VIET NAMCORPORATE BOND MARKET REPORT

Contents 1. Viet Nam’s Corporate Bond Market Characteristics ....................................................................................................................... 7

1.1. Overall Characteristics ...................................................................................................................................................................... 7

1.2. Corporate Bond Market Size ........................................................................................................................................................... 7

2. Specific Characteristics .............................................................................................................................................................................. 9

2.1. Issue Size ................................................................................................................................................................................................ 9

2.2. Maturity Distribution ......................................................................................................................................................................... 9

2.3. Maturity Type ..................................................................................................................................................................................... 10

2.4. Coupon Type ...................................................................................................................................................................................... 11

2.5. Payment Rank .................................................................................................................................................................................... 13

3. Investors ........................................................................................................................................................................................................ 14

3.1. Banks ...................................................................................................................................................................................................... 14

3.2. Social Insurance ................................................................................................................................................................................. 16

3.3. Private Insurance Companies....................................................................................................................................................... 16

3.3. Fund Management Companies ................................................................................................................................................... 17

3.4. Foreign investors .............................................................................................................................................................................. 19

4. Other Market Participants ...................................................................................................................................................................... 21

4.1. Issuers .................................................................................................................................................................................................... 21

4.2. Viet Nam Bond Market Association ........................................................................................................................................... 21

4.3. Banking and Financial Institutions Department, Ministry of Finance .......................................................................... 22

4.4. State Securities Commission ........................................................................................................................................................ 22

5. Credit Spreads ............................................................................................................................................................................................. 23

5.1. Yield Matrix .......................................................................................................................................................................................... 23

5.2. Credit Spread Matrix ........................................................................................................................................................................ 23

6. Guaranteed Bonds ..................................................................................................................................................................................... 26

6.1. Characteristics of VND Guaranteed Corporate Bond Market .......................................................................................... 27

7. Cross Border Bonds ................................................................................................................................................................................... 28

7.1. VND Bonds of Foreign Entities ..................................................................................................................................................... 28

7.2. Foreign Currency Bonds of Vietnamese Companies .......................................................................................................... 28

8. Regulatory Direction ................................................................................................................................................................................ 29

References ......................................................................................................................................................................................................... 30

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Tables

Table 1: Corporate Bond Market, Market Capitalization, and Gross Domestic Product of ASEAN6+3, 2018 ............... 7

Table 2: Corporate Bond Market, Government Bond Market, and Corporate Loan Market of ASEAN6+3, 2018 ....... 8

Table 3: Comparison of Average Issue Sizes of LCY Corporate Bonds in ASEAN 6, 2018 (USD million) ......................... 9

Table 4: Comparison of Maturity Distribution of Corporate Bonds in ASEAN 6, 2018 .......................................................... 9

Table 5: Maturity Distribution of VND Corporate Bonds, by Industry, 2018 ............................................................................ 10

Table 6: Comparison of Maturity Type of Corporate Bonds in ASEAN 6, 2018 ....................................................................... 10

Table 7: Distribution of VND Corporate Bonds, by Maturity Type and Industry, 2018 ........................................................ 11

Table 8: Comparison of Coupon Type of Corporate Bonds in ASEAN 6, 2018........................................................................ 11

Table 9: Distribution of VND Corporate Bonds, by Coupon Type and Industry, 2018 ......................................................... 12

Table 10: Spread Premium for Floating and Variable Rate Bonds, 2018 ................................................................................... 12

Table 11: Distribution of VND Corporate Bonds, according to Coupon Frequency and Industry, 2018 ...................... 13

Table 12: Comparison of Payment Rank of Corporate Bonds in ASEAN 6, 2018 ................................................................... 13

Table 13: Distribution of VND Corporate Bonds, according to Payment Rank and Industry, 2018 ................................ 13

Table 14: Overview of Banking Industry and Investments ............................................................................................................ 14

Table 15: List of Insurance Companies with Investments on Corporate Bonds, 2017 ........................................................ 17

Table 16: Types of Funds and Corresponding Restrictions on Investments in Corporate Bonds ................................... 18

Table 17: VND Yield Curve, as of 13 March 2019 ................................................................................................................................ 23

Table 18: Credit Spreads Between Coupon Rates of Corporate Bonds and Comparable Government Bonds ......... 24

Table 19: Credit Spreads of No Va Land Investment and Vingroup, 2017 ............................................................................... 25

Table 20: Overview of Local Currency Guaranteed Corporate Bonds in ASEAN 6 Markets,.............................................. 26

Table 21: VND Guaranteed Corporate Bond Issuers ......................................................................................................................... 27

Table 22: List of VND Bonds of Foreign Companies .......................................................................................................................... 28

Table 23: List of Foreign Currency Bonds of Vietnamese Companies ....................................................................................... 28

Figures

Figure 1: Breakdown of Total Bond Holdings Between Several State-owned Commercial Banks and Joint Stock Commercial Banks .......................................................................................................................................................................................... 15

Figure 2: Investment Portfolio of Vietnamese Insurance Companies, 2017............................................................................ 16

Figure 3: Assets Under Management of Vietnamese Mutual Funds (VND billion) ............................................................... 19

Figure 4: Issuer Distribution by Sector, 2018 ....................................................................................................................................... 21

Figure 5: Distribution of Guaranteed Corporate Bonds, by Type of Guarantor ..................................................................... 27

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Abbreviations

ABO Asian Bonds Online ACB Asia Commercial Bank Agribank Viet Nam Bank for Agriculture and Rural Development AUM asset under management BIDV Joint Stock Commercial Bank for Investment and Development of Viet Nam BFID Banks and Financial Institutions Department (of the Ministry of Finance Viet Nam) FCY foreign currency GDP gross domestic product HNX Hanoi Stock Exchange HOSE Ho Chi Minh Stock Exchange JSCB joint stock commercial bank LCY local currency MOF Viet Nam Ministry of Finance Viet Nam NAV net asset value NPL nonperforming loan SBV State Bank of Viet Nam SGX Singapore Exchange SME small and medium enterprises SOCB state-owned commercial bank SOE state-owned enterprises SSC State Securities Commission of Viet Nam TechcomBank Viet Nam Technological and Commercial Joint Stock Bank USD United States dollar VAMC Viet Nam Asset Management Company VBMA Viet Nam Bond Market Association Vietcombank Joint Stock Commercial Bank for Foreign Trade of Viet Nam Vietinbank Viet Nam Joint Stock Commercial Bank for Industry and Trade VND Viet Nam dong VSX Viet Nam Stock Exchange

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Disclaimer

The views expressed in this report are those of the authors and do not necessarily reflect the views and policies of Credit Guarantee and Investment Facility (CGIF), a trust fund of the Asian Development Bank (ADB) or its Board of Directors or the governments they represent.

This report is provided solely for informational purposes, and is not to be construed as providing advice, recommendations, endorsements, representations or warranties of any kind or whatsoever. The mention of specific companies or organizations, products or services does not imply that they are endorsed or recommended by CGIF in preference to others of similar nature that are not mentioned. No legal responsibility can be accepted by CGIF or the individual authors for the information in this report.

While every effort has been taken to ensure the accuracy of the information, CGIF shall have no liability for any loss or damage arising directly or indirectly from the use of information in this report.

Reproduction in full or in part use for any public purpose is permitted only with the prior written approval of CGIF.

This paper is part of the ASEAN corporate bond market research under the Finance Department of CGIF. As led by Dong Woo Rhee, Chief Financial Officer of CGIF, with assistance from Soleil Corpuz, Research Analyst of CGIF, this research effort aims to show the characteristics of corporate bond markets in ASEAN region. For any questions or comments on the contents of this report, please contact research@cgif-abmi.org.

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Data Description

For the understanding of the specific characteristics of Viet Nam’s corporate bond market, total outstanding corporate bonds as of 31 December 2018 obtained from Bloomberg were investigated. Local currency bonds issued by domestic entities in Viet Nam dong (VND) and issued in Viet Nam were included in the criteria for selecting the bonds for analysis. VND bonds issued by foreign entities were treated separately as cross-border issuances.

In this report, industry classifications were based on Bloomberg’s classification.

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Summary

1. Viet Nam’s Corporate Bond Market Characteristics

• Available data from Bloomberg about Viet Nam’s corporate bond market shows that Viet Nam is still the smallest corporate bond market among ASEAN 6 economies (Indonesia, Malaysia, Singapore, Thailand, Philippines, and Viet Nam). Its corporate bond market share to GDP stood at 1.8% at end of 2018, which was smaller than those of Indonesia (2.8%) and the Philippines (7.6%).

• In terms of maturity, Viet Nam’s corporate bond market is still a short-term market, as 46% of total number of corporate bonds had maturities of up to 3 years (based on data as of December 2018). Interestingly, outstanding bonds of Viet Nam’s banking sector were longer term, since 53% of the bonds from the banking sector had maturities between 5 and 10 years.

