A study on issuing corporate bond the case of bank for investment and development of Vietnam -BIDV

vietnam national university, HANOI school of business Do Thi Hoa A STUDY ON ISSUING CORPORATE BOND THE CASE OF BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM - BIDV master of business

vietnam national university, HANOI

school of business

Do Thi Hoa

A STUDY ON ISSUING CORPORATE BOND THE CASE OF BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM - BIDV

master of business administration thesis

vietnam national university, HANOI

school of business

Do Thi Hoa

A STUDY 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

Hanoi – 2007

TABLE OF CONTENTS

ACKNOWLEDGMENTS i

ABSTRACT ii

TÓM TẮT iii

TABLE OF CONTENTS iv

LIST OF ABBREVIATIONS vii

LIST OF TABLES ix

LIST OF FIGURES ix

INTRODUCTION 1

1 The necessary of research 1

2 Objectives and aims 3

3 Scope of work 4

4 Methodology 4

5 Data collection method 4

6 Data analysis 5

7 Significance 5

8 Limitations 5

9 Findings 7

10 Outline 7

CHAPTER 1 THEORETICAL PART 7

1.1 Bonds 7

1.1.1 Bonds and corporate bonds 7

1.1.2 Types of bonds 10

1.2 Types of issuance 14

1.3 Methods of Issuance 15

1.3.1 Auction 15

1.3.2 Underwriting: 15

1.3.3 Agent 17

1 4 Corporate bond issuance: 17

1.4.1 Key players in the transaction: 17

1.4.2 Bond documents 22

1.4.3 Market selection 25

1.4.4 Model of issuing process: 29

1.5 Issuance experience 33

1.5.1 Malaysia’s experience on developing bond market 33

1.5.2 Japan’s experience on empirical pricing 35

1.6 Sum-up 37

CHAPTER 2 DEVELOPMENT OF CORPORATE BOND MARKET 41

2.1 Vietnam’s corporate bond market overview 41

2.1.1 Period of 1998-2004: 41

2.1.2 Period of 2005-2006: 42

2.2 Compare to some Asian countries 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 47

2.3.3 Limited supply of quality bond issues 48

2.3.4 Inadequate bond market infrastructure 48

CHAPTER 3 CASE STUDY: BIDV SENIOR BOND ISSUANCE 49

3.1 BIDV introduction 49

3.2 Market conditions and Demand analyse 54

3.2.1 Analyse interest rate 54

3.2.2 Asset – liabilities structure as at 28th February 2007: 56

3.3 Plan on issuing 57

3.4 Approval from the State Bank of Vietnam 57

3.5 Regulation S and other jurisdiction limitations 58

3.6 Issuing process: 62

3.7 Analyse case study 75

3.7.1 Successes of the transaction 75

3.7.2 Limitations of the transaction 77

3.7.3 Advantages 77

3.7.4 Disadvantages 79

CHAPTER 4 RECOMMENDATIONS AND SOLUTIONS 81

4.1 Strategy for development of bond market in Vietnam to 2010 81

4.1.1 Government strategy: 81

4.1.2 Capital demand for investment and development 81

4.1.3 Appraise the outlook of corporate bond market 82

4.2 Recommendations on bond issuance 84

4.2.1 Time of issue: 84

4.2.2 Choosing underwriter from the candidates: 85

4.2.3 Selecting appropriate market 87

4.2.4 Preparing offering documents 87

4.2.5 Marketing process 87

4.2.6 Building book 88

4.2.7 Pricing and allocating bonds 88

4.2.8 Time for paying proceeds 89

4.3 Solutions for developing primary bond market 90

4.3.1 Supply-Side Strategies 91

4.3.2 Demand-Side Strategies 92

4.3.3 Developing Infrastructure 93

CONCLUSION 96

REFERENCES 99

LIST OF ABBREVIATIONS

MOF Ministry of Finance

LIST OF TABLES

Table 1.1 Differences between Bond and Loan 9

Table 1.2 Sample due diligence question topics 25

Table 1.3 Quantitative selection criteria 26

Table 1.4 Qualitative selection criteria 27

Table 1.5 The different issuance formats 28

Table 3.1 List of BIDV outstanding bonds 53

Table 3.2 Government and Corporate local bonds 56

Table 4.1 Capital demand of economy 83

LIST OF FIGURES Figure 1.1 Market selection 26

Figure 1.2 Issuing process 29

Figure 2.1 Structure of bond market at the end of the third quarter 2006 43

Figure 2.2 Outstanding amount of bond from 2001-2006 43

Figure 2.3 Outstanding Volume of Local currency bonds 44

Figure 2.4 Ratio of Government bonds and Corporate bonds 45

Figure 2.5 Corporate bond market Development 45

Figure 3.1 BIDV Financial results in period of 2001-2006 52

Figure 3.2 Onshore – offshore investors structure 75

Figure 3.3 By Business Types 75

Figure 3.4 By Geography 75

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 GDP1 The parties engage in the market not only Government, local Government but also Corporations The number of parties is increasing gradually and there are more and more financial institutions pay attention to bonds

