___________________________________________________________________________
2015/FMP/WKSP2/018 Session 4.2
The Development of Asian Bond Markets and the Role of the Credit Guarantee and Investment Facility
Submitted by: Credit Guarantee and Investment Facility (CGIF)
Workshop on Infrastructure Financing and Capital Market Development
Iloilo, Philippines23-24 July 2015
The Development of Asian Bond Markets
and
the Role of the Credit Guarantee and
Investment Facility (CGIF)
APEC Workshop on Infrastructure Financing and Capital
Market Development , Iloilo City, Philippines, 23-24 July 2015
Contents
2
ASEAN Local Currency (LCY) Bond Markets
Growth of ASEAN LCY Bond Markets
LCY Bond Markets – Remaining Challenges
Asian Bond Markets Initiative (ABMI) Policy Dialogues in Asia and Pacific
Asian Bond Markets Initiative (ABMI)
Priority Areas in ABMI
Credit Guarantee and Investment Facility (CGIF)
Profile of CGIF
CGIF Goals
CGIF Strategy – Focus Areas
ASEAN Project Bonds
Project Bonds
Time for ASEAN Project Bonds?
CGIF’s Role in Developing ASEAN Project Bonds
ASEAN Local Currency (LCY) Bond Markets
3
Growth of ASEAN LCY Bond Markets
There has been dramatic growth in bond markets in
ASEAN countries
LCY Corporate Bond markets in ASEAN 6 * grew by
over 70% in last 5 years to reach $330 billion at end
2014
* Indonesia, Malaysia, Philippines ,Singapore, Thailand, and Vietnam
Their relative sizes to GDP have also increased,
reaching 41% in Malaysia and 32% in Singapore, well
surpassing Japan’s level (16%)
Total issuances of LCY Corporate Bonds in ASEAN 6
have also increased, exceeding $110 billion per year
The contractual saving (pension and life insurance)
and asset management sector is growing rapidly.
Accumulated assets of the sector in ASEAN 6
reached $2.4 trillion, almost equal to the banking
sector
This rapid growth also reflects conscious efforts of
policy makers to develop LCY bond markets to
create more balanced financing systems in the
region. Key initiatives include Asian Bond Markets
Initiative (“ABMI”)4
0
20
40
60
80
100
120
140
ID MY PH SG TH VN
(US$ Bn)LCY Corporate Bonds: Outstanding
2000
2014
0
10
20
30
40
50
ID MY PH SG TH VN
%LCY Corporate Bonds: % of GDP
2000
2014
0
50
100
150
0
500
1000
1500
ID MY PH SG TH VN
(%)
US$ Bn Institutional Investors Assets
Pension
Fund Mngt
Insurance
% of GDP
LCY Bond Markets – Remaining Challenges
Banks still dominate the region’s financial sector, with
the total value of banks loans substantially exceeding
the size of bond markets
The market’s issuer base is still thin. Only limited
number of ASEAN corporates have tapped LCY bond
markets, resulting in the high concentration of top 30
issuers in LCY corporate bond markets
The region’s corporate bonds are still concentrated at
the short end of the curve. Long-tenor issues beyond
10 years are still rarity in general and not available in
a number of ASEAN countries
Financial integration lagging behind trade and FDI
integration. Cross border portfolio investment within
ASEAN are still limited as most of them still originates
from, or is directed, outside the region
5
0
50
100
150
ID MY PH SG TH
%
LCY Corporate Bonds and Bank Loansas a Share of GDP
LCY Corporate Bonds Bank Loans
0
20
40
60
80
100
ID MY PH SG TH VN
%
Issuer Concentration at end 2014(Top 30 Issuers as % of Total LCY Corporate Bonds)
0%
20%
40%