• One of the most notable characteristics of the market is the prevalence of floating rate notes (51% of total issued corporate bonds). Floating rate bonds use the 12-month retail deposit rate of four major local banks as the reference rate. This reflects that, to some extent, bonds were treated as an alternative to corporate loans as a source of funding.

• Compared to other ASEAN markets, Viet Nam has the highest ratio of convertible bonds to total outstanding bonds. Convertible bonds have been in Viet Nam’s corporate bond market since 2005–2006. Back then, commercial banks issued convertible bonds to raise capital and to improve their respective financial capacities. Based on the State Bank of Viet Nam regulation, convertible bonds issued by banks could be used as Tier II capital to improve their respective capital adequacy ratios.

2. Investors

• Viet Nam’s local currency (LCY) corporate bond market’s investors are mostly domestic institutions, which include the three investor groups: banks, insurance companies, fund management companies and securities companies. Among these investor groups, banks are still considered as the biggest investor group.

• Based on available financial information, major state-owned commercial banks such as Agribank, Vietcombank, Vietinbank, and Bank for Investment and Development of Viet Nam (BIDV) held approximately VND149 trillion of corporate bonds, which was already 25% of their total securities in 2017. On the other hand, six joint-stock commercial banks held VND83 trillion of corporate bonds during the same year.

• Investments of Viet Nam’s insurance industry in corporate bonds were less than 7% of its total investment portfolio in 2017. Though this allocation was still not sizeable, market players have noticed a rising interest from insurance companies for corporate bond investments.

• Fund management companies also emerge as a potential investor group for corporate bonds. The mutual fund industry in Viet Nam has been growing; its asset under management (AUM) was estimated to reach VND6.45 trillion in the second quarter (Q2) of 2017, which was 2.5 times larger than its value in Q1 2016. In addition, collective investment schemes in Viet Nam have been gaining popularity. These developments may increase the demand for corporate bonds.

3. Other Market Participants

• As of December 2018, there were 37 issuers of LCY corporate bonds in Viet Nam. These issuers were coming from the following sectors: banking (24% of total number of issuers), real estate (16%), and industrials (11%).

• There is one bond market association in Viet Nam, the Viet Nam Bond Market Association (VBMA). VBMA is established as a private, nonprofit organization. One of the key functions of VBMA is to act as a bridge among market players, especially in exchanging information.

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• Decree 88/2014/ND-CP served as the regulatory framework for the establishment of credit rating agencies (CRAs) in Viet Nam. In 2017, MOF Viet Nam granted license to Sai Gon Phat Thinh JSC to provide credit rating services; however, there have been no news or updates on the status of its operations.

4. Credit Spreads

• Since there is no bond pricing agency yet in Viet Nam, the analysis for credit spreads was based on coupon rates of corporate bonds over treasury bond rates at issue dates of the corporate bonds which were available from Bloomberg. Bonds issued by companies in the real estate sector were observed to have the widest spread—6.0% and above—compared to those issued in other sectors. This reflects the perceived risk placed on real estate companies in Viet Nam.

• The analysis of credit spreads also indicated that 12-month deposit rates were more widely used than comparable treasury rates as the benchmark in pricing corporate bonds.

5. Guaranteed Bonds

• In Viet Nam, government-guaranteed bonds are recognized as a separate segment in the bond market. Only specific entities are allowed to receive guarantees from the government, namely, the policy banks of the state, financial and credit institutions implementing the government’s credit programs, and enterprises with programs and projects deemed to achieve economic development as per the government’s criteria.

• From the available information in Bloomberg, Viet Nam’s guaranteed corporate bond market is the third highest among the ASEAN 6 markets in terms of the ratio of guaranteed corporate bonds out of the total corporate bonds. In 2018, there were nine outstanding guaranteed corporate bonds in Viet Nam, which had an outstanding amount of VND10.8 trillion or 11.8% of the total LCY corporate bond market in the country.

7. Cross Border Bonds

• There were two outstanding USD-denominated bonds from Vietnamese issuers, as of December 2018. No Va Land Investment Group Corporation issued USD240 million bonds with a maturity of 5 years. Vinpearl also issued USD450 million bonds, with 5-year maturity. Both issuances were listed at international exchanges such as the Singapore Exchange.

8. Regulatory Direction

• The amendment of Decree 90/2011/ND-CP aimed to make the issuance process of corporate bonds easier and more conducive for issuers. The new decree for corporate bonds, Decree 163/2018/ND-CP, detailed a simpler process for bond issuance.

• The new Securities Law is expected to be finalized in 2019. The new Securities Law provides recognition and guidelines on the private placement method of bond issuance.

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1. Viet Nam’s Corporate Bond Market Characteristics

1.1. Overall Characteristics

Viet Nam’s corporate bond market has shown progress over the recent years. Over a 10-year period, the country has almost doubled the value of outstanding corporate bonds, reaching USD4.3 billion-equivalent in December 2018. Even though there are signs of growth, the Vietnamese corporate bond market is still recognized to be the smallest among the ASEAN 6 economies.

Recognizing the importance of the corporate bond market in the country, the Ministry of Finance Viet Nam (MOF Viet Nam) passed Decree 163/2018/ND-CP (or, the Decree on Issuance of Corporate Bonds), which amended Decree 90/2011/ND-CP. The goal of the amended Decree is to make issuance process simpler and easier for potential issuers in the country.1

Before this Decree, the Government of Viet Nam approved a roadmap for the period 2017 to 2020 and envisioned to extend up to 2030. The roadmap aims to achieve a well-functioning bond market which is aligned with international best practices and standards. Under this roadmap, total bonds to gross domestic product (GDP) ratio is targeted at 45% by 2020 and 65% by 2030. Specifically, the corporate bonds should reach 7% of total GDP by 2020 and aggressively expand to 20% of GDP by 2030.

1.2. Corporate Bond Market Size

In terms of its relative size to market capitalization and GDP, Viet Nam was the smallest among the regions. To some extent, this characteristic also shows that Viet Nam still has untapped its corporate bond market. Table 1 shows the comparison of corporate bond market sizes across ASEAN6+3 countries2.

Table 1: Corporate Bond Market, Market Capitalization, and Gross Domestic Product of ASEAN6+3, 2018

Country LCY Corporate Bond Market

(A)

Market Capitalization a

(B)

GDP (C) A/B A/C

Viet Nam 4.29 171 238.85 2.5% 1.8% Indonesia 28.62 438 1,031.09 6.5% 2.8% Philippines 25.01 253 331.51 9.9% 7.6% Thailand 107.00 495 504.73 21.6% 21.2% Malaysia 160.19 392 345.92 40.9% 46.3% Singapore 116.15 483 357.39 24.0% 32.5% People’s Republic of China

2,615.42 5,377 13,088.75 48.6% 19.9%

Japan 723.62 5,373 5,004.14 12.8% 14.5% South Korea 1,191.26 1,377 1,604.27 84.4% 74.3%

LCY = local currency

Note: Values in USD billions. a Bloomberg’s estimates on market capitalization are calculated from all shares outstanding in a country’s exchange(s); these do not include exchange-traded funds (ETFs) and American Depositary Receipts (ADRs) as they do not directly represent companies. Estimates include only actively traded, primary securities on the country’s exchange(s) to avoid double counting. Bloomberg’s estimates may be deemed lower than those reported in other sources.

1 Information about Decree 163/2018/ND-CP is further explained in Chapter 8, Regulatory Direction. 2 ASEAN6+3 countries include Viet Nam, Indonesia, Philippines, Thailand, Malaysia, Singapore People’s Republic of China, Japan, and South Korea.

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Sources: Asian Bonds Online for corporate bond market size and GDP (as of December 2018); Market capitalization in domestic exchanges (in current values, as of 2018) from Bloomberg.

In terms of share to GDP, Viet Nam’s ratio was the smallest among ASEAN 6 markets, as shown in Table 2.

Table 2: Corporate Bond Market, Government Bond Market, and Corporate Loan Market of ASEAN6+3, 2018

Country LCY Corporate Bond Market

(A)

Government Bond Market

(B)

Corporate Loan

Market (C)

A/B A/C

Viet Nam 4.29 46.65 N/A 9.2% Indonesia 28.62 164.59 211.89 17.4% 13.5% Philippines 25.01 91.01 139.70 27.5% 17.9% Thailand 107.00 170.41 486.30 62.8% 22.0% Malaysia 160.26 174.08 400.62 92.1% 40.0% Singapore 116.15 91.64 295.55 126.7% 39.3% People’s Republic of China

2,615.42 6,837.08 12,930.28 38.3% 20.2%

Japan 688.20 9,545.11 17,749.12 7.2% 3.9% Korea 1,167.93 679.36 710.97 171.9% 164.3%

LCY = local currency

Note: Values are in USD billions. Sources: Asian Bonds Online for corporate bond market size and government bond market size (as of December 2018); Corporate loan market size (as of December 2018) from the central bank of each country.