At that time, the Vietnam bond market is required to become the really effective capital-leading channel in the economy Corporations and projects has one new more funds mobilization channel, 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 outcomes achieved in Vietnam (since banks more effectively monitor financial environments characterised by asymmetric information in underdeveloped financial markets) it has also resulted in the industrial sector‟s overreliance on short-term bank intermediated borrowings This kind of industrial financing behavior has caused two critical financial mismatches: a maturity mismatch and a currency mismatch First, the maturity mismatch was the consequence of unhealthy financing practices, which were characterized by large long-term investments under the financing of short-term bank borrowings Second, the practice involved a serious currency mismatch without a proper currency hedging arrangement In fact, the currency mismatch was implicitly protected 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 financing, an easier process of risk transformation and a smaller concentration of financial risks; second, the capital markets may check and screen

financial risks more efficiently and quickly than bank credit departments, based on swifter flows of various information, thereby providing more expedient and appropriate financing decisions; and third, more effective capital markets deepens the financial base which has far-reaching positive implications for development resource mobilization in developing countries

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 an important role in the economy Many Vietnam businesses consider issuing bonds is one of effective fund mobilization channels in order to get short-term and long-term financial objectives

Vietnam officially enters World Trade Organization (WTO) in November

2006 This is the opportunity to internationalize the bond market Vietnam corporations could issue its bonds in offshore markets; conversely, foreign investors could enter the Vietnam bond market, both issuing bonds and trading bonds as well From the reasons, the final thesis titled “A STUDY ON ISSUING CORPORATE BOND - THE CASE OF BANK FOR INVESTMENT AND DEVELOPMENT OF VIET 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 and a picture overview of bond market

BIDV is one of the biggest banks in Vietnam and BIDV bonds would be the landmark in the primary bond market, which presented new method of 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 in the South East 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, BIDV has increased the proportion of valuable papers in total mobilization fund and issuing bond is BIDV long-term strategy in which BIDV hope to structure and improve its financial situation From the requirement of equitisation process scheduled at the end of

2007, BIDV has awaked that it is high time to balance short and long-term 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 market in Vietnam

2 Objectives and aims

This study focus mainly on the objectives as followings:

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

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 get inside overview of its transaction;

issuance and solutions to develop the primary bond market as well

The final thesis aim to:

Introduce the international standard and normal practice in issuing corporate bond through underwriting with best effort and bookbuilding and apply into a case

of BIDV bonds From that

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

- Bring some lessons for corporations also other beneficiaries in issuing bonds; 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 BIDV, a bank, a little bit different from bond issued by general corporations There are more levels of control for bank bond other than general corporate bond, however, in basic points, there are no differences

in issuing 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 bond But the study 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 bookbuilding

4 Methodology

Methodology is used in this study is applying theory in analysing a case study 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 information obtained 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

that a good case study may want to use as many sources as possible

In this study, data was collected from various sources: documentary sources, archival records and direct observation

6 Data analysis

The study focuses reviewing all of necessary documentations, archival records relating to the bonds transactions and observing directly all of issuing process These multiple source of evidence is what made the study more valid

7 Significance

This study contributes some certain meanings to the economy in generally and the firms in particularly

To the economy: the study introduces a new effective way of mobilizing fund

to meet the capital demand for developing economy as well as exploit maximally internal and external capital resources From that reducing the pressure on the bank system to supply loans, also reducing risk in banking activities, 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 bond in the market which the firms can apply to raise fund

