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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: knishimura@cgif-abmi.org

2015-01 - PTB – 20150105

www.cgif-abmi.org

Thank You !