Luận văn a study on issuing corporate bond the case of bank for investment and development of vietnam bidv

VIETNAM NATIONAL UNIVERSITY, HANOT SCHOOL OF BUSINESS Do Thi Hoa ASTUDY ON ISSUING CORPORATE BOND THE CASE OF BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM - BIDV Major: Business Admi

VIETNAM NATIONAL UNIVERSITY, HANOI

DEVELOPMENT OF VIETNAM - BIDV

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi - 2007

VIETNAM NATIONAL UNIVERSITY, HANOT

SCHOOL OF BUSINESS

Do Thi Hoa

ASTUDY ON ISSUING CORPORATE BOND THE CASE OF BANK FOR INVESTMENT AND

DEVELOPMENT OF VIETNAM - BIDV

Major: Business Administration

Code: 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: DR VU XUAN QUANG

Hanvi — 2007

5 Data colleetion method cover

6 Data analysis Hee "—

1.14, Côrpotate bon 1SSUBH0EI uc oeeoeeeireeisrssessesuao T77

1.4.3, Market selection .-1-:.ce-cscrevssssesnsneuneseceserenensensennenesee 2D

1.4.4, Model of issuing process "5ã

1.5 Issuance experienee _ "

1.5.1 Malaysia’s experience on developing bond market sả 1.5.2 Japan’s experience on empirical pricing 35

CHAPTER 2 DEVELOPMENT OF CORPORATE BOND MARKET 41

2.1 Vietnam’s corporate bond market overview ste § Al

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2.2 Compare to some Asian countries qui10:C0040700500088000G80 44

2.3 Major obstacles of the primary corporate bond market 46 2.3.1 Lack of a benchmark yield curve 46 2.3.2 Narrow Investor base : a Ngân ga

3 Limited supply of quality bond issues .48

2.3.4, Inadequate bond market infrastructure cose AB

CHAPTER 3 CASE STUDY: BIDV SENIOR BOND ISSUANCE 49

3.1 BIDV introduction obesesacakus tise x6: 3g ut 49

3.2 Market conditions and Demand i, XzEigggW104a1310,Ai 54

3.2.1 Analyse interest rate sẵn em _ - 54 3.2.2 Asset — liabilities structure as at 28th February 2007 56 3.3 Plan on issuing 3E421950304S429088148E04Đ1ã43vEQ3a521S3512194800048 eT 3.4 Approval from the State Bank of Vietnam ca Để

3.5 Regulation S and other jurisdiction limitations —

3.6, Issuing process: wes snsssesvestsstrstneeneeneeistnsaeiete 62 3.7, Analyse case StUdY sssosssessenesseesineesesoeeeintn "—

3.7.2 Limitatlons of the traisactlon -.coc is “1?

3.7.3, Advantages oes csenssstssesnenesen siete senssneeinet "H TH

CHAPTER 4 RHCOMMENDATIONS AND 8OLUTIONS verve BL

4.1 Strategy for development of bond market in Vietnam to 2010 8L

4.2.2 Choosing underwriter from the candidates: - .BS

4.2.4 Preparing offering documenis seventeen BF

4.2.6, Building book

4.27 Pricing and alloeating bonds mm

4.3 8olutons for developing prumary bond market „ĐỒ 4.3.1 Supply-Side Strategies cuocooeoeeres poset seein IL

4.3.3 Developing Infrastructure sen, Đ8

Board of Directors Board of Managements Basic points

Deustche Bank Emst and Young audit company Euro (cwrency)

Generally Accepted Accounting Principles Grish Bristish Pound

Tonhson Stock and Master law vompany Japan Yon

Hongkong Dollar Industrial Commercial Bank The International Capital Market Association Tnlemational

Tnilial public offering Mekong Delta Housing Bank

million

Statement on Auditing Slandards

State bank of Viclnam

Sccurities & Exchange Commission (US goverment) Singapore Dollar

Quahfied Tnstitulioral Buyer

United States United States Dollar

Viemam on Audi

1 Standards

Viemam Commercial Bank

World Trade Organisalion Rule 144A (as defined in Chapter 1)

vill

LIST OF TABLES

Table 1 1 Differences between Bond and Loan

Table 1.2 Sample due diligence question topics

‘Table 1.3 Quantitative selection eriteria

‘Table 1.4 Qualitative selection criteria

Table 1.5 The different issuanoe Íormats con

‘Table 3.1 List of 2V outstanding bonds

‘Table 3.2 Government and Corporate locaÏ bonds

Table 4.1 Capital demand of cconomy

LIST OF FIGURES

Figure 1.1 Market selection

Figure 1.2 Issuing process

Figure 2.1, Structure of hond market al the end of the third quarler 2006

Figure 2.2 Quistanding amount of bond from 2001-2006

Figure 2.3 Ouistanding Volume of Local curreney honds

Figure 2.4 Ratio af Goverment bonds and Corporate bonds

Figure 2.5 Corporate bond market Development

Figure 3.1 BIDV Financial results in period of 2001-2006

Figure 3.2 Onshore — offshore investors structure

Figure 3.3 By Business Types

Figure 3.4, By Geography

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83

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43 44

INTRODUCTION

1 The necessary of research

For some recent years, the bond market has been developing very actively As

so far, the market value of bonds in Vietnam makes up about 8-9 percent of GDP?

