Vietnam: Bond Issues Become Increasingly Popular


Dr Nick Freeman

With Vietnam’s corporate sector growing rapidly, the demand for capital to fund future investment is considerable and growing. Although the country’s capital market remains at a fledgling stage, we are witnessing increasing activity in the area of bond issues. Mighty PetroVietnam is a good example, having launched in early September a VND 300 billion (around US$19.5 million) domestic bond issue - the first of its kind by a state enterprise. PetroVietnam’s funding needs are substantial, with plans to develop multiple oil refineries and petrochemical complexes. With an annual coupon of 8.7 per cent in the first year, these five-year bonds appear very attractive, with VND 240 million allocated for institutions and VND 60 million for individuals. If the bond issue goes well, PetroVietnam is highly likely to tap the market again quite soon. A financial leasing company under state-run Vietcombank is also reportedly gearing up for a VND 50 billion (around US$3.3 million) bond issue, needed to fund expansion of its portfolio.

And it is not just the corporate sector that is issuing fixed income paper to fund investment projects. Ho Chi Minh City People’s Committee recently enacted a VND 1,200 billion (around US$80 million) bond issue, consisting of both two and five year maturities, with 8.5 per cent and 9 per cent coupons, respectively. Both local and foreign investors are eligible to buy these bonds, with individuals exempt from personal income tax. A further VND 800 billion bond issue by the city is expected before the end of the year. Indeed, the national government anticipates raising around VND 63 trillion (around US$4 billion) in both local currency and US dollar denominated bonds to finance major infrastructure projects between now and 2010.

The emphasis being placed on bonds also reflects in part inadequacies in other kinds of securities, such as equities (or shares). Opened in mid-2000, there is little doubt that Vietnam’s stock market is becoming a disappointment. There has been just one company listing so far this year, bringing the total number of companies listed to 21, of which only one stems from an actual initial public offering. All but one of the listed firms are ‘equitised’ former state enterprises that have allowed previously issued shares to be traded on the market. Therefore, as a vehicle for companies to raise long-term capital, the stock market in Vietnam is virtually unused and untested. Instead, the relatively few share issues tend to occur in the informal market, where both regulatory oversight and shareholder protection is minimal.

One of the main factors constraining the development of the stock market has been a lack of local financial institutions, rather than individual punters, willing to buy listed shares. This constraint will be eased, in part, by the introduction of local fund management companies. The first of these, VietFund Management, was licensed and launched in late August. A joint venture between a local private bank and a foreign private equity company, it aims to raise up to VND 150 billion for its first fund, of which a proportion will be invested in the stock market.

The stock market also still awaits a ‘big name’ bank or corporation to grace its index. There had been some anticipation surrounding the equitisation and listing of state-owned Vinamilk, a U$97m company, now scheduled for October. But with the government intending to retain 80 per cent of shares, rather than the 51 per cent previously announced, and the remaining 20 per cent to be divided between employees, other companies in the milk industry, and outside investors, this divestment is looking increasingly uneventful. A couple of the larger and more successful joint stock banks are reportedly keen to list on the stock market, but the State Bank of Vietnam has thus far resisted giving approval for them to do so. Witnessing rapid credit growth, banks like Asia Commercial Bank and Phuong Nam Bank have recently announced plans to issue new shares in order to increase their capital base, which will occur off market.

Vietnam has also been toying for some time with conducting its first international Eurobond issue, having now received sovereign ratings from a few of the major ratings agencies. The local press recently reported that Finance Minister Nguyen Sinh Hung was pondering an international bond issue. If enacted, this would be the first major fixed income paper that foreign institutions could acquire since roughly US$540 million of Vietnam’s foreign debt was converted into Brady bonds in March 1998. The main arguments in favour of Vietnam proceeding with an international bond issue are: i) it would serve as a benchmark for major state firms to enact their own corporate bond issues; ii) it would help put the country on the map of global financial markets; and iii) a bond issue now would allow Vietnam to take advantage of very low global interest rates. However, one major concern would be the response of the donor community, some members of which could well blanch at seeing Vietnam raising money on the financial markets at the same time as receiving grant aid.

WATCHPOINT: Expect to see more bond issues emanate from Vietnam, as the capital market develops and both private and state-owned organisations seek to use fixed income instruments to provide funding for their future investment plans.


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