60%
80%
100%
ID MY PH SG TH VN
LCY Corporate Bonds: Maturity Structure
>10 yrs
5-10 yrs
3-5 yrs
1-3 yrs
Asia: Foreign Portfolio Investment
Asian Bond Markets Initiative (ABMI)
6
Policy Dialogues in Asia and Pacific
7
Asian Bond Market Initiative (ABMI)
Prevention of Currency Crisis
Accelerate Economic Development of ASEAN+3
Develop and strengthen the local currency and regional
bond markets in the Region
• Rebalance excessive dependence on bank
borrowing
• Avoid double mismatch of maturity and
currency
• Channel regional resources to regional
investment
Asian Bond Markets Initiative (ABMI)Launched in 2003 with endorsement from the
ASEAN+3 Finance Ministers
8
Priority areas in ABMI
• Launching the CGIF guarantee programs
• Developing infrastructure financing schemeTF1 (Supply)
• Fostering an investment-friendly environment for institutional investors & transmitting the ABMI’s knowledge to them
• Expansion of Hedging Markets
• Additional Types of Investment Tools
TF2 (Demand)
• Enhancing ABMF activities (including Common Bond Issuance Program)
• Enhancing financial access to consumer and SMEs
TF3 (Regulation)
• Facilitating the establishment of the Regional Settlement Intermediaries (RSI)
• Strengthening the foundation for regional credit rating system
• Raising financial awareness
TF4 (Infrastructure)
ABMI adopted “New Roadmap+” in May 2012 which includes the
following priorities areas under 4 Task Forces (TFs)
9
Credit Guarantee and Investment Facility
(CGIF)
10
Profile of CGIF
Legal Structure A Trust Fund of the Asian Development Bank (ADB) Governed by CGIF Articles of Agreement,
ADB acts as the Trustee for CGIF’s assets
Establishment 12 November 2010 (commenced operations May 2012)
Paid-In Capital US$ 700 million
Maximum Leverage 2 to 2.5 times
Contributors(Shareholders)
Governments of ASEAN+3(10 member countries of ASEAN + China, Japan, South Korea)
and Asian Development Bank (ADB)
Objective Development of Capital Markets in ASEAN+3(Part of Asian Bond Markets Initiative (ABMI))
Main Operations Guaranteeing Bonds issued in ASEAN+3
Ratings Global Scale AA (Standard & Poor’s) AAA (RAM - Malaysia)
ASEAN Scale AAA (Standard & Poor’s, RAM - Malaysia)
National ScaleAAA (RAM, MARC – Malaysia, TRIS Rating - Thailand)
11
CGIF Goals
Financial
Inclusion
Bringing new issuers to the
market
Kick-starting a bond market in BCLM countries
Financial
Deepening
Extension of tenors
Broadening of investor base
Financial
Integration
Promotion of cross border fund raising
Mobilising surplus savings in the region to
needed investment (eg. Infrastructure)
Financial
Innovation
New fixed-income products
• Project bonds
• Green bonds
• Securitisation
• Sukuks
Issuer
Ma
rket
12
CGIF Strategy – Focus AreasD
eve
lop
me
nta
lIm
pac
t
*
• Encourage More ASEAN 6
Issuers to Issue in LCY
Bond Markets
• Help develop new products
for issuers
• Help ASEAN 6 Issuers tap
+3 markets
ASEAN 6
BCLM
+ 3
Markets
• Diversify Issuer Base
• Bring in new Investors (+3)
• Develop new LCY bonds
• Help BCLM Issuers
tap ASEAN Markets
• and home & +3 markets
• Develop new and nascent LCY
bond markets
• Encourage +3 Issuers to tap
ASEAN markets
• Encourage +3 investors to buy
ASEAN LCY Bonds
• & buy ASEAN Issuer bonds in
+3 currencies
Companies
Main Focus – Newly Expanded Focus13
ASEAN Project Bonds
14
Project Bonds
What is Project Bond?
