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 Hanoi - 2007 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 The necessary of research Objectives and aims 3 Scope of work 4 Methodology Data collection method Data analysis Significance Limitations Findings 10 Outline CHAPTER THEORETICAL PART 1.1 Bonds 1.1.1 Bonds and corporate bonds 1.1.2 Types of bonds 10 1.2 Types of issuance 14 1.3 Methods of Issuance 15 1.3.1 Auction 15 iv 1.3.2 Underwriting: 15 1.3.3 Agent 17 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 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 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 v 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 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 vi LIST OF ABBREVIATIONS ADB Asia Development Bank AICPA American Institute of Certified Public Accountants BIDV Bank for Investment and Development of Vietnam Bn billion BOD Board of Directors BOM Board of Managements Bps Basic points DB Deustche Bank E&Y Ernst and Young audit company EUR Euro (currency) GAAP Generally Accepted Accounting Principles GBP Grish Bristish Pound JSM Jonhson Stock and Master law company JPY Japan Yen HKD Hongkong Dollar ICB Industrial Commercial Bank ICMA The International Capital Market Association IFAS International IPO Initial public offering MHB Mekong Delta Housing Bank Mn million vii MOF Ministry of Finance MOI Ministry of Investment REG Regulation SAS Statement on Auditing Standards SBV State bank of Vietnam SEC Securities & Exchange Commission (US government) SGD Singapore Dollar QIB Qualified Institutional Buyer US United States USD United States Dollar VAS Vietnam on Auditing Standards VCB Vietnam Commercial Bank WTO World Trade Organisation 144A Rule 144A (as defined in Chapter 1) viii LIST OF TABLES Table 1.1 Differences between Bond and Loan 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 ix INTRODUCTION 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 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 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 ... 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... recommendations on the bond 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. .. 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