Corporate Bond Market and the Asian Bond Market Initiative February 2004
1. Introduction Outline of Asian Bond Markets Initiative The role of securities regulators Japan s case: Is the Japanese corporate bond market successfully developed? 2
2. Background of Asian currency Crisis Fundamentals before the crisis High savings rate in Asian countries Short-term bank loans as dominant financing tools Underdeveloped bond markets in the region Vulnerability caused by double mismatch Currency: short-term foreign currencydenominated financing, and Maturity: long-term domestic currencydenominated investments at home 3
3. Asian Bond Markets Initiative (1) Dec 2002 ASEAN+3 Informal Session (Thailand) Japan s proposal of Asian Bond Markets Initiative Background In spite of high savings in Asian countries, medium- or long-term investment funds for development have not enough supplied It is important to establish bond markets in Asia to supply funds for investment from private sectors, to solve double mismatch and to avoid excessively relying on bank loans. 4
3. Asian Bond Markets Initiative (2) Issues to be handled at Asian Bond Markets Initiative Facilitating access to the market through a wider variety of issuers A robust primary and secondary bond market in Asia requires wide variety of issuers and products Enhancing market infrastructure to foster bond markets in Asia Development of efficient and deep domestic and regional markets, being a conductive environment for active participation of both issuers and investors 5
3. Asian Bond Markets Initiative (3) Feb/Mar 2003 ASEAN+3 Informal Meeting and High Level Seminar for Asian Bond Markets Initiative (Japan) Urgent establishment of 2 Working Groups 1. Creating new securitized debt instruments 2. Credit guarantee mechanisms Panel discussions on various issues of Asian Bond Markets Initiatives 6
3. Asian Bond Markets Initiative (4) Jun 2003 ASEAN+3 Finance Ministers Process ABMI Working Group Meeting (Japan) Establishment of all 6 Working Groups 1. Creating new securitized debt instruments 2. Credit guarantee mechanisms 3. Foreign exchange transactions and settlement issues 4. Issuance of bonds denominated in local currency 5. Local and regional rating agencies 6. Technical assistance coordination 7
3. Asian Bond Markets Initiative (5) Aug 2003 ASEAN+3 Finance Ministers Meeting (Philippines) Chairman s press release on the Asian Bond Markets Initiative Latest development: establishment of 6 Working Groups, due to complexity of issues and various development levels of bonds markets in each country Challenging ahead: items of further examination Facilitating access to the market through a wider variety of issuers Enhancing market infrastructure to foster bond markets in Asia 8
3. Asian Bond Markets Initiative (6) Facilitating access to the market through a wider variety of issuers 1. Government bond issuance to establish benchmarks 2. Asian governmental financial institutions to issue bonds in Asia 3. Creation of asset-backed securities markets 4. Bond issuance in the region by multilateral development banks and government agencies 5. Bond issuance in the region for funding foreign direct investment in Asian countries 6. Expansion of local currency-denominated bonds and introduction of currency basket bonds 9
3. Asian Bond Markets Initiative (7) Enhancing market infrastructure to foster bond markets in Asia 1. Provision of credit guarantees 2. Strengthening of the rating system 3. Establishment of a mechanism for disseminating information 4. Facilitating settlement system 5. Enhancing capacity building through conduct of market research and technical assistance programmes 10
4. Creation of an Environment Development of bond market infrastructure Accounting standards Disclosure rules Rating agencies Settlement systems Market surveillance The role of securities regulators 11
5.1 Japan s Corporate Bond Market 60 50 40 30 20 10 (JPY trillion) 0 Issue Amount Corporate Bond Outstanding Amount Corporate Bond Market Historical deregulation to the corporate bond market in 1993 and 1996 has activated finance through issue of bonds CY1974 CY1975 CY1976 CY1977 CY1978 CY1979 CY1980 CY1981 CY1982 CY1983 CY1984 CY1985 CY1986 CY1987 CY1988 CY1989 CY1990 CY1991 CY1992 CY1993 CY1994 CY1995 CY1996 CY1997 CY1998 CY1999 CY2000 CY2001 CY2002 CY2003 12
5.2 History of Deregulations (1) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Situation of Finance by Corporations Loan Equity Finance Bond Issuance Foreign Bond Issuance Others Loan Bond Issuance Equity Finance CY1970 CY1975 CY1980 CY1985 CY1990 CY1995 CY2000 Reliance on bank loans Direct finance increased,mainly through equity finance, but bank loans are still large for corporate finance 13
5.2 History of Deregulations (2) Previous regulated bond issuance Limit of maximum bond issuance by the Commercial Code, based on capital/additional paid-in capital Self-control of issuance by major banks and securities companies, allowing issuance and conditions of bonds based the adequacy of bond issuance standard Mandatory setting of commissioned banks 14
5.2 History of Deregulations (3) Deregulation and introduction of new methods (Year) 1950 1960 1970 1980 1990 2000 Limit of issue amount (abolished in 1993) Adequacy of bond issuance standard (Standard for non-collateral issue) (abolished in 1996) Setting of commission banks Securities transaction tax (abolished in 1993) (abolished in 1999) Setting of commissioned company (introduced in 1993) Proposal method (introduced in 1987) Issue by MTN (introduced in 1988) (Year) 1950 1960 1970 1980 1990 2000 15
5.3 Impact of the Market Corporate bond market is: Small in size, compared with JGBs Small in size, compared with the US market (JPY trillion) 600 Outstanding Amount of JGBs and Corporate Bonds Others JPY85tril 12% Corporate Bonds JPY53tril 7% Munis JPY22tril 3% Govn't Agencies/GGs JPY40tril 5% Japan(2003) Total JPY730tril Govn't Bonds JPY530tril 73% 500 JGB Outstanding Amount Corporate Bond Outstanding Amount 400 300 Others US$496bil 3% Govn't Bonds US$2,968bil 20% 200 100 Corporate Bonds US$5,190bil 35% US(2001) Total 14,971bil 0 CY1974 CY1975 CY1976 CY1977 CY1978 CY1979 CY1980 CY1981 CY1982 CY1983 CY1984 CY1985 CY1986 CY1987 CY1988 CY1989 CY1990 CY1991 CY1992 CY1993 CY1994 CY1995 CY1996 CY1997 CY1998 CY1999 CY2000 CY2001 CY2002 CY2003 Munis US$1,374bil 9% Govn't Agencies/GGs US$4,944bil 33% 16
6. Encouragement of Investment (1) To stimulate further investment to the corporate bonds: Disclosure Transparency Cabinet Order was revised, based on the Proposal by Securities and Exchange Surveillance Commission, that securities firms shall inform material information of market conditions occurred during the subscription period to the retail investors Reduction of cost and risks 17
6. Encouragement of Investment (2) Credit bond market (including corporate bonds) suffered serious credit events: Mycal (domestic corporate bonds, 2001) Enron (euroyen/repackaged bonds, 2002) Argentine (samurai/euroyen bonds, 2002) Investors needs adequate and timely information about issuers Regulators shall ensure disclosure of information 18
6. Encouragement of investment (3) The Law which enables to issue paperless bonds passed in 2002 Full start by the end of 2007 This ensures quick settlement and enables to shorten the settlement period period 19
6. Encouragement of Investment (4) For improvement of transparency: Japan Securities Dealers Association, a SRO started announcement service of quotation of retail-target corporate bonds in in 2003 To ensure fairness of transaction: Report of executed prices was considered 20
7. Conclusion Confidence of market participants in corporate bond markets is critical for development of markets Deregulation and enhancement of surveillance International cooperation for institutional building 21