This further relates to the underdevelopment of Viet Nam’s corporate bond market. On the other hand, Viet Nam’s official data on corporate loan market is not available for comparison with other markets. As noted by one market participant, the corporate loan market is very big in Viet Nam since banks used to provide corporate loans than retail loans. Corporates see bank loans as the initial source of funding, while corporate bonds will only be a secondary option. Corporates may have bank loans with maturity ranging from 1 to 3 years.

Based on corporate bond regulations set by MOF Viet Nam, bond issuance methods include: (i) bond bidding, (ii) bond issuance underwriting, (iii) through bond issuance agency, and (iv) direct sale of bonds, if the issuer is a financial or credit institution. Bonds can be issued through a public offering or a private offering (“private placement”). Public offers pertain to bonds offered to more than 100 investors. On the other hand, any offer made to less than 100 investors would be considered as private placement.

As one caveat for this report, the entire information on corporate bond market in Viet Nam remains unclear. Various data sources may be reporting different estimates on Vietnam’s corporate bond market. For uniformity, this report uses corporate bond information sourced primarily from Bloomberg, and to some extent with references from Asian Bonds Online.

Although only being able to capture a sample of the total corporate bonds in Vietnam, Bloomberg provides some information on the specific characteristics in the primary market, which may be useful in understanding the trends in Vietnam’s corporate bond market.

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2. Specific Characteristics

2.1. Issue Size

The average issue size of corporate bonds in Viet Nam as reported in Bloomberg was equivalent to around USD56.7 million, which was only next to Indonesia based on data from December 2018. This can be an indication of how nascent Viet Nam’s corporate bond market is. Not only in terms of LCY issuances, as will be discussed in the last chapter of this report, as of December 2018, there were only two outstanding FCY corporate bond issued by Vietnamese entities.

Table 3: Comparison of Average Issue Sizes of LCY Corporate Bonds in ASEAN 6, 2018 (USD million)

Country Average Issue Size Minimum Issue Size Maximum Issue Size Viet Nam 56.7 0.09 414.3 Indonesia 36.9 0.08 634.9 Malaysia 60.5 0.02 1,750.0 Singapore 156.4 0.25 740.6 Thailand 61.7 0.14 1,360.0 Philippines 122.5 1.87 548.7

Source: Bloomberg.

2.2. Maturity Distribution

Compared to other ASEAN 6 markets, the Vietnamese corporate bond market was still a short-term market, with 46% of the total number of issued corporate bonds having maturity of up to 3 years, based on Bloomberg’s data as of December 2018. Another 26% had maturities of 3–5 years, and 22% had 5–10 years maturity. Longer term bonds (i.e., more than 10 years maturity) took 6% of the total number of issued corporate bonds.

Table 4: Comparison of Maturity Distribution of Corporate Bonds in ASEAN 6, 2018

Country Up to 3 years

>3 to 5 years >5 to 10

years >10 years Perpetual

Average Maturity

Viet Nam 46% 26% 22% 4 (6) 5.1 Indonesia 50% 28% 19% 3% 4.6 Malaysia 11% 17% 35% 35% 2% 9.7 Singapore 11% 23% 46% 8% 12% 7.4 Thailand 39% 28% 25% 6% 1% 5.3 Philippines 6% 4% 79% 10% 7.5

Notes: Figures denote percentage share to total number of bonds per country. Figures may not add up to 100% due to rounding off.

Source: Bloomberg.

Majority of the issuers came from banks, real estate, industrial, and consumer stables industries. Although the Vietnamese corporate bond market is generally characterized to be short term (up to 3 years maturity), its banking industry stood out in being able to issue relatively long-term corporate bonds, as 53% of bonds issued in the banking industry had maturities between 5 to 10 years.

Among the bank issuers, major bank players, such as Asia Commercial Bank (ACB), Bank for Investment and Development of Viet Nam (BIDV), Viet Nam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), Viet Nam Bank for Agriculture and Development (Agribank), Bank for Foreign Trade of Viet Nam (Vietcombank), and Viet Nam Technological and Commercial Joint Stock Bank (TechcomBank), issued long term bonds with maturities ranging from 10 to 20 years. Notable issuances within the banking industry included longer tenor bonds such as BIDV’s 20-year bond issuance and Agribank’s 15-year bond.

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Table 5: Maturity Distribution of VND Corporate Bonds, by Industry, 2018

Industry Up to 3 years >3 to 5 years >5 to 10

years >10 years

Total

Banks 24% 12% 53% 12% 100% Real Estate 75% 13% 13% 100% Industrial 50% 21% 14% 14% 100% Consumer Staples 50% 38% 13% 100% Others 35% 53% 12% 100% Total 35% 26% 22% 6% 100%

Notes: Figures denote percentage share to total number of bonds per sector and may not sum up to 100% due to rounding off. Industries were based on Bloomberg’s classification.

Source: Bloomberg.

Corporate bonds issued by industrial firms accounted for the remaining share of 19% of the total volume of corporate bonds. Bonds issued by industrial firms had an average maturity of 5.1 years following the market’s average. The longest maturities in this industry were from the issuances of Viet Nam Expressway Corporation, with maturity of 15 years.

The issuances from industries such as real estate and consumer staples showed shorter maturities, with average maturities of 3.3 years for real estate and 3.9 years for consumer staples. The longest-dated bonds from these industries included the 10-year bonds issued in 2014 by Masan Consumer Holdings and the 10-year bonds of Vingroup JSC issued in 2016. Both bonds were guaranteed by CGIF.3

2.3. Maturity Type

Based on 2018 data, about 82% of VND corporate bonds were straight bonds (or redeemed at maturity), while 10% were convertible and another 8% were callable bonds. The characteristic of being dominated by straight bonds is also observed in other ASEAN markets. However, a more interesting feature is that the share of convertible bonds in Viet Nam was the highest in all ASEAN. Convertible bonds can only be issued by joint-stock companies in Viet Nam.4

Table 6: Comparison of Maturity Type of Corporate Bonds in ASEAN 6, 2018 Country Straight Callable Sinkable Convertible Others Viet Nam 82% 8% 10%

Indonesia 98% 1% 0.3% 0.2%

Malaysia 90% 5% 0.3% 3% 3% Singapore 77% 8% 0.6% 15% Thailand 82% 15% 1% 0.1% 2% Philippines 38% 58% 2% 2%

Notes: Figures denote percentage share to total number of bonds per country. Figures may not add up to 100% due to rounding off. Source: Bloomberg.

Convertible bonds have been introduced in the market since 2006. During this time, convertible bonds were issued especially by commercial banks because of the need to raise capital to meet the capital adequacy ratio and minimum capital level required by the regulators. 5 In 2010, the State Bank of Viet Nam (SBV) issued Circular Number 13/2010/TT-NHNN, which covered the capital adequacy ratio requirements of banks. Based on the circular,

3 More information about guaranteed bonds in Viet Nam is found in Chapter 6 of this report. 4 Based on the Securities Law of Viet Nam, limited liability companies are not allowed to issue convertible bonds. 5 Nguyen Quoc Hung. 2012. Vietnam’s Capital Markets: Young and Growing. Chapter 9. http://www.ide.go.jp/library/Japanese/Publish/Download/Report/2011/pdf/107_ch9.pdf

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convertible bonds of banks were considered to be part of Tier 2 capital, which might have influenced the behavior of banks on issuing convertible bonds.6

As of end of 2018, looking at the level by industry, convertible bonds were mostly in the industry sector (4 out of 7 convertible bonds were issued). Ho Chi Minh City Infrastructure JSC (an investment group company in infrastructure development in Viet Nam) and Transimex-Saigon (a logistics service provider in the country) were the two issuers of convertible bonds in the industry sector.

By current market practice, convertible bonds are issued to existing shareholders because issuers do not want to dilute the equity upon conversion.7 Convertible bonds are issuer-led.

Table 7: Distribution of VND Corporate Bonds, by Maturity Type and Industry, 2018

Sector Straight Callable Convertible Total Banks 65% 29% 6% 100% Real Estate 94% 6%

100%

Industrial 71%

29% 100% Consumer Staples 88%

13% 100%

Others 94%

6% 100% Total 82% 8% 10% 100%

Note: Figures may not sum up to 100% due to rounding off. Industries were based on Bloomberg’s classification.

Source: Bloomberg.