The parties engage in the market not only Government, focal Government but also Corporations The number of parties is increasing gradually and there are more and siore financial institutions pay attention to bonds

At that Gime, the Viemam bond market is required to become the really

affective capital-leading, channel in the economy Corporations and projects has one

new more funds mobilization charmel, it is issuing bonds, besides the traditional channels, for example, loans from banks In the fact that the bank-centre financial

system approach has successfully contributed to the high-economic growth

oulcomes achieved im Vietnam {since banks more effectively monitor fmanciat

envirouments characterised by asymmetric information in underdeveloped financial

markets) it has also resulted in the industrial sector’s overreliance on short-term bank intenmedialed borrowings This kind of mdusinal financing behavier has

caused two oritical financial mismatches: a maturity mismatch and a currency mismatch First, the maturity mismatch was the consequence of unhealthy financing

praclices, which were characlerized by large long-lerm investments under the

financing of short-term bank borrowings Second, the practice involved a serious omrency mismatch without a proper currency hedging arrangement In fact, the currency mismatch was implicilly protecled by overvalued exchange rates, which were the result of foreign exchange misalignments in the country By contrast, effective capital markets may play several positive roles: first, there will be greater

diversification of finanemg, an casicr process of risk transformation and a smaller concentration of financial risks, second, the capital markets may check and screen

+ Source: Report of MOF, 2006

financial risks more efficiently and quickly than bank credit departments, based on swifter flows of various information, thereby providing more expedient and

Year of 2006 is opening and dynamic year in the primary bond market

because a series of big corporations such as BIDV, Vinashin, ACB, EVN, issued

a huge amount of bonds However, the demand for capital in the economy still so

big, therefore, issuing bonds will be a potential channel and the bond market will

play au important role in the economy Many Vietuam businesses cousider issuing

‘bonds is one of effective fund mobilization chamnels in order to get short-tena and

long-term financial objectives

Vietnam officially enters World Trade Organization (WTO) in November

2006 This is the opporhmily ta internationalize the bond market Vietnam corporations could issue its bonds in offshore markets; conversely, foreign investors

could enter the Viemam bond market, both issuing bonds and trading bonds as well

Trom the reasons, the final thesis titled “A STUDY ON ISSUING CORPORATE BOND - THE CASE OF BANK FOR INVESTMENT AND DEVELOPMUNT OF VLUT NAM” ‘The study provided a real case and updated

international issuing model hence, it will bring some lessons for corporations also other beneficiaries in issuing bonds anda pieture overview of bond market

BIDV is one of the biggest banks mm Vietnam and BIDV bonds would be the

landmark in the primary bond market, which presented new method ef issuance, it

is underwriting with best effort and bookbuilding BIDV’s strategy is to become the leading commercial bank in Vietnam with a diverse ownership, a diverse business platform, a well-regarded and a strong financial position similar to that of other

banks tu the South Fasl Asia region As part of its restructuring process, the Issuer

formulated a business model which involves developing from a bank specializing in

development investment into a diversified and comprehensive commercial bank providing a range of products and services Accordingly, IDV has increased the proportion of valuable papers in lolal mobilization fund and issuing bond is BIDV long-term strategy in which BLDV hope to structure and improve its financial situation From the requirement of equitisation process scheduled at the end of

2007 BIDV has awaked that iLis high lime to balance short and loug-lerm debts by

increasing long-term liabilities From 2006, BIDV chose issuing bonds as key solution for this problem BIDV bonds became a benchmark case in the bond

inarket in Vietran

2 Objectives and aims

Tiris sturly focus mainly on the abjectives as Collowings

=> Mirstly, give out a systematical approach of bond, corporate bond and

bond issuance; also introduce a popular method of issuing corporate bond, it is underwrite with best ¢fforl and bookbuilding which has applied all over the world,

=> Secondly, overview Vietnam bond market; raise some highlights and

obstacles now

—» Thirdly, apply theory into case of BIDV bond issuance to show the successes, limitation, advantages and disadvantages of the transaction, from that

help BIDV gel inside overview of ils transaction,

=> Hinally, give out some appropriate recommendations on the bond issuance and solutions to develop the primary bond market as well

The final thesis aim to:

Introduce the intemational standard and normal practice in issuing corporate

bond through underwriling with best effort and bookbuilding and apply into a case

of BLDV bonds From that

- Help BLDV review its bond transactions and from that standardise its bond

issuing process:

- Bring some lessons for corporations also other beneficiaries in issuing bands, help them have a guide on how to issue bonds effectively

- Give out some solutions to improve primary corporate bond market

effectively in the future

3 Scope of work

The study is conducted in BIDV senior bond issuance in 2007 as a sample of Vietnam, BIDV bond is a bond issued by BID, a bank, a little bil differert lrom bond issued by general corporations There are more levels of control for bank bond other (han generat corporale bond, however, in basic points, there are no differences

in issumg process between them That is the reason the study choose BIDV bond issuance to analysis as the sample for general corporate bonds

‘There are many types of bonds such as senior or subordinated bond or secure

and unsecured bonds, convertible or callable bord But the siady only focus on

senior and unsecured bond which is the most popular in the market

‘Also the study focuses on local bond or bond issued in VND denomination, and issued to onshore and offshore investor under Regulation S and Prive placement

via underwriting with best effort and bockbuilding

4 Methodology

Methodotogy is used in this study is applying theory in analysing a case sludy which will be described in the chapter three of the thesis

