just EVN, discussed in the box in this article. Sean Henderson at HSBC points to BIDV, the first lower tier two deal in Vietnam for three years, which HSBC jointly led with BIDV itself. “That was a great print in terms of being able to execute a lower tier two deal through the crisis,” he says. Doing it internationally would have been “exceptionally difficult if not impossible for most names – you’ve only just seen OCBC do it. So it was a great success being able to get them capital out of their domestic market.” HSBC also joint-led the Techcombank deal, with Standard Chartered, the largest single tranche by a financial institution this year. Peng-Meng Ling at Stanchart thinks there’s more where that came from, and reports a number of local currency deals in the pipeline.
There’s certainly no shortage of a need for funds. Vietnam’s vice minister of planning and investment, Dang Huy Dong, tells IFR Asia he hopes the local bond market can be one of many sources for the country’s vital infrastructure funding. “We need a substantial amount of capital to finance our ambitious and huge demand for infrastructure developments,” he says. “So far we have been relying on the conventional sources, such as the national budget, grants and loans. Now we have to look to the commercial bond markets, domestically and internationally.”
He accepts there is more to do. “The domestic bond market is developing,” he says. “It’s still in its initial stages, but we are learning by doing, and as people become more confident it will expand. I’m optimistic about it.”
And it’s not just the projects that need funds. Companies need to expand and are keen to do so with rates low. “Corporates want to raise medium to long term funding for two reasons,” says Nguyen Quang Minh, deputy director of the treasury department at Vietcombank. “Firstly there are real needs to finance their projects. Secondly, they expect that next year interest rates will increase, so if they raise funds now it will be cheaper than in the next two years.”
But Nguyen is typical of local bankers in seeing harder times ahead, and his tone is more cautious than the international players. He says despite the successful issues this year – he calls it “the year of the corporate bond” – things may get tougher. “Now I think it is very difficult for corporations to issue,” because the State Bank of Vietnam is not adding liquidity to the market. Similarly at BIDV, Trinh Quynh Thanh, deputy manager of the dealing room, also bemoans the lack of liquidity and calls 2009 “a tough year” for that reason. “In 2007 you could see a strong amount of capital coming to Vietnam and a lot of government bond investment, but after 2008 and the financial crisis it ran out. There was also a sell-off of government bonds in Vietnam and after that liquidity fell to a low over 2009.”
And the future? “We think 2010 will also not be really good for liquidity for bonds. We need the recovery not only of Vietnam but the whole world.”
Indeed, one of the striking things about the bond issuance in 2009 is that it has been done almost entirely with only a single slice of the potential investor base – domestic banks. Local funds play a limited role, but international capital, once so active, has all but gone. “Last year they [foreign investors] got very big losses because of fluctuations in the exchange markets,” says Nguyen. “I don’t see them coming back yet – the main players are the domestic commercial banks.”
Getting this international capital back into these markets requires changes to happen both inside and outside Vietnam. Minister Dang Huy Dong says that dispersed FDI in the first 10 months of 2009, at US$8 billion, is not significantly down on the $9 billion figure for 2008, but the committed FDI is dramatically down – $18.9 billion for 2009 to date when we spoke to him compared to $69 billion in 2008. And portfolio flows have been even more flighty. “I don’t think they are ready to come back because of their home country; they don’t have the confidence elsewhere in the world,” he says. “But quite a few foreign funds are still active in the stock markets.”
Some are no doubt deterred by the macro position, particularly inflation. “Just like any other country inflation is always an issue and any government has to take a close look at it; Vietnam is no different from that,” he says. “As we are rolling out the stimulus package, we install the mechanisms with a number of different indicators to keep a close watch on inflation.” And what are those indicators telling him? “At the moment they are saying we are still on the safe side. The moment we feel it is shaky, we have mechanisms.”
If foreign flows do return to dong bonds, they ought to support growth in the market. “In 2010 the picture may be a little brighter, but it should be taken step by step and there will not be a big change in the market,” says Trinh. “If you look at the macro, Vietnam is quite an attractive place to invest: we have positive GDP growth rates in 2009, a little bit higher in 2010; we are recovering quite well. By the second quarter of 2010 we may have some cashflow coming back into Vietnam.”
Deal profile: EVN
EVN’s D3.5 trillion bond re-opened a market that had been flattened for more than a year. “The market had really been closed since the fourth quarter of 2007, given the disruption to local fixed income markets with rapidly accelerating inflation,” says Reuben Tucker, head of debt capital markets for Asia at ANZ. “The bond markets had been shut for five quarters.”
ANZ had been close to EVN for years, having handled its inaugural transaction in dong. “We saw them as an ideal candidate to reopen the market with an appropriately sized benchmark deal, to signal to domestic investors that the market was open.” Early in the first quarter of 2009 the bank began sounding out accounts who said they had a lot of dong liquidity to deploy, given the dearth of trading available in the secondary markets at that time. Finding appetite from large domestic players, the bank went back to EVN with that feedback in late February, and the issuer set out for a D1.5 trillion transaction. “We felt that would be large enough to represent a true benchmark in the market, and also an adequate size to reopen the market with.”
Documentation took around four weeks, which Tucker suspects is a record in the local market. “But more important than the timing was the fact that we used the deal not only to reopen the market, but create a benchmark of international style documentation in the local market. It closely resembled a traditional Regulation S offering circular in international markets.”
The bookbuild took three days and closed at over D5 trillion, allowing the deal to increase to D3.5 trillion, the largest ever Vietnamese dong corporate bond. It succeeded in reopening the door, as many other issues followed.
Tucker says he is “very optimistic about this market, which is why we continue to commit more resources to it. It is in early stages of development but there is good diversity in terms of issuers: we have had large SOEs, joint stock banks, and a listed company in the tech space this year. The market is showing its capability to absorb credit across the entire spectrum of issuer types, and that’s occurring at a very early stage in the market’s development.”
He says he is seeing the level of sophistication in bank and asset manager portfolios lifting dramatically. He hasn’t yet seen international funds returning to the market, though he feels it will come back. “The encouraging thing to note is that many transactions have been successful based on almost 100% onshore distribution. While the return of international investors will be an encouraging signal, the fact that the market has seen the volumes it has without them is a strong sign.”