The Development of Asian Bond Markets and the Role of the Credit Guarantee and Investment Facility

Transcription

1 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, Philippines July 2015

2 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, July 2015

3 Contents 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 2

4 ASEAN Local Currency (LCY) Bond Markets 3

5 Growth of ASEAN LCY Bond Markets LCY Corporate Bonds: Outstanding (US$ Bn) % US$ Bn ID MY PH SG TH VN LCY Corporate Bonds: % of GDP ID MY PH SG TH VN Institutional Investors Assets (%) ID MY PH SG TH VN Pension Fund Mngt Insurance % of GDP 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

6 LCY Bond Markets Remaining Challenges 150 LCY Corporate Bonds and Bank Loans as a Share of GDP % Banks still dominate the region s financial sector, with the total value of banks loans substantially exceeding the size of bond markets % ID MY PH SG TH LCY Corporate Bonds Bank Loans Issuer Concentration at end 2014 (Top 30 Issuers as % of Total LCY Corporate Bonds) ID MY PH SG TH VN LCY Corporate Bonds: Maturity Structure 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 Asia: Foreign Portfolio Investment 100% 80% 60% 40% 20% 0% ID MY PH SG TH VN >10 yrs 5-10 yrs 3-5 yrs 1-3 yrs 5

7 Asian Bond Markets Initiative (ABMI) 6

8 Policy Dialogues in Asia and Pacific 7

9 Asian Bond Market Initiative (ABMI) Prevention of Currency Crisis Accelerate Economic Development of ASEAN+3 Asian Bond Markets Initiative (ABMI) Launched in 2003 with endorsement from the ASEAN+3 Finance Ministers 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 8

10 Priority areas in ABMI ABMI adopted New Roadmap+ in May 2012 which includes the following priorities areas under 4 Task Forces (TFs) TF1 (Supply) Launching the CGIF guarantee programs Developing infrastructure financing scheme TF2 (Demand) Fostering an investment-friendly environment for institutional investors & transmitting the ABMI s knowledge to them Expansion of Hedging Markets Additional Types of Investment Tools TF3 (Regulation) Enhancing ABMF activities (including Common Bond Issuance Program) Enhancing financial access to consumer and SMEs TF4 (Infrastructure) Facilitating the establishment of the Regional Settlement Intermediaries (RSI) Strengthening the foundation for regional credit rating system Raising financial awareness 9

11 Credit Guarantee and Investment Facility (CGIF) 10

12 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) Objective Governments of ASEAN+3 (10 member countries of ASEAN + China, Japan, South Korea) and Asian Development Bank (ADB) 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

13 Market Issuer CGIF Goals Financial Financial Financial Financial Inclusion Deepening Integration Innovation Bringing new issuers to the market Extension of tenors Promotion of cross border fund raising New fixed-income products Project bonds Green bonds Securitisation Sukuks Kick-starting a bond market in BCLM countries Broadening of investor base Mobilising surplus savings in the region to needed investment (eg. Infrastructure) 12

14 Developmental Impact CGIF Strategy Focus Areas ASEAN 6 Companies Encourage More ASEAN 6 Issuers to Issue in LCY Bond Markets Help develop new products for issuers Help ASEAN 6 Issuers tap +3 markets * Markets Diversify Issuer Base Bring in new Investors (+3) Develop new LCY bonds BCLM Help BCLM Issuers tap ASEAN Markets and home & +3 markets Develop new and nascent LCY bond markets + 3 Encourage +3 Issuers to tap ASEAN markets Encourage +3 investors to buy ASEAN LCY Bonds & buy ASEAN Issuer bonds in +3 currencies Main Focus Newly Expanded Focus 13

15 ASEAN Project Bonds 14

16 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 Currency A domestic bond market can be an important LCY funding source for project to avoid currency mismatch Long Tenors Reliance on relatively short bank loans will expose projects to refinancing risks in future The bond markets can typically offer longer tenor debt than bank loans The 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 adjustment Reduced project risks can be reflected in a bond refinancing package of an operational asset Diversification The 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

17 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

18 CGIF s Role in Developing ASEAN Project Bonds Hurdles for Bond Investors 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 s Catalytic Roles 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 17

19 PTB Thank You! Kiyoshi Nishimura (Mr.) Chief Executive Officer Tel: +63 (2) knishimura@cgif-abmi.org