5 Data collection method

There are some data sources from which information can be garnered for a case study It includes interview, documentary sources, archival records, participant, observation, physical artifacts and direct observation Of those resources, extensive

use is made of interview, documentary sources such as mformalion obtamed from

organization, direct observation and occasional references to archival materials for

the present today Each of these data sources has strengths and weaknesses Since

no single source of data has a complete advantage over all the others and given that the data sources are highly complementary and the recommendation by researchers

thal a good case study may want! lo use as many sources as possible

In this study, data was collected from various sources: documentary sources,

archival records and direct observation

To the economy the study introduces a new effective way of mobilizing find

to meet the capital demand for developing economy as well as exploit maximally intemal and external capital resources From that reducing the pressure on the bank syslom to supply loans, also reducing risk in banking aclivities, especially in mismatching maturity

To the firms: the study introduces a new effective way of raising fund to finance business activities and provides a commonly standard model of issuing ond in the market which the firms can apply to raise fund,

The study only focus on issuing local bond which issued denominated in Vietnamese dong Meanwhile the demand for issuing international bond which issued denominated in other currencies are increasing dramatically However, the study build a common standard model of issuing bond which results in experience from both foreign and Vietnam issuances could provide some important lessons

The study raise a case of spevial firm, it is a bank, The issuing process of a bond issued by a bank is more quite complicated than a real corporation Llowever, dasivally it is the same When # corporate wanls lo issue bond, it should yay more attention to the use of proceeds

9 Findings

=> The study introduces new method of corporate bond issuance which

applied popular in the world

=> The study also highlights some main results in the corporate bond

market in Vietnam right now,

—> The study raises a case study of issuing bond: BIDV case which will introduce issuing process as well as give some analysis about it, from that build a common standard model of issuing bond could apply for all firms;

=> After alll, the study gives out some recommendations to improve effective issuing corporate hond as well as solutions for developing bond market

10 Outline

The thesis is divided into two three chapters The study wonld like to introduce purpose of choosing the thesis Lopic, the outhne for the entire thesis and

the scope of work in the openmg part before the first chapter that reviewed all

literature of bond and normal practice of bond issue The second chapter will review

corporate bond market in Vietnam night now, in which raise some obstacles prevent

developing corporate bond market as well as the potential development Chapter

three contains a within case introduction including case study method, analysis and

findings of BIDV bonds issac This chapter also focuses on giving oul successes and failures from the case study analysis Moreover, in chapter four, the study will

give out some recommmendalions and solutions to develop the bond markel as well

as improve effectiveness of issuing corporate bond and the conclusions will be

presented in finally

CHAPTER 1 THEORETICAL PART

1.1 Bonds

Amsterdam was the financial center of the world in the 17% century In order

to finance companies’ business, the market imovated debts instruments such as annuitics and perpetual bonds It is said that Debt instruments build value like the proverbial tortoise races the hare slow and steady,

Bond market plays important role in the economy Hrstly, it complements bank financing and contributes to the development of multi-layered financial aysloms The businesses not only expect loans from barks bul also could raise funds from issuing bonds Issuing bonds will help the business avoid complicated documentaries the banks request, however, this way requires a certain credit rating

of Ihe issuers Tf the issuer is rated higher, it will be in an easier position to issuing bonds Secandly, the bond market help mobilise domestic long-term savings to

finance investment for growth withoul excessively relymg on external borrowing,

1.1.1 Bonds and corporate bonds

1111 Definitions and terminologies of bonds

A bond is a contract of an institution which binds the institution to pay certain amounts of money to {he owner of the bond on certain dates At the maturily of the

‘bond, the institution agrees to pay fully the bond’s face value Face value and far value have the same meaning It indicates the nominal dollar amount assigned to a securily by the issuer Tis asually the amount borrowed and repaid Lo the investor

when the bond matures

Maturity is the length of time before the principal is retumed on a bond It is

also called ternm-to-malurity Al the time of malwity, the issuer is no longer

obligated to make interest payments Maturities range significantly, from 1 month for some municipal notes to 40+ years for some corporate bonds

When evaluating your goals, keep in mind that bonds of different maturities will behave somewhat differently For example, bonds with long-term maturities

will be more sensitive to changes in interest rates Shorter-term bonds are more

stable and, because you are more likely to hold it to maturity, are more predictable

There are some circumstances where a bond will be "called" before maturity In

conclusion, a bond's maturity is crucial for several reasous First, maturity indicates

expected life of the instrument, or the number of periods during which the holder of

the bond can expect lo receive the coupon interest and the number of years before

the principal will be paid Sccond, the yield on a bend depends substantially on its maturity Third, the volatility of a bond’s price is closely associated with maturity: changes in markel level ol rales will wrest much larger changes in price from bonds

of long maturity than from otherwise similar debt of shorter life Finally, there are

other risks associated with the maturity of a bond

Also periodically before the maturity, the bond issuer agrees to make coupon payment, The coupon is the interest rate on a fixed income security, determined

‘uapon the issuance, and expressed as a percentage of far ‘he coupon payment is the amount of money calculated by multiplying coupon rate and face value and made to the bondholder The coupon rate of bend also depends on the tenor, which is the number of year the bond alive and calculate from the issue date to the maturity date

As usual, the up-to-3-year bonds are short term bonds: the 3-ta-5-year bonds are medium tenn bonds and the over-S ear bonds are loryg Lorin bonds

A bond is simply a loan, but in the form of a securily, although Lorminology

used is rather different ‘he issuer is equivalent to the borreawer, the bond holder to

the fender, and the coupon io the interest However, a bond is different from a loan

This table will indicate the differences:

‘Lable 1.1 Differences between Bond and Loan

Bond

Typical longer maturities

‘Tradable instrument

Listed

Usually fixed rate

Rating preferable — drives pricing

and relative value

y — Little flexibility on drawdown and

repayment

v Prepayment very restricted (but can

include issuer calls)

v Generally fewer covenants

¥ Nol confidential or disercte urdess

private placement

y Broad investor base, cnhanccd

visibility and debt capacity

y Diversification retain bank

Loan

Typically shorter maturities

Usually a non-tradable instrument

Non-listed

Usually floating rate

No rating required

Flexible structure,

repaymient to suit client

⁄ Can be prepaid generally without

penalty

¥ Generally more covenants

vy Confidentially

¥ — Speed-gencrally a faster documentation and marketing process

vy Often lower costs dục to

capacity for other funding

¥ Onerous documentation and

disclosure for certain markets

(Source: Barclays report, Noventher 2006)

Qne important characteristic of a bond is the nature of it issuer The three

largest issuers of debt are corporations, municipal governments and Government

and its agencies However, each class of issuer features additional and significant differences Domeslic corporalions, for example, inchide regulated utilities as well

as unregulated manufacturers Furthermore, each firm may sell different kinds of

‘bonds: some debt may be publicly placed, whereas other bonds may be sold directly

fo one only a few buyers (referred lo ax a private placement); some debt is collateralized by specific assets of the company, whereas other debt may be

secured Municipal debt is also vaned: “General obligation” bonds (GOs) thal are

backed by the full faith, ercdit and taxing power of the Govemmental unit issuing

them; “revenue bonds”, on the other hand, have a safety, or creditworthiness, that

depends upon the vitality and success of the particular enlily (such as toll roads,

hospitals, or water systems) within the municipal Government issuing the bond,

It is important for the investor to realize that, by law or practice or both, these different borrowers have developed different ways of raising debt capital over the year As the result, the dislinctions among bonds in yield, denomination, safety of principal, maturity, tax status, and such important provisions as the call privilege, put features, and sinking fund

11.12 Corporate Bonds

A corparate bond is a bond issued by a corporation and it is a debt instrament

setting forth the obligation of the issusr to salisfy the terms of the agreement in

which the issuer agrees to pay a certain amount or a percentage of the pace, or principle, par value to the owner of the bond, either periodically over the life of the

iasuc or ita lump sur upon the bond’s relirement or maturity

Although some bonds trade on a formal exchange most bonds are waded over

the counter in a network of bond dealers linked by a computer quotation system In practice, the bond market can be quite “thin”, in that there are few investors

interested im trading # parlicular issue al any particular time

1.1.2 Types of bonds

1.4.2.1 By currency and place of issue

- Domestic bond issued by a borrower resident in the country and denominated

in its lucal cwrency For cxample, EVN issues bonds denominated in Vietnan dong

denominated foreign bonds sold in the United Kingdom are called Bulldog bonds.

- Euro Bond issued by a borrower who is non-resident in the country and denominated in a currency different from the country where it is issued l’or example, Vinashin issues bonds denominated in US Dollars and sells them in Hurope

1.1.2.2, By coupon Type

- fixed rate: A fixed rate bond is a bond that carries a predetermined interest

rate Usually, coupon rate is fixed before the issue and announce to the investors

Most corporate bonds are fixed-rate bonds The inflerest rate (he corporation pays is

fixed until maturity and will never change

- Floating rate: A Floating rate bond is a bond whose interest is pegged to a benchmark, such as the Treasury interest rate and adjusted periodically ‘These

bonds do offer protection agaist mcreases im tutcresl rales, bul the lade-off is thal

their yields are typically lower than those of fixed-rate securities with the same

maturity

- Zero coupon: a zero coupon bond is a bond which the issuer does not pay

coupons or interest payments, to the bandholder This is different from a regular

bond which does make these interest payments ‘The holder of a zero- coupon bond

only receives the face value of the bond ai maturity However Zero- coupon

bondholders gain on the difference between whal they pay for the bond and the

amount they will receive at maturity because Zero- coupon bonds are purchased at a

large discount, known as deep discount, to the face value of the bonds

1.1.23 By coupon frequency

- Annual: an annual bond is a bond whose interest will be paid annually

- Semi-Annual: an anmual bond is a bond whose interest will be paid every six

months

- Quarterly: an annual bond is a bond whose interest will be paid quarterly

- Monthly an annual bond is a bond whose interest will be paid monthly

1.1.24 By others

- Bullet and callable bond:

A bullet bond is not able to be redeemed prior to maturity It is usually more expensive than a callable bond, since the investor protected against the possibility of the bond being called when market interest rates fall

A callable bond is a bond which the issuer has the right to redeem prior to its

tmalurity date, under certain conditions When issued, the bond will explain when it

can be redeemed and what the price will be In most cases, the price will be slightly above the par value for the bond and will increase the earlier the bond is called A company will often call a bond if it is paying a higher coupon than the current market interest rates Basically, the company can reissue the same bonds at a lower

interest rate, saving {hem some amount on all (he coupon payments; this process is

called “refunding.” Unfortunately, these are also the same circumstances in which the bonds have the highest price, interest rates have decreased since the bonds were

issued, increasing the price In many cases, the company will have Lhe righl to calt

the bonds at a lower price than the market price If a bend is called, the bondholder

will be notified by mail and have no choice in the matter The band will stop paying

interest shortly afler the bond is called, so there is no reason to hold on to it

Companies also typically advertise in major financial publications to notify bondholders Generally, callable bonds will carry something called call protection

This means thal there ta some period of time durmg which the bond cannot be called, also called redeemable bond, opposite of irredeemable bond or non-callable bond