2.4. Coupon Type

One of the distinct characteristics of Viet Nam’s corporate bond market is the dominance of floating/variable bonds compared to other ASEAN markets. Fixed coupon bonds in Viet Nam only accounted for 45% of the total outstanding corporate bonds as of end of 2018; while 51% accounted for floating and variable coupon types. This is interesting to note since fixed coupon bonds are dominant in most corporate bond markets.

Table 8: Comparison of Coupon Type of Corporate Bonds in ASEAN 6, 2018

Country Fixed Floating Step-Up Variable Zero Others Viet Nam 43% 36% 3% 15% 3%

Indonesia 95% 0.3% 0.6% 0.5% 4%

Malaysia 76% 12% 3% 2% 7% 0.3% Singapore 82% 1% 2% 13% 1% Thailand 90% 1% 8% 0.06%

Philippines 92% 1% 1% 4% 2%

Note: Figures denote percentage share to total number of bonds per country. Figures may not add up to 100% due to rounding off. Source: Bloomberg.

6 This is seen in Article 5 of Circular No. 13/2010/TT-NHNN. Article 5 also laid out the eligibility conditions of a convertible bond to be part of Tier 2 capital of the bank. Some of the conditions include the following:

• Having an initial term of 5 years; • Not secured by assets of the credit institution itself; and • Credit institutions may not redeem at the request of the owner or repurchase at the secondary market; credit

institutions may only buy back after obtaining from State Bank of Viet Nam (SBV) a written approval that the repurchase would not affect the capital adequacy ratio of credit institutions.

7 In 2006, banks such as Sai Gon Joint Stock Commercial Bank (SCB) and Asia Commercial Bank (ACB) were among the first to issue convertible bonds. SCB’s convertible bonds were issued to three groups: existing shareholders, bank’s staff, and other (external) investors.

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Floating and variable coupon bonds were most common in Banks and Real Estate sectors, as shown in the table below.

Table 9: Distribution of VND Corporate Bonds, by Coupon Type and Industry, 2018

Industry Fixed Floating/Variable Step-Up Zero Total Banks 41% 41% 12% 6% 100% Real Estate 19% 81%

100%

Industrial 64% 36%

100% Consumer Staples 50% 38%

13% 100%

Others 47% 53%

100% Total 43% 51% 3% 3% 100%

Notes: Figures may not sum up to 100% due to rounding off. Industries were based on Bloomberg’s classification.

Source: Bloomberg.

The formula for pricing floating and variable coupon bonds is to use the 12-month average retail deposit rate as the reference benchmark and a predetermined spread. The reason why the 12-month deposit rate linked floating and variable bonds are popular in Viet Nam is due to commercial banks’ preference. It is said that commercial banks are the largest investor group of corporate bonds in Viet Nam and they prefer investing in floating and variable rate bonds because their liabilities are also linked to deposit rates. In addition, the Vietnamese market has also been oriented towards corporate loan as bonds are considered as its alternative.8

Based on the descriptions of the 37 floating and variable bonds, floating rate bonds normally carry fixed coupon on the first year. Subsequently, the coupon rate is adjusted based on the 12-month retail deposit rate plus spread over the succeeding years. The deposit rate used is normally the rate quoted by either one bank or the average rate from several banks, mostly state-owned, such as BIDV, Agribank, Vietinbank, and Vietcombank. Variable rate bonds share the same coupon features with floating rate bonds.

The ranges of spread premiums for floating rate and variable rate corporate bonds differed from one industry to another, as shown in Table 10. Real estate had the highest spread among the industries, with 3.25% to 4.50%; while Banks had the lowest spread at 0.80% to 1.20%.

Table 10: Spread Premium for Floating and Variable Rate Bonds, 2018

Industry Minimum Spread Maximum Spread Banks 0.80% 1.20% Real Estate 3.25% 4.50% Industrial 1.00% 3.80% Consumer Staples 1.50% 3.00% Others 0.10% 4.00%

Note: The figures were computed based on available information in Bloomberg. Source: Bloomberg.

In terms of coupon frequency, semiannual frequency accounted for 49% share of the total volume of corporate bonds at the end of 2018. Among the new corporate bonds issued in 2018, 50% of corporate bonds had semiannual coupon frequency. It can be noted, however, that among the firms in the financial sector, there was no issuance of semiannual coupon by banking institutions. Nonetheless, annual coupon frequency was still quite substantial, accounting for 39% of the aggregate corporate bonds during the review period.

8 Additional information about the 12-month retail deposit rate is discussed in Section 5 of this report.

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Table 11: Distribution of VND Corporate Bonds, according to Coupon Frequency and Industry, 2018

Annual Semi-Annual Quarterly Total Banks 94%

6% 100%

Real Estate

88% 12% 100% Industrial 50% 36% 14% 100% Consumer Staples 14% 71% 14% 100% Others 24% 59% 18% 100% Total 39% 49% 13% 100%

Notes: 1. Industries were based on Bloomberg’s classification. 2. Zero coupon bonds were excluded in this table. Source: Bloomberg.

2.5. Payment Rank

As shown in Table 12 below, Viet Nam’s corporate bond market was dominated by unsecured payment ranks, which was similar with that of Thailand.

Table 12: Comparison of Payment Rank of Corporate Bonds in ASEAN 6, 2018

Country Secured Unsecured Subordinated Viet Nam 6% 93% 1% Indonesia 21% 77% 5% Malaysia 52% 41% 6% Singapore 3% 84% 12% Thailand 3% 94% 3% Philippines 5% 86% 9%

Note: Figures denote percentage share to total number of bonds per country. Figures may not add up to 100% due to rounding off. Source: Bloomberg.

About 93% of corporate bonds in Viet Nam were unsecured. Only one bond issue was subordinated, which was issued by Agribank. The bond issued by Anphat Plastic Green in December 2015 was the only secured bond among the list of corporate bonds.

Table 13: Distribution of VND Corporate Bonds, according to Payment Rank and Industry, 2018 Secured Unsecured Subordinated Total

Banks 6% 88% 6% 100% Real Estate 6% 94%

100%

Industrial

100%

100% Consumer Staples 13% 88%

100%

Others 6% 94%

100% Total 6% 93% 1% 100%

Notes: Figures may not sum up to 100% due to rounding off. Industries were based on Bloomberg’s classification.

Source: Bloomberg.

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3. Investors

Viet Nam’s local currency bond market is dominated by domestic investors and remains limited to only a few major investor groups. Non-residents are allowed to purchase bonds. Both resident and non-resident investors are levied a 5% withholding tax. However, the tax rate may be reduced depending on existing tax treaties.

3.1. Banks

The banking industry in Viet Nam is categorized according to state-owned commercial banks (SOCBs), joint stock commercial banks (JSCBs), foreign bank branches, wholly-owned foreign banks, joint-venture banks, and policy banks. Among these bank groups, SOCBs and JSCBs are the most active investors for corporate bonds. As an illustration of the banking industry’s investments in corporate bonds, Table 14 shows the extent of investments in corporate bonds among SOCBs and JSCBs.9

Table 14: Overview of Banking Industry and Investments 10

Bank Groupsa

Major Players Total Securities Holdingsb

(as of Dec 2017)

Total Corporate Bond Holdingsc (as of Dec 2017)

% Share of Corp. Bond Holdings to Total Investments

SOCB • Agribank • Vietcombank • Vietinbank • BIDV

VND593 trillion VND149 trillion 25%

JSCB • TechcomBank • Sacombank • ACB • Military Bank • Maritime Bank • LienVietPostBank

VND191 trillion VND83 trillion 44%

ACB = Asia Commercial Bank, BIDV = Bank for Investment and Development of Viet Nam, JSCB = joint-stock commercial bank, SOCB = state-owned commercial bank a List and categorization of banks are based on a World Bank report, accessed through http://documents.worldbank.org/curated/en/434251527221608421/pdf/126578-PUB-PUBLIC-docdate-5-24-2018.pdf b Total securities holdings refer to the total securities held for trading and investment securities. This includes government bonds, government-guaranteed bonds, treasury bills, SBV bills and non-VAMC bonds. (There were no descriptions if non-VAMC bonds were issued by banks or private enterprises.) c Corporate bond holdings refer to bonds or debt securities issued by domestic/local credit institutions and domestic/local economic entities, as described in financial reports of each identified bank.

Source: Financial Statements of Banks in 2017; Authors’ interpretation and calculations.

From the data presented in Table 14, the estimated corporate bond holdings of SOCBs and JSCBs amounted to VND232 trillion in 2017, which was even more than the amount of reported corporate bond holdings in sources such as ABO or Bloomberg.