8 Limitations

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 special firm, it is a bank The issuing process of a bond issued by a bank is more quite complicated than a real corporation However, basically it is the same When a corporate wants to issue bond, it should pay more attention to the use of proceeds

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;

effective issuing corporate bond as well as solutions for developing bond market

10 Outline

The thesis is divided into two three chapters The study would like to introduce purpose of choosing the thesis topic, the outline for the entire thesis and the scope of work in the opening 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 right 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 issue This chapter also focuses on giving out successes and failures from the case study analysis Moreover, in chapter four, the study will give out some recommendations and solutions to develop the bond market 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 17th century In order

to finance companies‟ business, the market innovated debts instruments such as annuities 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 Firstly, it complements bank financing and contributes to the development of multi-layered financial systems The businesses not only expect loans from banks but 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 the issuers If the issuer is rated higher, it will be in an easier position to issuing bonds Secondly, the bond market help mobilise domestic long-term savings to finance investment for growth without excessively relying on external borrowing

1.1.1 Bonds and corporate bonds

1.1.1.1 Definitions and terminologies of bonds

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

security by the issuer It is usually the amount borrowed and repaid to the investor when the bond matures

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

also called term-to-maturity At the time of maturity, 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 reasons First, maturity indicates expected life of the instrument, or the number of periods during which the holder of the bond can expect to receive the coupon interest and the number of years before the principal will be paid Second, the yield on a bond depends substantially on its maturity Third, the volatility of a bond‟s price is closely associated with maturity: changes in market level of rates 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 upon the issuance, and expressed as a percentage of far The coupon payment is the amount of money calculated by multiplying coupon rate and face value and made to the bondholder The coupon rate of bond 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-to-5-year bonds are medium term bonds and the over-5-year bonds are long term bonds

A bond is simply a loan, but in the form of a security, although terminology

used is rather different The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest However, a bond is different from a loan

This table will indicate the differences:

Table 1.1 Differences between Bond and Loan

 Typical longer maturities

 Usually fixed rate

 Rating preferable – drives pricing

and relative value

 Little flexibility on drawdown and

repayment

 Prepayment very restricted (but can

include issuer calls)

 Not confidential or discrete unless

private placement

visibility and debt capacity

 Diversification – retain bank

capacity for other funding

disclosure for certain markets

 Typically shorter maturities

 Usually a non-tradable instrument

documentation and marketing process

relationships

 Value or ancillary business

(Source: Barclays report, November 2006)

One 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 Domestic corporations, for example, include 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

to one only a few buyers (referred to as a private placement); some debt is collateralized by specific assets of the company, whereas other debt may be secured Municipal debt is also varied: “General obligation” bonds (GOs) that are backed by the full faith, credit and taxing power of the Governmental unit issuing them; “revenue bonds”, on the other hand, have a safety, or creditworthiness, that depends upon the vitality and success of the particular entity (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 distinctions among bonds in yield, denomination, safety of principal, maturity, tax status, and such important provisions as the call privilege, put features, and sinking fund

1.1.1.2 Corporate Bonds

A corporate bond is a bond issued by a corporation and it is a debt instrument setting forth the obligation of the issuer to satisfy 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 issue or in a lump sum upon the bond‟s retirement or maturity

Although some bonds trade on a formal exchange most bonds are traded 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 in trading a particular issue at any particular time

1.1.2 Types of bonds

1.1.2.1 By currency and place of issue

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

in its local currency For example, EVN issues bonds denominated in Vietnam dong

in Vietnam

- Foreign Bond issued by a borrower non-resident in the country in which the

bond is being issued For example, General Electric USA issues bonds denominated

in Singapore Dollars and sells them in Singapore These bonds are given colorful names based on the countries in which they are marketed For example, foreign bonds sold in the United States are called Yankee Bonds Yen-denominated bonds sold in Japan by non-Japanese issuers are called Samurai bonds British pound-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 For example, Vinashin issues bonds denominated in US Dollars and sells them in Europe

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 interest rate the 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 against increases in interest rates, but the trade-off is that 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 bondholder 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 at maturity However Zero- coupon bondholders gain on the difference between what 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