- Secured versus Unsecured Bonds

Bonds can either be secured by some sort of collateral or unsecured

Unsecured bonds, called debentures, are considered to be nskter than scoured bonds because they are simply backed by the issuer's word that it will repay the bonds

Secured bonds are backed by some goods that can be sold by the issuer to raise money to pay off the debt in the event of default

‘The most common form of secured bonds are mortgage bonds ‘'hese bonds are backed by real estate or physical equipment that can be liquidated These are thought to be high-grade, safe investments Other bonds are secured by the revenues created by projects If an issuer in default has both secured and unsecured bonds outstanding, secured bondholders are paid off first, then unsecured bondholders Naturally, because unsecured bonds varry greater risk than secured bonds, they usually pay higher yields

- Convertible and putable bonds Convertible bond carries a provision that the

bond can be converted into shares of common stock under cerlain circumslances

Convertible bonds can be more attractive that bonds with no conversion provision,

depending on the price of the underlying stock On the other hand, putable bond grams the investor the right to sell the issue back lo the issuer al par valuc on designed dates If the bond’s coupon rate exceeds current market yields, for

instance, the bondholder will choose to extend the bond’s life If the bond’s coupon

rate is loo low, it will be optimal not to extend; the bondholder insicady reclaims

prineipal, which can be invested at cwrent vields

-.A junk bond is any bond that is rated below investment grade (B13 or lower)

by Moody’s or Standard & Poor's due to the high risk of default A junk bond is also referred to as a high yield bond Prior to 1977, every junk bond was a previously investment grade bond for a company that had saw its credit quality erode In that year, Bear Stearns underwrote an original-issue bond that started with

a junk rating Drexel Buriham Lambert quickly followed suil wilh a series of junk bond issues for companies that had been locked out of the bond market Michael Milkin, who is ofien referred to as the junk bond king, led the Drexel Burriam junk bond initiative The junk bond market peaked in 1989, when it was depressed by a

series of issuer defaults Many corporate bond issues today arc given junk bond, or high-yield status, and even blue chip stocks have seen their bonds rated junk

- Registered and beaver bonds: Vonds issued today are usually registered, meaning that the issuing firm keeps records of the owner of the bond and can mail interest checks to the owner Bearer bonds are those traded without any records of ownership The investor’s physical possession of the bond certificate is the anly evidence of ownership

1.2 Types of issuance

On the basic, there are two type of issuance: Private Placement, and Public

Offering Private Placement means offering of securities for sale by any of the following modes:

«Private solicitation (not through mass media including internet)

Offering the securities to less than 100 investors, excluding professional

securities investors (or institutional investors) Offering of scowities to specified munber of investors

And versus, Public offering means offering of securitics for sale by any of the

following modes:

« Onmass media, meluding internet

«Offering the securities to 100 or more investors, excluding, professional

securities investors (or institutional investors)

«Offering of scowritics to unspecified number of investors

Private placement is way to offer bonds to limited number of investors And Private placement has fewer conditions for Issuance, such as size of company, yrofilabilily, Goverment approval and disclosed documents Today, many issuers use Underwriting methods for private placement,

1.3 Methods of Tssuance

1.3.1 Auction

The term "auction" is usually associated with a U.S, Treasury bond aution, at which the issuer sells bonds to the investing public Bids are taken by the issuers and securities are allocated on a high to low price basis

Investors can use a "competitive tender" or a "noncompetitive tender" format

The competitive tender bid specifies a purchase order al a spoeific price Competitive bids are filled by the Treasury from the highest price to the lowest

price A noncompetitive bid is one thal is submitted to the Treasury for purchase

without a specitic price or yield These bids arc filled based on the price and yield

of the weighted average vield of the accepted competitive bids

Dutch auction, started in Netherlands farms, is a descending price auction for amulliple identical ilans A true Dutch auction starts with a prohibilive price and is bid lower Harly winners 1 a strict Dutch auction pay more and later winners pay

less till the Dutch auction ends A more familiar variant of Dutch auction starts with

a reserve price Bidders bid at or above that base price for the number of items they

want In this Dutch auction, successful bidders pay only the price of the lowest

accepted bid The Dutch auction in an Initial Public Offering (IPO) is actually a

sealed-bid, uniform second-price variant Tn the traditional TPO, the investment barik

allocates shares at deflated prices to select investors who make a good profit in the secondary market In the Dutch auction IPO, all applicants are on a level-playing ficld and allotices pay a price only slighily lowor than the highest bid The issuer

collects more capital with a Dutch auction IPO

Most corporate debt and private placements are underwritten by investment banks on a commitment basic ‘This guarantees that the issuer receives a certain amount of proceeds from the bond issuc However, bond are lypivally underwritten

on a best efforts “bought as sold basic, reflecting the imvestor’s discretion in

choosing among an entire program of maturities and structures

Best effort:

Ina best efforts agreement, the underwriter agrees to use all efforts to sell as

much of an issue as possible to the public The underwriter can purchase only the

amount required to fulfill its client's demand or the ontire issue However, if the underwriter is unable to sell all securities, it is not responsible for any unsold

undenwriter “builds the book” by soliciting non-binding indications of interest from

inveslors and uses the information, along with imformation derived through ils duc

diligence on the issuer, to negotiate the offering size and the offering price

Following convenlion, we refer fo this type of negotialed offermg as “book

building.”