9 Based on an unofficial estimate from a market player, banks serve as the major investor group in Viet Nam’s bond market. Banks hold 80%–90% of the total bond issuances (both government and corporate bonds). Other investor groups include insurance companies, which capture about 8%–9% of total bonds in the country. 10 Based on the Law on Credit Institutions (2010) of Viet Nam, a foreign bank branch means a subsidiary of the foreign bank without legal entity status. The foreign bank is liable for all the obligations and commitments of the branch in Viet Nam. A policy bank is established by the government to implement the socio-economic policies of the State and not to operate for profit. These types of banks are excluded in the illustration in Table 15.

15

In addition, between SOCBs and JSCBs, Table 14 shows that JSCBs had higher ratio of corporate bond holdings than SOCBs. The securities investments of SOCBs were leaning towards government bonds. Figure 1 shows the distribution of bond holdings among the select SOCBs and JSCBs.

Figure 1: Breakdown of Total Bond Holdings Between Several State-owned Commercial Banks and Joint Stock Commercial Banks

GB = government bond, JSCB = joint stock commercial bank, SOCB = state-owned commercial bank, VAMC = Viet Nam Asset Management Company

Note: Others include government-guaranteed bonds, treasury bills, SBV bills and non-VAMC bonds. Source: Financial Reports of each bank in Table 14; Authors’ calculations and interpretation.

From previous discussions with market participants and as seen in financial reports of some banks, banks normally invest in corporate bonds with maturities of up to 5 years. They also invest in bonds with maturity of beyond 5 years, but these are mostly bonds issued by other banking institutions. Figure 1 reinforces this information that holdings from other banks (VND122 trillion for both SOCB and JSCB) were greater than the holdings from non-bank enterprises (VND107 trillion) in 2017.

Banks are quite aggressive in taking credit risks of bonds as they already give loans to small- and medium-sized enterprises (SMEs) and state-owned enterprises (SOEs). Some banks also invest in corporate bonds not only to hold them in their books but also to distribute to their retail clients.

Figure 1 shows that there are “VAMC Bonds” existing in the market. The Viet Nam Asset Management Company (VAMC) was established by SBV in July 2013 to clean up bad debt from the banking system and allow domestic banks to undergo restructuring.11 Banks with nonperforming loan (NPL) ratio of 3% or more are required to sell their NPLs to VAMC, which in turn will issue bonds (“VAMC Bonds” or “Special Bonds”). VAMC bonds have a maturity of 5 years. Based on the financial statements of the banks, VAMC bonds are held until maturity.

In 2018, the SBV issued Circular No. 15/2018/TT-NHNN that prohibits banks to buy corporate bonds for restructuring of existing loans of issuers. The circular also mentioned that banks should have prudential internal credit risk rating as well as a rating system for issuers.

11 State Bank of Viet Nam (SBV) Circular No. 19/2013/TT-NHNN.

SOCB JSCB

GBs 365 17

Bonds issued by banks 73 49

Bonds issued by enterprises 73 34

VAMC Bonds 63 53

Others 30 0

0100200300400500600700

in V

ND

trill

ions

16

3.2. Social Insurance

Social insurance is managed separately by the government agency, Viet Nam Social Security (VSS). 12 The investment activities of VSS are generally governed by Law No. 58/2014/QH13 (“Law on Social Insurance”)13. The main investment principle is to ensure safety, efficiency, and capital recoverability. As such, VSS is only allowed to invest the social insurance fund on the following assets:

• Purchase of government bonds; • Deposits or purchase of bonds, term bills or deposit certificates at well-performing commercial banks as

rated by the SBV; and • Provision of loans to the state budget.14

In addition, Article 19 of Decree 115/2015/ND-CP (“Guidance on the Law on Social Insurance”) states that the gains from the investment activities of the social insurance fund shall be placed into the fund and be used to pay for the administrative expenses of the social insurance.

According to a news report, the accumulated fund investment of the social insurance fund as of end of 2017 reached VND610 trillion, of which 90% were invested in government bonds and the remaining 10% were invested in short-term deposits at commercial banks.15 Based on these descriptions, it can be said that the social insurance fund is has yet to invest in corporate bonds in Viet Nam.

3.3. Private Insurance Companies

In 2017, there were 30 non-life insurance companies and 18 life insurance companies. According to the Annual Report of MOF Viet Nam on the insurance industry in 2017, the insurance sector had invested VND248 trillion in 2017. The annual report mentioned that the industry’s investment grew by 25.1% in 2017. Most of the investments were in government bonds, government-guaranteed bonds, and local government bonds. Figure 2 shows the breakdown of the investments.

Figure 2: Investment Portfolio of Vietnamese Insurance Companies, 2017

*Includes government bonds, government-guaranteed bonds, and local government bonds.

Source: MOF Viet Nam. 2017. Annual Report of Viet Nam Insurance Market 2017.

12 Along with the social insurance fund, VSS also manages the health insurance fund. 13 The Law on Social Insurance serves as the main regulation for social insurance regimes and policies. 14 Articles 91 and 92 of the Law on Social Insurance (2014). 15 Viet Nam News. 2018. 90% of Social Insurance Fund Invested in G-bonds. https://Vietnamnews.vn/economy/465116/90-of-social-insurance-fund-invested-in-g-bonds.html#jsL96KakOCAs5g2Y.97. Accessed on 20 March 2019

Government Bonds*54.14%

Deposits31.07%

Corporate share, fund certificates, unsecured bonds

6.50%

Loans2.84%

Investment Trust2.06%

Secured corproate bonds1.55%

Others1.84%

17

The available data from MOF Viet Nam suggests that “secured corporate bonds” and “corporate share, fund certificates, unsecured bonds” items are reflective of the investment trends of insurance companies on corporate bonds. As shown in Table 15 below, it can be inferred that life insurance companies had higher investments on corporate bonds than non-life insurance companies.

Table 15: List of Insurance Companies with Investments on Corporate Bonds, 2017

Rank Life Insurance Companies

Holdings (VND

trillion)

% Share

Non-Life Insurance Companies Holdings

(VND trillion)

% Share

1 Bao Viet Life 3.7 22% Vietinbank Insurance 0.6 18% 2 Manulife 2.9 17% BIDV Insurance 0.5 15% 3 Prudential 2.8 17% Viet Nam National Aviation

Insurance 0.4 12%

4 Daiichi 2.4 14% Military Insurance JSC 0.4 12% 5 Aviva 2.0 12% Bao Minh Insurance 0.3 9% Others 2.8 17% Others 1.1 33% Total - Life 16.6 100% Total – Non-Life 3.3 100%

BIDV = Bank for Investment and Development of Viet Nam

Notes:

1. The source did not mention specific details for corporate bonds. The holdings referred in the table are the sum of “secured corporate bonds” and “corporate share, fund certificates, unsecured bonds”.

2. Details may not add up to 100% due to rounding off.

Source: MOF Viet Nam. 2017. Annual Report of Viet Nam Insurance Market 2017.

From previous market interviews, there was a rising interest from insurance companies to invest their investible funds in corporate bonds. Their holdings were estimated at about 20% of the total corporate bond stock. The 5-year bonds of Mobile World Investment Corporation issued in November 2017 and guaranteed by CGIF were largely placed in domestic insurance firms. Some 97% of the said bonds were taken up by insurance institutions.

Based on previous dialogues with investors, insurance companies mostly invest in corporate bonds with maturity of up to five years for bonds which are not guaranteed. For CGIF-guaranteed bonds, there is no limit on the maturity term, allowing them to invest in longer-dated bonds.

In terms of credit risk, insurance companies are quite conservative in their investment. Unlike banks, they are reluctant to take the credit risks of small companies and SOEs, which are considered riskier than big companies like Masan or Vingroup. While Vingroup is a real estate company, it is said to be in a better market position compared with other real estate companies in Viet Nam. In fact, it was the only real estate company which received a rating upgrade from S&P in South East Asia in 2017. Some insurance companies need to follow a particular credit scoring level as part of their internal investment limits. Most insurance companies also do not invest in subordinated bonds issued by banks. In terms of asset allocation, insurance companies normally invest about 5% to 20% of their investment funds in corporate bonds.

3.3. Fund Management Companies

The Securities Law of Viet Nam (2006) differentiates fund management companies from securities companies. Fund management companies are allowed to do two main activities: (i) securities investment fund management and (ii) securities investment portfolio management. The definition makes fund management companies in charge of managing mutual funds, open-ended funds, and pension funds.16

16 The same law provides the scope of activities of securities companies, which include: (i) securities brokerage, (ii) securities self-trading, (iii) underwriting issues of securities, and (iv) securities investment consultancy.

18

Based on the data available from the State Security Commission’s (SSC) website, there were 48 fund management companies registered and licensed in Viet Nam. 17 Of the 48 fund management companies, only one fund management company was under restructuring (i.e., Dong A Securities Investment Management Company Limited).

The following sub-sections present the types of funds under fund management companies.