1.1.2.3 By coupon frequency

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

- Semi-Annual: an annual 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

1.1.2.4 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 maturity 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 them some amount on all the 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 the right to call the bonds at a lower price than the market price If a bond is called, the bondholder will be notified by mail and have no choice in the matter The bond will stop paying interest shortly after 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 that there is some period of time during 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 riskier than secured 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 These 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 carry 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 certain circumstances 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 grants the investor the right to sell the issue back to the issuer at par value 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 too low, it will be optimal not to extend; the bondholder insteady reclaims principal, which can be invested at current yields

- A junk bond is any bond that is rated below investment grade (BB 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 Burnham Lambert quickly followed suit with a series of junk bond issues for companies that had been locked out of the bond market Michael Milkin, who is often referred to as the junk bond king, led the Drexel Burnham 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 are given junk bond, or high-yield status, and even blue chip stocks have seen their bonds rated junk

- Registered and bearer bonds: Bonds 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 only 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 securities to specified number of investors

And versus, Public offering means offering of securities for sale by any of the following modes:

 Offering the securities to 100 or more investors, excluding professional securities investors (or institutional investors)

 Offering of securities 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, profitability, Government approval and disclosed documents Today, many issuers use Underwriting methods for private placement

1.3 Methods of Issuance

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 at a specific price Competitive bids are filled by the Treasury from the highest price to the lowest price A noncompetitive bid is one that is submitted to the Treasury for purchase without a specific price or yield These bids are filled based on the price and yield

of the weighted average yield of the accepted competitive bids

Dutch auction, started in Netherlands' farms, is a descending price auction for

multiple identical items A true Dutch auction starts with a prohibitive price and is bid lower Early winners in 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 In the traditional IPO, the investment bank 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 field and allottees pay a price only slightly lower than the highest bid The issuer collects more capital with a Dutch auction IPO

1.3.2 Underwriting:

Underwriting means the act where underwriter agrees with the issuing company to conduct pre-issuance activities, to distribute bonds to investors, and to purchase bonds for resale, or to purchase the remainder of undistributed bonds

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 issue However, bond are typically underwritten

on a best efforts “bought as sold basic, reflecting the investor‟s discretion in choosing among an entire program of maturities and structures

Best effort:

In a 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 entire issue However, if the underwriter is unable to sell all securities, it is not responsible for any unsold inventory

Best effort agreements are used mainly for bonds with higher risk, such as unseasoned offerings

Book building

In the US, Japan, and many other countries, firm-commitment offerings are marketed and priced by a negotiation process that includes book building The underwriter “builds the book” by soliciting non-binding indications of interest from investors and uses the information, along with information derived through its due diligence on the issuer, to negotiate the offering size and the offering price Following convention, we refer to this type of negotiated offering as “book building.”

Under book building, the underwriter seeks indications of interest, primarily from institutional investors The underwriter and the issuer determine the offering price by negotiation, in light of the underwriter‟s due diligence and evidence on demand derived through pre-marketing efforts

1.3.3 Agent

Agent means the act where the issuing company assigns 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 bond issuance:

Herein the study will present one special method of corporate bond issuance:

It is underwriting method with best effort through bookbuilding that have applied for most of all corporate bond issuance in the market economies

1.4.1 Key players in the transaction:

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

- Issuer: Final 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 issuer takes responsibilities:

 Negotiate and agree 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;

 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 requirements Directs

the issuer 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

1.4.1.2 Key players with access to public material information:

- Trading: Provides information on the offering‟s secondary market

performance Maintains a liquid two-way market for the offering in the aftermarket 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 to best target 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 credit, and if interested, place orders with sales They are usually banks, private banks, Asset management, Insurance, Hedge Funds

1.4.1.3 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 (s) and lead Manager (s):

 Negotiate and agree terms and conditions of the bonds, including covenants, with the issuer;

 Conduct due diligence on issuer‟s business, operational and financial affairs;

 Agree pricing and size of bond issue with issuer;

 Transfer net proceeds of bond issuance to issuer

+ Co-lead Managers and Co-manager (s):

Co-lead Manager or Co-Manager roles

+ Issuer’s international counsel:

 Take lead in drafting offering circular;

 Participate in due diligence sessions;

 Advice issuer regarding terms and conditions;

 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 to Vietnam law aspects;

 Ensure that issuer 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)