Secured
Secured on the key, cashflow generating assets of the project / business
May include physical assets, contracts, insurances and bank account
Covenant Comprehensive covenant package offering
substantial creditor protections Typically includes restrictions on dividends
(subject to financial ratios), permitted business, additional indebtedness as well as information provision requirements
Long Tenor Long tenors (10 years+ ), matching the long
term nature of the assets and cashflow
Non-Recourse • Typically structured to be non-recourse to the
sponsors / shareholders
Bonds Usually fixed rate Bullet or amortising repayment profiles
possible
What Benefits Does Project Bond Offer?
Matching CurrencyA domestic bond market can be an important LCY
funding source for project to avoid currency mismatch
Long TenorsReliance on relatively short bank loans will expose
projects to refinancing risks in futureThe bond markets can typically offer longer tenor
debt than bank loansThe tariff/rate of infrastructure usage can be
reduced substantially as the principal payments get spread over longer period, boosting affordability and usage levels
Fixed rates While the majority of bank loans are at floating rate
basis, bonds are normally issued with fixed interest rates.
Reducing interest rate risks will be crucial in less benign interest rate regime in future
Risk adjustmentReduced project risks can be reflected in a bond
refinancing package of an operational asset
DiversificationThe capital markets can offer diversification of the
investor base away from bank lenders, enabling them to recycle capacity for new projects
Preserves single name borrower limits with existing relationship banks
15
Time for ASEAN Project Bonds?
Emerging Asia is facing a major challenge in financing large
infrastructure investment needs in the region, where increasing
private sector participation is called for
Banks have been the dominant form of private sector financing
for infrastructure projects in ASEAN countries, except for
Malaysia where most of them (including Greenfields) have been
financed by the local bond market
Bank loans, however, are not suited for long-term financing
required by these projects, especially under new banking
regulatory regimes
Bond markets should play a greater role in shaping the
infrastructure financing in the region through the development of
active project bond markets in other ASEAN countries
16
CGIF’s Role in Developing ASEAN Project Bonds
Investors Base
Many local institutional investors in the region still
lack internal capacity to evaluate and manage
project risks
They are hesitant to move into project finance
markets despite the fact that project finance has
resilient and attractive track records in the past
Rating Requirements
Bond investors will typically require top notched
ratings for their investment, limiting a scope of
infrastructure projects eligible for bond funding
Foreign bond investors could be constrained by the
project country’s sovereign rating
The rating process does involve additional costs,
time and disclosure which may not be acceptable to
project sponsors.
Security Package / Monitoring
Project finance transactions are normally structured
with comprehensive security packages, requiring
active and continuous involvements from creditors
throughout the project period
Bond investors are typically passive investors who
prefer limited involvements in loan monitoring
Decision Making
Project finance conditions requires frequent decision
makings among creditors in a timely fashion, which
is confronted by passive nature of bond investors
and their diversities.
CGIF as Project Finance Intermediary
While relying on CGIF’s support initially, Bond
investors will start recognizing project bonds as an
important asset class and will be incentivized to
develop own internal capacity to take project risks
CGIF can also sell down project risks to other
investors (e.g. reinsurers) through risk sharing
arrangements, thus separating funding investors
(bond investors) from risk taking investors
CGIF as Highly Rated Guarantor
Project Bond will be rated on the basis of credit
rating of CGIF which have top-notched rating in
global rating scale
Because rating will be based on CGIF’ rating, rating
process will be substantially simplified and rating
costs can be minimized
CGIF as Monitoring Agent
Project monitoring will be handled by CGIF with its
specialists, ensuring pro-active and timely project
management to minimise project risks
CGIF as Controlling Creditor
As a risk taking entity, CGIF can make an efficient
decision making on behalf of bond investors
Hurdles for Bond Investors CGIF’s Catalytic Roles
17
Kiyoshi Nishimura (Mr.)
Chief Executive Officer
Tel: +63 (2) 988 3911
Email: [email protected]
2015-01 - PTB – 20150105
www.cgif-abmi.org
Thank You !