Mutual Funds and Collective Investment Schemes

Mutual funds are managed by fund management companies. In Viet Nam, mutual funds are divided into three categories: open-ended funds, closed funds, and member funds.18 Each fund type has restrictions for investments. At present, the operational funds are those open-ended and closed-ended funds; member funds are under dissolution.19

Table 16: Types of Funds and Corresponding Restrictions on Investments in Corporate Bonds20

Type of Fund Investment Restrictions on Corporate Bonds

Open-ended Type • For Bond Funds o At least 80% of net asset value (NAV) are invested in treasury bills, bonds, and

other fixed-income instruments. • For Balanced and Equity Funds, it must follow the following:

o Not more than 30% of total asset value of the fund issued by one company or group of owner-related companies;

o Not more than 20% of the total NAV of the fund is invested in currently circulating securities of one issuing organization, including valuable papers, negotiable instruments, bonds, voting shares, non-voting preferential shares, and convertible bonds;

o Not more than 10% of the total asset value of the fund is permitted to be invested in shares and bonds which are being prepared for listing or for registration for trading as issued by issuing organizations operating in accordance with Vietnamese laws; and

o The total value of large investment items in the investment portfolio may not exceed 40% of the total asset value of the fund.

Closed-ended Type

• Up to 30% of the fund's total value of assets issued by a group or a group of companies having ownership relationships with each other.

Member Type • No limitations.

Source: MOF Viet Nam Circulars per fund type.

Based on the data from VinaCapital, the mutual funds market in Viet Nam grew by 17% quarter-on-quarter from Q1 2016 to Q2 2017, as shown in the assets under management (AUM) data.

17 Accessed through http://www.ssc.gov.vn/ubck/faces/vi/vimenu/vipages_vicsdlcty/ctyquanlyquy?_adf.ctrl-state=10ejcbzdr3_4&_afrLoop=110078358148000 18 Member funds refer to securities investment fund, which consists of organizations with at most 30 capital-contributing members. 19 Based on current list of funds available at SSC website. 20 Each fund type follows its own set of regulations from MOF Viet Nam.

19

Figure 3: Assets Under Management of Vietnamese Mutual Funds (VND billion)

Source: VinaCapital Presentation (2017).21

In 2016, MOF Viet Nam amended regulations for open-ended funds. In Circular 15/2016/ND-CP, open-ended funds should invest in bonds issued by publicly listed companies. This implies that open-ended funds should not invest in private offerings of bonds.

Voluntary Supplemental Retirement Funds

Viet Nam welcome the concept of private pension funds or the voluntary supplemental retirement funds to help develop the bond market in the country. Under Decree 88/2018/ND-CP, voluntary supplemental retirement fund should only be invested in the following in accordance with the retirement fund’s investment policies specified in its fund charter:

• Deposits at commercial banks; • Government bonds, government-guaranteed bonds, and municipal bonds; and • Securities investment fund certificates.

Out of these three investment instruments, Decree 88 stipulates that 50% of total asset value of the investments should be placed in government bonds. In addition, Decree 88 implies that voluntary supplemental retirement funds can invest indirectly in corporate bonds through securities investment fund certificates (or open-ended funds).

3.4. Foreign investors

Foreign investors are defined as those “individuals bearing foreign citizenship or organization established under foreign law and conducting investment or trading activities in Viet Nam.”22 Based on Decree 60/2015/ND-CP, foreign investors have unrestricted investments in government bonds, government-guaranteed bonds, local government bonds and corporate bonds, unless stipulated by relevant laws or the issuer. 23

21 Accessed through http://pdf.hubbis.com/pdf/eventAgenda/vietnam-wealth-management-forum-2017-2017-9-7-Driving+diversity+via+mutual+funds.pdf 22 MOF Vietnam Circular No. 123/2015/TT-BTC (Circular on Guiding Foreign Investment Activities on the Vietnamese Securities Market) 23 Decree Detailing a Number of Articles in Law on Securities issued by the MOF Viet Nam.

2,5532,847

3,317

3,992

5,256

6,452

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017

in V

ND

bill

ion

20

In the same decree, for convertible bonds, the issuer should ensure that the rate of foreign ownership on the maturity date when these bonds are converted into stocks or on the date when stocks are bought shall conform to regulations. These regulations include:

• For issuers who are public companies: o Where the International Agreement of which Viet Nam is a signatory lays down regulations on

the rate of foreign ownership, it will be governed by the International Agreement. o If the public company operates in the investment and business sector subject to conditions

applied to foreign investors but none of specific regulations on the rate of foreign ownership, the maximum rate of foreign ownership will be 49%.

• For SOEs equitized in the form of public securities offering: o The rate of foreign ownership will be governed under legal regulations on equitization. If there

is no provision written in the law on equitization, the rate of foreign ownership will be governed under the equivalent regulations for issuers who are public companies.

21

4. Other Market Participants

4.1. Issuers

Using Bloomberg’s data as of 2018, there were 37 issuers of corporate bonds in Viet Nam, in which nine were banks, translating to 24% of total issuers. This was followed by the real estate sector with six issuers (16%). Issuers from the industrials sector loosely followed, with four companies (11%).

Even in terms of number of issued bonds, banks and real estate had the highest shares among the sectors at 24% and 22%, respectively. One interesting characteristic is the consumer staples sector. Even though this sector comprised only 3% of total issuers, consumer staples captured 12% of the total issue amount of corporate bonds in Viet Nam in 2018. Within this sector, one major issuer was Masan Consumer Holding, which issued two bonds. These issuances of Masan Consumer Holdings took 59% of the total issue amount in the consumer staples sector and 12% of the total VND corporate bond market in 2018.

Figure 4: Issuer Distribution by Sector, 2018

Source: Bloomberg.

Among the 37 issuers, there were five government-related entities (GREs) or SOEs, which are in the financial sector (4 banks and 1 securities company). These SOEs included Vietcombank, BIDV, Agribank, Vietinbank, and VietinBank Securities. These five SOEs had a total of eight outstanding corporate bonds, totaling to VND14 trillion, or 15% of total VND corporate bonds in 2018.

4.2. Viet Nam Bond Market Association

Officially established in 2009, the Viet Nam Bond Market Association (VBMA) is a nonprofit organization created “to promote the professional and effective development of Viet Nam’s bond market, guarantee the legitimate rights and interests of members and at the same time ensure the national interests”.24 As a market association, one of the roles of VBMA is to act as a forum and bridge in exchanging and updating bond information as well as to update, store, and build a database of Viet Nam’s bond market information.

24 Introduction about VBMA. http://www.vbma.org.vn/vbma/intro/view.do?id=2

24%

16%11%

3%

46%

24% 22%17%

3%

35%30% 32%

6%

12%

20%

0%5%

10%15%20%25%30%35%40%45%50%

Banks Real Estate Industrials Retail - ConsumerStaples

Others

Share to total issuers Share to No. of Issued Bonds Share to Total Issue Amount

22

At present, VBMA publishes monthly reports on bond market activity in Viet Nam. In terms of corporate bonds, information is limited to their members.

4.3. Banking and Financial Institutions Department, Ministry of Finance

The Banking and Financial Institutions Department (BFID) is the main department within the MOF which is responsible for banking and financial institutions, including the securities market. The main role of BFID is to create decrees for the financial sector. BFID is the regulatory oversight of SSC and consequently the two often interchange in Viet Nam.

4.4. State Securities Commission

The State Securities Commission (SSC) is the implementing agency of the securities market in Viet Nam. As a government body, it is tasked to draft and implement regulations on Vietnamese securities market and to provide direction on securities market development. In addition, SSC is the owner of the two stock exchanges in Viet Nam – Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HSX) – making it the main regulator for securities exchanges in the country.25

25 On 7 January 2019, the government issued Prime Minister Decision No. 32 on creating the “Viet Nam Stock Exchange” (VSX), which will be the result of the merging of HNX and HSX. Decision No. 32 is further discussed in Chapter 8, Regulatory Direction.

23

5. Credit Spreads

5.1. Yield Matrix

There is no VND credit yield curve available from Bloomberg. Only sovereign yield curve is provided by Bloomberg. While the government yields provided in Bloomberg and VBMA only extends up to 15 years, the government is also issuing bonds with maturities extending up to 30 years. However, pricing information is not available on a regular basis.

Table 17: VND Yield Curve, as of 13 March 2019

1Y 2Y 3Y 5Y 7Y 10Y 15Y Sovereign 2.90 3.20 3.40 3.75 4.10 4.75 5.00 Y = year Unit: % Source: Bloomberg.