+ Underwriter’s Counsel:

 Underwriters‟ International Counsel: Review offering circular; prepare transaction documents; Participate in due diligence sessions; Deliver legal opinion covering, among other things, “enforceability”; 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;

o Trustee has fiduciary duties to bondholders;

o Bondholders prefer a trustee structure;

 Advantages of having fiscal agent:

o Lower transaction expenses;

o Fiscal agency structure is recommended for plain vanilla senior unsecured debt and investment grade frequent issuers

 Fiscal Agent or Trustee will wear “different hats” and provide these other services;

+ Registrar: maintains ownership records on behalf of issuer for registered

securities;

+ 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

+ Auditor: Review and comment on financial information contained in

offering circular and Provides Auditor‟s comfort letter

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

issuer with credit rating process

- Transaction Management: Oversees the documentation process Coordinates

legal aspects of transaction Works closely with external lawyers (i.e Underwriters‟ Counsel, issuers‟ Counsel)

- Rating Agencies: Provide measures of the issuer‟s credit by respected

independent authorities An international ratings is a critical first step to raising an Issuer‟s overall international 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 Because when investors decide to buy a corporate bond, they must have faith that the company will eventually 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 Services all specialize in assigning ratings to bonds that determine the ability of their issuers to repay those bonds

The following are summaries of the definitions of Moody's ratings for term bonds

long- 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 medium-grade obligations

upper- Baa - Medium-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 of bonds, with extremely poor prospects of ever attaining any real investment standing

1.4.2 Bond documents

- Prospectus/ Offering Circular/Information Memorandum:

 Disclosure document – prospectus/offering circular;

 Listing document – required by stock exchange;

 Liability document – provides “issuance policy” against potential liability;

 Marketing document – tell issuer‟s story

- Terms and conditions/ Description of Notes

 Contained within Offering Circular;

 Sets out the commercial and legal terms of bonds, including: interest and principal payment dates; maturity date; negative pledge; covenants; events of default and governing law/jurisdiction

- Purchase agreement/ Subscription agreement:

o Issuer agrees to issue and sell securities to Managers, and

o Managers agree to purchase securities

 Includes:

o Representations and Warranties;

o Purchase and Sale;

o Payment and Delivery;

o Offering by the Initial Purchasers;

o Default by an Initial Purchaser;

o Submission to jurisdictions; agent for Service of Process;

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

obligations of issuer, trustee (or fiscal agent) and bondholders vis-à-vis each other

- Legal opinion:

 Cover four primary aspects: (i) due authorization, (ii) regulatory approvals, (iii) no conflicts and (iv) enforceability;

 English/ New York: enforceability;

 Local: due authorisation and regulatory approvals

- Comfort letter:

Generally, a comfort letter is a letter from an accountant to 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 circular;

 Provides: negative assurance – i.e., nothing has come to their attention that leads them to believe that financial position of issuer has changed materially and adversely since the date of such information

 ICMA (The 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 that “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any nation securities exchange,

 To employ any device, scheme, or artifice to defraud;

 To make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made, in light

of the circumstances in which they were made, not misleading, or

 To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any securities

Due diligence defense – most jurisdictions provide defense to most transaction parties against investor claims if defendants can prove that reasonable efforts have been made to ensure that disclosure document meets 10b-5 standard

Table 1.2 Sample due diligence question topics:

- History and overview

- Capitalisation and shareholders/

joint venture partners

- Employees and labor relations

- Financial statement requirements

- When are pro forma financials required?

- Business combination/ restructuring

- GAAP (Generally Accepted Accounting Principles) differences

- Comfort letters

1.4.3 Market selection

There are various markets:

- Regulation S Eurobond – 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 U.S 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 S rules

Selecting issuance formats based on Quantitative selection criteria:

Table 1.3 Quantitative selection criteria Regulation S 144A/Regulation S SEC Registered Typical Deal Size Usually USD 150-

500mn

Usually USD 300mn-1bn

USD 500 or above

Maturities 5, 7 and 10 years

Selecting issuance formats based on qualitative market selection criteria:

Table 1.4 Qualitative selection criteria Regulation S 144A/Regulation S SEC Registered Distribution Non-US investors

(subject to selling restrictions)