Under book building, the underwriter secks indications of interest, primarily

from institutional investors ‘he underwniter and the issuer determine the offerimg

price by negotiation, in light, of the underwriler’s duc diligence and evident

on

demand derived through pre-marketing efforts

1.33 Agent

Agent means the act where the issuing company assigus a third party institution to do bond issuance and/ or redemption activities on their behalf Agent

is not used popularly today as before

1 4 Corporate boud issuance:

Herein the study will present one special method of corporate bond issuance: This underwriting method with best effort through bookbuilding that have applied for most of all corparate bond issuance in the market economies

1.4.1 Key players in the transaction:

LAL Key players with access to non-public material information:

= issuer; Vinal authority in decision making process throughout the bond

‘transaction Major responsibility of the management team is to present the credit to investors during group presentations and one-to-one meetings during the roadshow

The issucr takes responsibilities

¥ Negoliale and agreo terms and conditions of the bonds, including

covenants;

¥ Provides all information required and facilitates due diligent sessions;

¥ Prepare disclosure documents with the assistance of issuer’s legal

counsel, + Participate in investor marketing roadshow;

Agree pricing and size of bond issue;

v Issue bonds and receive net proceeds of issuance

- Investment banking: Consult the issuer concerning its funding requirements

and advises the issuer on the best solutions to meeting those requircments Direcls

the issuor to relevant product groups so that the issuer can be served with specific

expertise

- Capital markets: Product specialists Work hand in hand with investment banking professionals to provide issuers with best solutions to meet their funding requirements Spearheads the transaction process from mandate to close and provides issuer with timely market information

L412 Key players with access to public material information:

- Trading Provides information on the offering’s secondary market performance Maintains a liquid two-way markel for the offering in the afermarket

and for the life of the offering

- Sales In direct contact with investors Promotes the offering to their

respective investor accounts Communicates investor appetite and other market feedback to the syndicate to help shape the offering la best targel pools of demand,

- Research: Provides insights into market movements and future directions Provides investors with non-biased research on the credit, which can help to dispel misconceptions and create a level of comfort with the credit

- Investors: Buyer of the bond Provides funding to the issuer Attend group

presentations and one-one-one meetings during roadshow to increase their

familiarity with the eredil, and if interested, place orders with sales They are usually banks, private banks, Asset management, Insurance, Iledge Funds

L413 Key players who sit “on” the wall:

- Syndicates; Market focused, Provides Capital markets with timely market information Coordinates the activities of the salesforce during bookbuilding Claims ownership over the handing of the order book and the price discovery

‘process

| Bookrunner (3) and lead Manager (3):

Nogotiatc and agree terms and conditions of the bonds, including

covenants, with the issuer,

Conduct due diligence on issuer’s business, operational and financial affairs:

Prepare roadshow presentation:

Organise roadshow and accompany issuer on roadshow;

Apree pricing and size of bond issue with issuer;

Underwrite bond issue:

Transfer net proceeds of bond issuance to issuer

Co-lead Managers and Co-manager (5):

An issuer may choose to reward some of its relationship banks with Co-

lead Manager or Co-Mamager roles

+ Issuer's international counsel:

¥

¥

v

Take lead in drafling offering circular,

Participate irr due diligence sessions,

Advice issuer reparding terms and conditions;

Review and comment on transaction documents;

Deliver legal opinion in transaction documents:

Deliver 10b-5 disclosure letter for 144A or SEC-registered offerings

+ Issuer's local counsel:

¥ Review offering circular and underlying transaction documents in

relation lo Vietnam law aspects:

Advise on Vielnam regulalory requirements;

Ensure that issucr has duly authorised bond issue and complied with all

internal requirements;

Deliver legal opinion covering, among other things, “deu authorisation”; Deliver 10b-5 disclosure letter on offering circular (if requested)

Underwritar’s Counsel:

Underwriters’ Intemational Counsel: Review offering circular, prepare

transaction documents; Participate in due diligence sessions; Deliver

legal opinion covering, among other things, “onforccability”; Deliver

10b-5 disclosure letter

Underwriters’ Local counsel: Perform similar function as issuer’s local counsel,

+ Fiscal agent and Trustee:

¥ Trustee acts on behalf of Bondholders;

Fiscal Agent acts on behalf of Issuer;

Advantages of having Trustee’

¢ ‘trustee has fiduciary duties to bondholders;

¢ Bondholders prefer a trustee structure,

Advantages of having fiscal agent:

¢ Lower transaction expenses;

c Fiscal agency structure is recommended for plain vanilla senior

unsecured debt and inveshment grade frequent issusrs

+ Paying agent responsible for transmitting payments of interest and principal from issuer to bondholders;

+ ‘transfer agent records and facilitates transfer of securities among bondholders;

' Common depositary: acts as custodian by safekeeping global note in behalf

of clearing systems

+ Audiior, Review and comment on financial information conlained in

offering circular and Provides Auditor’s comfort letter

+ Rating advisor: usually one of Bookrunners/Lead Managers and assist

issuer with credit raling process

- Transaction Management: Oversees the documentation process Coardinates legal aspects of transaction Works closcly with extemal lawyers (ic Underwriters’ Counsel, issuers’ Counsel)

- Rating Agencies Provide measures of the issuer’s credit by respected independent authorities An intemational ratings is a critical first step to raising an Tssuer’s overall interational profile With international credit ratings in place, Issuers receive full flexibility to tap the international debt capital market