5.2. Credit Spread Matrix

Credit Spreads of Corporate Bonds

As yield matrix of corporate bonds based on credit ratings is not available in Viet Nam, credit spreads for fixed, floating and variable bonds were computed. For fixed rate bonds, credit spreads were obtained by calculating the difference between the coupon rate and the comparable treasury instrument of the same tenor and date. On the other hand, for floating and variable bonds, the same process was applied only for those bonds issued before 2018, using the current coupon rate for the computation.26 The current coupon rate was based on 12-month deposit rate plus the indicated spread. In cases when an issuer had issued several bonds for a particular tenor, the average spread was used.

For some bonds with no comparable government maturity, the benchmark yield was interpolated by taking the average yield of the next lower and upper tenors.27 Zeroes, step-up coupon bonds and variable bonds with no available information on current coupon rates were also excluded.

Based on the data, bonds issued by real estate firms obtained the widest spread in 2-year and 3-year maturities. This reflected the high risk placed on real estate companies in Viet Nam. All the credit spreads from bonds under real estate were 6.0% and above. In terms of longer-term maturities, it is observed that corporate bonds from the financial sector, especially bonds issued by banks, had tighter credit spreads over comparable treasury maturities.

For 5-year maturities, CGIF-guaranteed bonds for Mobile World Investment Corporation and PAN Group had the tightest spreads compared with bonds of the same tenor from other industries. Meanwhile, spreads for 10-year CGIF-guaranteed bonds had also been competitive with those issued by the banks.

Across all industry sectors, it can be noted that credit spreads for the 2-year bonds carried much higher spreads compared with longer tenors. This phenomenon is different from the general intuition that the longer the tenor is, the more spread is required. It is based on the fact that high risk companies issue short term bonds and low risk

26 The structure of floating and variable rate bonds is that the coupon rate for the first year is usually fixed and will be changed to floating or variable rate for the remainder of the tenor. Bonds issued in 2018 were excluded since there is still no second coupon rate available at the time of writing. 27 Viet Nam’s government bonds are issued in the following tenors: 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 15-year, and 30-year.

24

companies issue long term bonds. The relatively wide fluctuations in credit spreads across the curve indicates that in Viet Nam the comparable treasury instrument is not the reference benchmark used for pricing corporate bonds.

Table 18: Credit Spreads Between Coupon Rates of Corporate Bonds and Comparable Government Bonds Tenor Industry Company 1.5 2 2.5 3 4 5 6 7 10 Bank Viet Nam Prosperity JSC Bank

2.49

Vietcombank

-0.59 Vietinbank

1.23

ACB

2.19

2.18 BIDV

0.50

Viet Nam International Bank

2.03

Consumer Discretionary

Khang Dien House Trading and Investment

3.93

Thanh Thanh Cong Education JSC

4.06

Consumer Staples

Masan Group Corporation

4.82

Agro Nutrition International

2.54

Industrial HCMC Infrastructure Investment

4.95

4.85

4.81

4.38

Kinh Bac City Development Share Holding Corporation

6.76

Son Ha International Corporation

2.96

FECON Corporation

2.81

Materials An Phat Plastic and Green Environment

-0.97 -0.43

DongNai Plastic

4.31

Nui Phao Mining Company

6.81 6.91

Real Estate Vingroup JSC

6.49

No Va Land Investment Group Corporation

6.67

Vinhomes JSC

5.69

Nam Long Investment Corporation

2.31

Saidong Urban Development & Investment JSC

5.81

Securities Company

Saigon Securities Inc.

3.82

0.89

VietinBank Securities JSC

5.01

Sai Gon-Ha Noi Securities JSC

6.32

Transportation and Logistics

Transimex-Saigon Corporation

3.85

CGIF-Guaranteed

Hoan My Medical Corporation 2.21 2.02

Mobile World Investment Corporation

1.92

Pan Group JSC/The 1.98 Masan Consumer Holdings 0.9 Vingroup JSC 1.41

ACB = Asia Commercial Bank, BIDV = Bank for Investment and Development of Viet Nam Notes: 1. Computations done by CGIF. 2. Units are in percentage. 3. Some issuers had multiple bonds of the same maturities; the reported figures for these issuers were average of those bonds.

25

4. Industry classifications are based on Bloomberg’s classifications. Source: Bloomberg.

Benchmark Rate for Corporate Bonds in Viet Nam

Table 19 shows several floating rate issuances of select issuers in Viet Nam and the corresponding spreads over treasury rates and deposit rates. As shown in the table, the spread over deposit rates were higher than the spread over treasury rates among the select VND floating rate bonds.

Table 19: Credit Spreads of No Va Land Investment and Vingroup, 2017

Issuer Issue Date Maturity (Years)

Amount Issued

(VND billion)

Coupon Rate

Treasury Rate a

12M DR b Spread over T

Spread over DR

No Va Land Investment

28 Feb 2017 2 500 11.08% 4.39% 6.65% 6.69% 4.43%

31 Mar 2017 2 1,800 11.20% 4.79% 6.65% 6.41% 4.55%

8 Aug 2017 2 1,000 11.08% 4.17% 6.65% 6.91% 4.43%

Vingroup JSC 3 Jul 2017 2 2,500 10.80% 4.36% 6.65% 6.44% 4.15%

23 Nov 2017 2 1,000 10.75% 4.17% 6.75% 6.58% 4.00%

28 Dec 2017 2 1,000 10.80% 3.79% 6.85% 7.01% 3.95%

DR = Deposit Rate, T = Treasury Rate a Figures for treasury rates were derived from the government bond rate with the same maturity of the corporate bond. b Data on 12-month retail deposit rate represents average rates of BIDV and Vietcombank. Data on the rates were retrieved from Bloomberg. Source: Bloomberg; Authors’ calculations.

In terms of maturity, spreads over treasury rates and deposit rates were higher among those bonds with short term maturity than those with longer term maturity. This does not necessarily reflect the risk of the bonds across maturity. One possible factor can be the nature of industry of each issuer. Vietinbank is operating as an SOCB, while No Va Land Investment and Vingroup JSC are operating with real estate businesses. Investors may see higher risk in real estate than banking industry in general.

Based on the data and the descriptions of the bond, the 12-month deposit rate has been more widely used as a benchmark rate for floating rate bonds. There may be several reasons for this trend. First, it may reflect the continuing preference of investors on bank deposit rates. Second, it can also be due to the lack of a pricing agency in the country, which makes it challenging in appropriately pricing a bond. Lastly, it can also be due to a relatively irregular issuance of government bonds especially for longer term maturities.

26

6. Guaranteed Bonds

At the end of 2018, there were 409 guaranteed VND-denominated bonds in Viet Nam, comprising both government and corporate bonds. Out of this total, 337 bonds were guaranteed by the Republic of Viet Nam. Another 9 were corporate bonds with guarantees.

Viet Nam considers government-guaranteed bonds as a separate segment in bond market. As stated in Law on Public Debt Management of Vietnam (Law No. 29/2009/QH12) 28, beneficiaries of the government guarantee include (i) policy banks of State and financial and credit institutions implementing the State’s target credit programs and (ii) enterprises implementing the following:

• Investment programs and projects in which investment is decided by the National Assembly or the Prime Minister;

• Programs and projects applying high technologies and projects in energy, mineral exploration and processing, or export production or provision of export services in accordance with national socioeconomic development orientations;

• Programs and projects in the domains or localities eligible for state investment incentives under the investment law and other relevant laws; and

• Programs and projects funded with commercial loans associated with official development assistance (ODA) funds in the form of syndicated credit. 29

Government-guaranteed bonds comprised of bonds issued by VEC, VDB, and VBSP. All bonds issued by VBSP and VEC are government-guaranteed, while not all bonds issued by VDB are provided with a guarantee from the government.

Based on the available information in Bloomberg, Viet Nam only had 9 guaranteed corporate bonds, but these had accounted for 12.5% of LCY corporate bonds in 2018. In terms of value, Viet Nam’s guaranteed corporate bond market reached 11.8% of total VND bonds in the country. Viet Nam had the third highest ratio of guaranteed corporate bonds among ASEAN6 countries, as shown in Table 20.

Table 20: Overview of Local Currency Guaranteed Corporate Bonds in ASEAN 6 Markets, as of December 2018

LCY Corporate Bonds LCY Guaranteed Bonds Country Value

(A)

Number of Bonds

(B)

Value

(C)

Number of Bonds

(D)

Ratio of Value of Guaranteed Bonds

(C / A)

Ratio of Number of Guaranteed Bonds

(D/B)

Viet Nam 4.08 72 0.48 9 11.8% 12.5% Indonesia 34.69 938 0.58 10 1.7% 1.1% Philippines 28.43 233 0.55 7 1.9% 3.0% Thailand 91.01 1,468 8.71 109 9.6% 7.4% Singapore 53.02 339 20.98 145 39.6% 42.8% Malaysia 171.43 2,385 53.59 955 37.1% 40.0%

LCY = local currency Notes: Total values are in USD billions. Number refer to actual count of bond issues. Source: Bloomberg.