Non-US investors and QIBs in the US

Broadest public distribution, including US retail investors

Credit rating 2 ratings preferred 2 ratings required 2 ratings required

Documentation

Requirements

-No SEC registrations fee or review process

- Offering Circular

- No SEC registrations fee or review process

- Offering Circular

- 10b5 legal opinions

- SEC registrations fee

- Offering Circular

- 10b5 legal opinions

US GAAP financials

recommended

Investors will usually expect a roadshow

Investors will usually expect a roadshow

to 8 weeks (standalone)

Approximately 6-8 weeks (standalone)

8-12 weeks Possibility of SEC review can delay deal for 4 weeks

Table 1.5 The different issuance formats Regulation S 144A/Regulation S SEC Registered Advantages + Lowest

disclosure and upfront legal costs + In US$ and Euros, sufficient capacity for offerings of up to US$ 1bn

equivalent + Establishes benchmarks as reference for future pricing

+ Deep liquid US$

financing + Larger capacity than Reg S market + Higher total demand/price tension from inclusion of US QIBs

+ Establishes benchmarks as reference for future pricing

+ High secondary market liquidity

+ Deepest pool of investors base to provide highest secondary market liquidity

+ Largest capacity among all issuance formats

+ Establishes benchmarks as reference for future pricing

+ Highest investors profile

+ Highest secondary market liquidity

Disadvantages + Minimum size

of US$300mn equivalent to ensure inclusion in key bond

indicates, in turn ensuring

secondary market liquidity

+ Limited to European, Asian and Middle Eastern investor base

+ More complicated documentation + Higher upfront and legal costs including 10b5 opinions from legal counsel

+ More time consuming + US investors are more relative value driven and tend to

be more price sensitive in the execution process

+ Most complicated documentation + Higher upfront and legal costs including SEC registration and 10b5 opinions from legal counsel + Most time consuming, potential delay if there is SEC review

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

Announce transaction:

 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)

 Advance notice to commence internal credit approval processes for investors

 Establish relative value:

o Issuers with established yield curve can benchmark new offerings against exiting yield curve

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

Initial Price Guidance

Revised Price Guidance

Marketing, Establishing Relative Value

Pricing and Allocation

After Market Announce

transaction

o While often a broad range of international comparable reference points exits, the focus will often be on the spread over or under 2-3 key reference points

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

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

as well as prevailing market conditions, the issuer and its bookrunner(s) then determine the credit spread it believes investors are willing to pay for the contemplated offering

 Syndicate gathers feedback from investors on the credit e.g price sensitivities

Initial Price guidance:

 A realistic initial price guidance range that aims to capture the broadest possible level of initial investor interest

 Objective: Order momentum and potential for oversubscription that will general price tension

 Pricing strategy is clearly explained to the issuer with the Issuer‟s sign off necessary before proceeding to each next step

 Presuming that the bond yield is a fair reflection of an issuer‟s credit, the stronger the credit of the issuer, the lower the yield curve- the closer its credit curve to the swap curve the Treasury curve – the tighter its credit spreads

Order book:

Written record of investors‟ Orders:

 Bookrunners manage an order book that collates the orders from respective sales teams

 Convention in the international market is the “Pot” system with all orders going into the same pot irrespective of which bank has secured the order to ensure a seamless 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 withdraw their orders Therefore, the attrition at different pricing levels can

be estimated

Fully Transparent:

 Continuous and timely updates on the consolidated order book

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

 Guides the syndicate to decide on a final pricing

 Allows regular updates to be provided to the issuer throughout the process Final Order Book:

 Orders confirmed, order book closed, offering launched

 Oversubscription may result in upsize

Revised guidance:

o The size of the order book

o Volume-price sensitivity of the book as a whole

o Surrounding market movements since initial price guidance

 Objective of revised guidance is to utilize the price tension that 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

o Low cost of funding for the issuer

o Involvement of a broad range of issuer to foster ongoing trading activity and enhance the issuers profile in the market

o Pricing at a level that provides a high likehood of a positive secondary market performance

 Benchmark rates fixed, final terms agreed

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

on the following factors:

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

o Minimize the distribution to “fast money” accounts that will look to take profit quickly in the secondary market

o The issuers existing relationships with investors

After market:

Research

 Frequent publications and updates