One factor investors pay attention the best is: at what rate will investors

believe the bonds are a good investment Recause when investors decide to buy a

corporate bond, they must have faith that the company will cventually repay them,

as well as make regular interest payments to them

Nowadays, there are companies that specialize in evaluating corporations and

other bond issuers to determine their fiscal strength

Moody's Investors Services, Fitch IBCA, and Standard & Poor's Rating Scrvives all specialize in assigning ratings lo bonds that determine the abilily of

their issuers to repay those bonds

The following arc summaries of the definitions of Moody's ratings for long- tenn bonds

v ‘Aaa - Best quality, with smallest degree of investment risk,

Aa - High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds

A -Possess many favorable investment attributes Considered as upper-

medium-grade obligalions Raa - Median-grade obligations (neither highly protected nor poorly

secured) Bonds rated Baa and above are considered investment grade

Ba - Have speculative elements, futures are not as well-assured Bonds rated Ba and below are generally considered speculative

B - Generally lack characteristics of a desirable investment Caa - Bonds of poor standing

C - Lowest rated class af bonds, with extremely poor prospects of ever

allaining any Teal invesment standing

1.4.2 Bond documents

- Prospectus! Offering Circutar/Information Memorandum:

¥ Disclosure document — prospectus/offering circular,

© Listing document — required by stock exchange:

v Liability document - provides “issuance policy” against potential

liability,

¥ Marketing document — tell issucr’s story

- Terms and conditions’ Description of Notes

¥ Contamed within Offering Circular,

covenants, events of defaull and governing law/juriadiction

- Purchase agreemeni/ Subscription agreement:

~ Document between Issuer and Managers under which

e

e

« Tnchulss

Representations and Warranties,

Purchase and Sale,

Paysent aud Delivery;

Offering by the Initial Purchasers;

Default by an Tnutial Purchaser,

Issuer agrees to issue and sell securities to Managers, and Managers agree to purchase securities

Submission to jurisdictions; agent

for Service of Process;

Counterparts

- Trust Deed/ Indenture/ Fiscal Agency Agreement: sets out rights and

obligations of issuer, trusice (or [tscal agent} and bondholders vis-a-vis cach other

- Legal opinion:

v Cover four primary aspecis: G) due authorivalion, (i) regulatory

approvals, (iii) no conflicts and (iv) enforceability,

¥ English’ New York: enforceability,

¥ Local; due authorisation and regulatory approvals

- Comfort letter:

Generally a comfort lellor is a letter [rom an accountant 19 a company about

to go public that his company's books are ok These are discussed in the AICPA's

Statement on Auditing Standards (SAS) Number 72 ("Letters for Underwriters and

Certain Other Requesting Parties") They are considered private and not published anywhere

⁄ Confirms accuracy of financial information contained in offering

cucular,

¥ Provides: negative assurance — ic., nothing has come to their attention

that Icads them to belicve that financial position of issuer bas changed

materially and adversely since the date of such information

v CMA (Ihe International Capital Market Association ) vs SAS 72

= Closing documents: usually consists of legal opinions; auditor’s comfort

letters; Issuers closing certificates, and Cross receipt

- Due Diligence:

According to Securities and Exchange Commission Rule 10b-5 (1974); It is said Ural “Tt shall be unlawful for arty person, dircetly or indirecily, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any nation securities exchange,

¥ Toemploy any device, scheme, or artifice to defraud:

v To make any untrue statement of a material fact or omit to state a

malcrial fact necessary in order lo make (he siatemenl made, in light

of the circtunstances in which they were made, uot misleading, or

¥ To cngage in any act, practice or course of business which operates or woutd operate as a fraud or deceit upon any person, in comnection

with Ihe purchase or sale of any securities

Due diligence defense — most jurisdictions provide defense to most transaction

Table 1.2 Sample due

patties against investor claims if defendants can prove that reasonable efforts have

‘been made to ensure that disclosure document meets }0b-5 standard

Customers, sales, marketing and

distribution

Management

Capitalisation and sharcholdcrs/

joint venture partners

Employees and labor relations

Management discussion and

analysis Control leehnology

General corporate information

When are pro forma financials required?

- Business combinations restructuring

- GAAP (Generally Accepted Accounting Principles) differences

- Comfort letters

1.4.3 Market selection

There are various markels:

- Reguiation $ Burobond — Access to Asia, Europe and offshore US accounts

- Regulation S + 144A — Access to Regulation S accounts add US Qualified Institutional Buyers - QIBs

- SEC Registered — Access to all accounts, including US retail accounts

Figure 1.1 Market selection

Source: Barclays Capital report, 2006

Two SEC rules that allow foreign companies that want their securities to be limited to being traded in the U.S by only certain individuals may set up a restricted

program are: Rule 144-A and Regulation S Rule 144A, adopted pursuant to the

US Securities Act of 1933, as amended (the "Securities Act") provides a safe

harbor from the registration requirements of the Securities Act of 1933 for certain private resales of restricted securities to QIBs The Regulation S means that the

securities are not and will not be registered with any United States securities

regulation authority Regulation S bonds cannot be held or traded by any “U.S

Person” as defined by SEC Regulation $ rules

Selecting issuance formats based on Quantitative selection criteria:

Table

Regulation S 144A/RegulationS SEC Registered Typical Deal Size Usually USD 150- Usually USD USD 500 or above

Maturities S,Tand10 years Up to 30 years Up lo 30 years

Distribution Non-US investors = Nou-US investors Broadest public

(subject to selling and QIBs inthe US — distribution,

retail investors

Credit rating 2 ratings preferred 2 ratings required 2 ratings required

Requirements registrations fee or registrations fee or registrations fee

review process Leview Process _ OgFasing Circular

- Offering Circular - Offering Circular _1Qus kạạj]