28 National Database of Legal Document. http://vbpl.vn/TW/Pages/vbpqen-toanvan.aspx?ItemID=10471 29 Articles 32 and 33 of Law on Public Debt Management (No. 29/2009/QH12).

27

6.1. Characteristics of VND Guaranteed Corporate Bond Market

The nine outstanding guaranteed corporate bonds in Viet Nam amounted to VND10.8 trillion.30 Guarantors are predominantly third-party organizations, such as CGIF and GuarantCo Ltd.

Figure 5: Distribution of Guaranteed Corporate Bonds, by Type of Guarantor

Source: Bloomberg. Note: Ratios were based on values of guaranteed corporate bonds.

Table 21 presents the list of VND-guaranteed bond issuers. These guaranteed bonds were provided with full guarantees by the respective guarantors for each bond. Based on the available information, CGIF is the most active third-party guarantor in Viet Nam, having guaranteed seven out of the 9 outstanding corporate bonds with guarantees. The 3.5-year bond of SG Thuong Tin Real Estate was provided guarantee by its subsidiary Thuong Tin Tao Cuoc; while the 7-year bond of Nam Long Investment Corp. was guaranteed by GuarantCo, another third-party guarantor.31

Table 21: VND Guaranteed Corporate Bond Issuers

Issuer Industry Guarantor Number of

Issues

Total Amount (VND trillion)

Average Maturity (Years)

Hoan My Medical Corporation Healthcare CGIF 2 2.33 6

Masan Consumer Holdings Consumer Staples CGIF 1 2.1 10

Mobile World Investment Corporation

Consumer Discretionary (Retail)

CGIF 1 1.14 5

Vingroup JSC Real Estate CGIF 2 3.00 7.5

The Pan Group JSC Consumer Discretionary (Consumer Services)

CGIF 1 1.14 5

Nam Long Investment Corporation

Real Estate GuarantCo Ltd.

1 0.66 7

30 In this section, government-guaranteed bonds are excluded. 31 GuarantCo is part of the Private Infrastructure Development Group (PIDG). GuarantCo’s aim is “to help address and overcome existing constraints in the supply of local financing to infrastructure projects and to help the development of local financial markets.” GuarantCo’s website. https://www.guarantco.com/about-us (Accessed on 08 March 2019).

Corporates9% GuarantCo

6%

CGIF85%

28

Sai Gon Thuong Tin Real Estate Real Estate Thuong Tin Tau Cuoc JSC

1 0.40 3.5

Source: Bloomberg.

Guaranteed corporate bonds had longer maturities than non-guaranteed corporate bonds in Viet Nam. Based on December 2018 data, average maturity of guaranteed corporate bonds in Viet Nam was around 5.9 years; while that of non-guaranteed corporate bonds was 5.1 years. Among the guaranteed corporate bonds, those guaranteed by CGIF had relatively longer average maturity compared with the bonds issued by SG Thuong Tin Real Estate.

7. Cross Border Bonds

7.1. VND Bonds of Foreign Entities

Only one foreign company had outstanding VND corporate bonds as of December 2018. BNP Paribas issued two bonds with 1-year maturity. Based on Bloomberg data, the bonds were issued in VND, but redeemed in USD.

Table 22: List of VND Bonds of Foreign Companies

Issuer Name Industry Issue Amount (VND billion)

Coupon Rate Issue Date Maturity (Years)

BNP Paribas Issuance BV Banks 60 5.5% 20 Nov 2018 1

108 4.1% 7 Mar 2018 1

Source: Bloomberg.

7.2. Foreign Currency Bonds of Vietnamese Companies

As of December 2018, there were two outstanding FCY bonds issued by Vietnamese entities, as shown in the Table 25. Both bonds were issued and would be redeemed in USD.

Table 23: List of Foreign Currency Bonds of Vietnamese Companies

Issuer Name Industry Issue Amount (USD million)

Coupon Rate Issue Date Maturity (Years)

No Va Land Investment Group Corporation

Real Estate 240 5.5% (Fixed)

27 Apr 2018 5

Vinpearl JSC Travel and Lodging 450 3.5% (Fixed)

14 Jun 2018 5

Source: Bloomberg.

Issuance of No Va Land Investment Group Corp. was listed on SGX, while Vinpearl’s was listed at SGX and Berlin Stock Exchange. As these issuances were listed in international exchanges, it might be possible that these issuances are intended for foreign investors as another source of funding aside from the local market. Interestingly, these two bond issuances were also convertible bonds, which could have possibly made it attractive to investors.

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8. Regulatory Direction

Revised Decree on Corporate Bonds

As mentioned in Chapter 1, MOF Viet Nam had already revised Decree 90/2011/ND-CP, which was the guiding decree for the issuance of corporate bonds. Some of the important points in Decree 163/2018/ND-CP (new corporate bond decree) include32:

• Privately-issued bonds are now required to be registered with the Viet Nam Securities Depository or its members within 10 business date from the issuance date.

• The concept of green bonds is introduced. • Issuance of bonds in multiple tranches is allowed, provided that all tranches must be issued within 12

months from the date of the first tranche. Each tranche must be completed within 90 days. • Offshore issuance of a bond by a Vietnamese company is no longer required to have a credit rating report

or to have a legal opinion on the issuance. • Issuers can directly sell bonds to investors without having to engage an underwriter or bond issuance

agent. • Issuers should adhere to comprehensive disclosure regime, which includes disclosure before issuance,

disclosure about issuance result, regular disclosure (such as six-month financial statement and use of proceeds report), and irregular disclosures.

New Securities Law

Another upcoming regulatory change in Viet Nam is the new Securities Law. MOF Viet Nam had prepared a draft of the law. The draft contains articles on private placement of bonds as well as introduction of a professional investor concept. Based on the draft version of the Securities Law, bonds offered through private placement can only be transferred or traded among professional investors until maturity.

The draft Securities Law is planned to be reviewed and finalized within 2019. MOF Viet Nam would also prepare specific documents and procedures for private placements of bonds.

32 Vietnamese Business Law. 2019. New Decree on Private Issuance of Corporate Bonds by Vietnamese Companies. https://vietnam-business-law.info/blog/2018/12/23/new-decree-on-private-issuance-of-corporate-bonds-by-vietnam-companies (Accessed on 21 February 2019) Chinhphu (Online Newspaper of the Socialist Republic of Viet Nam). 2019. Outstanding Policies Take Effect in February. http://news.chinhphu.vn/Home/Outstanding-policies-take-effect-in-February/20191/35809.vgp (Accessed on 21 February 2019)

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References

Bloomberg. https://www.bloomberg.com/asia GuarantCo. https://www.guarantco.com/about-us Nguyen Quoc Hung. 2012. Vietnam’s Capital Markets: Young and Growing. http://www.ide.go.jp/library/Japanese/Publish/Download/Report/2011/pdf/107_ch9.pdf Vietcombank Securities. 2017. VCBS Fixed Income Research, Corporate Bonds. https://vcbs.com.vn/vn/Communication/GetReport?reportId=5026 Viet Nam News. 2018. 90% of social insurance fund invested in g-bonds. https://vietnamnews.vn/economy/465116/90-of-social-insurance-fund-invested-in-g-bonds.html#jsL96KakOCAs5g2Y.97 World Bank. 2018. Mobilizing Finance for Local Infrastructure Development in Vietnam. A City Infrastructure Financing Facility. http://documents.worldbank.org/curated/en/434251527221608421/pdf/126578-PUB-PUBLIC-docdate-5-24-2018.pdf

About This Paper

This research provides an overview of the corporate bond market in Viet Nam, specifically on the unique characteristics of the market. Viet Nam’s corporate bond market has been the smallest as compared to its ASEAN6 neighbors. However, over the recent years, there has been a significant progress in the issuance of VND-denominated corporate bonds. In addition to the openness of Vietnamese entities for corporate bonds as means for financing, regulatory changes may serve as impetus for the development of the market. About CGIF

CGIF is a multilateral facility established by the Association of Southeast Asian Nations (“ASEAN”) members, China, Japan, Korea (“ASEAN+3”) and Asian Development Bank (“ADB”). It is established as a trust fund of ADB with paid-in capital of USD859.2 million from its Contributors. As a key component of the Asian Bond Markets Initiative, CGIF was established to develop and strengthen local currency and regional bond markets in the ASEAN+3 region. CGIF commenced its guarantee operations on 1 May 2012 and seeks to provide credit enhancements, mainly in local currencies, issued by credit worthy ASEAN+3-domiciled bond issuers.

Credit Guarantee and Investment Facility Asian Development Bank Building 6 ADB Avenue, Mandaluyong, 1550, Manila, Philippines Tel: +632 683 1340 Fax: +632 683 1377 www.cgif-abmi.org