~ 10b5 legal opinions opinions

differences between local and US GAAP Marketing Roadshow is Investors will Investors will

recommended usually expecta usually oxpoct a

‘Timing Approximately 6 Approximately 6-8 §-12weeks

to 8 wooks wooks (standalone) passibitity of SEC

deal for 4 weeks Pros and Cons of different issuance formats:

wa a

‘Table 1.5 The different issuance formats

Regulation S 144A/RegulationS SEC Registered

Advantages + Lowest +Deep liquid US$ + Deepest pool of

disclosure and ñnancing investors base to upfront legal costs 4.1 areer capacity provide! highest

| In US$ and , than Reg S market secontany mar et liquidity Lures, sufficient 4 Higher total

capacity for demandiptice + Largest capacity offerings of upto Sven hom, among, all issuance

_— imeheionoftrg — Íomats

equivalent QIBs + Hstablishes + Bstablishros +H benchmarks as

Phone for reference for future Pricing

are pricing pricing + Highest investors

+High secondary Profile

market fiquidily I Highest

secondary market liquidity

Disadvantages + Minimum size + More + Most

of US$300mn complicated complicated

equivalent to documentation documentation

ensure inclusion i 4 Hisher upfront + Higher upfront

hey bond | and legal costs and legal costs

indicates, intr including 10b5 including SEC

secondary marke CPRORS trom IB oon an om counsel 10bS opinions

iquidity | More time from legal counsel

i Limited CỐ juropean, Asian consuming, + Most tine

and Middle + US investors are SODSUNNDE

Lastem investor mOterebivevalue Potential delay if

base driven and tend to [Here is SEC

review

be mure price

sensitive in the

execution process

1.4.4, Model of issuing process:

Herein is an overview about Issuing process which applied commonly in

international bond issuance:

Figure 1.2 Issuing process

AYE Ta eats Establishing

ROE Value

v — Retain Issuer’s flexibility by announcing only the basic detail to capture

investors’ attention (general references to maturity range, often little or no detail on expected size)

vy Advance notice to commence internal credit approval processes for investors

v Look-in meetings with the target investors expected to provide

x _ Establish relative value:

° Issuers with established yield curve can benchmark new offerings

against exiting yield curve

© For new issuers in a given market, Syndicate will establish relative value against appropriately selected comparable credits

© While often a broad range of intornational comparable referenec points exits, the focus will often be on the spread over or under 2-3

key reference points

© These reference points are usually bonds that are trading in the secondary market, and often credit default swaps

© Based on this information, taking into account issue specific factors,

as well as prevailing market conditions, the issuer and its

hooknamer{s) then determine the credil spread i believes investors

are willing to pay for the contemplated offering,

¥ Syndicate gathers feedback from investors on the eredit og price

sensitivities

Initial Price guidance:

vA realistic initial price guidance range that aims to capture the broadest

possible level of initial investor interest

¥ Objective: Order momentum and potential for oversubseription that will general price Lension

v Pricing slralegy is clearly cxplained to the issuer with the Ts

uer’s sign olf necessary before proceeding to each next step

Pricing mechanics:

v Treasmy curve: used as risk-free rate and typically the most liquid

securities in the market

¥ Swap curve: the swap curve represents future values of Libor, Represents

borrowing cos of AA-rated banks

y Credit curve: an issucr’s credit curve is a snapshot of yields of its exiting

bonds in the secondary market at a given point in time It is derived from plotting yields of its bonds against number of years to maturity

30

— Prosuming that the bond yicld is a fair reflection of an issuct’s credit, the stronger the credit of the issuer, the lower the yield curve- the closer its credit

curve lo the swap curve (he Treasury curve — the tighter ifs eredil spreads,

Order book:

Written record of investors’ Orders’

y Bookrunners manage an order book that collates the orders from

respective sales Learns

¥ Convention im ihe intematioual markel is the “Pot” system with all orders

going into the same pot irrespective of which bank has secured the order to ensure a seaniless and coordinated process

Before Final Pricing, Orders are Indicative:

¥ — Orders are subject to the offering’s price

¥ Investors may specify the pricing level below which they will scale down

or wilhdraw their orders Therefore, the atirition at different pricmg levels can

be estimated

Fully ‘Transparent:

¥ — Continuous and timely updates on the consolidated order book

v Size of the order book directly reveals the demand of the offering

v Guides the syndicate to decide on a final pricing

Allows regular updates to be provided to the issuer throughout the process

Final Order Book:

y — Orders confirmed, order book closed, offermg launched

¥ — Oversubseription may result in upsize

Revised guidance:

¥ — Revised guidance (if any) should be based on the following factors

31

© Thesize of the order book

© Volume-price sensitivity of the book as a whole

© Surrounding market movements since initial price guidance

¥ Objective of revised guidance is to utilize the price tension thal has been

generated by a successful bookbuild

Pricing and allocation:

¥ Final yield/spreads will be a function of the Order Book size and the

issuer's objectives

~ Optimal final pricing needs to be a balance of these factors

© Low cost of funding for the issuer

© Involvement of a broad range of issuer to foster ongoing trading

activity and enhance lhe issuers profile in the market

Pricing al a level that provides # high ikehood of a positive secondary market performance

v Benchmark rates fixed, final terms agreed

¥ Bonds are allocated to investors by the bookrmning syndicate, following certain guidelines and in a fully transparent process for the issuer with a focus

on the following factors:

© Achieving a balance of hold-to-maturity and trading accounts

© Minimize the distribution to “fast money” accounts that will look to

lake profit quickly in the secondary market

© The issuers cxisting relationships with investors After murket:

Rescarch

y Frequent publications and updates