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


Code: 60 34 05
Master of business administration thesis

Supervisor: DR. vu xuan quang Hanoi – 2007

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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
1. The necessary of research 1
2. Objectives and aims 3

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 3. 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

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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 4. 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

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

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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)


so far, the market value of bonds in Vietnam makes up about 8-9 percent of GDP
1
.
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 1
Source: Report of MOF, 2006


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development investment into a diversified and comprehensive commercial bank
providing a range of products and services. Accordingly, BIDV has increased the
proportion of valuable papers in total mobilization fund and issuing bond is BIDV
long-term strategy in which BIDV hope to structure and improve its financial
situation. From the requirement of equitisation process scheduled at the end of
2007, BIDV has awaked that it is high time to balance short and long-term debts by
increasing long-term liabilities. From 2006, BIDV chose issuing bonds as key
solution for this problem. BIDV bonds became a benchmark case in the bond
market in Vietnam.
2. Objectives and aims
This study focus mainly on the objectives as followings:
 Firstly, give out a systematical approach of bond, corporate bond and
bond issuance; also introduce a popular method of issuing corporate bond, it is
underwrite with best effort and bookbuilding which has applied all over the world;
 Secondly, overview Vietnam bond market; raise some highlights and
obstacles now.
 Thirdly, apply theory into case of BIDV bond issuance to show the
successes, limitation, advantages and disadvantages of the transaction, from that
help BIDV get inside overview of its transaction;
 Finally, give out some appropriate 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 through underwriting with best effort and bookbuilding and apply into a case
of BIDV bonds. From that
- Help BIDV review its bond transactions and from that standardise its bond
issuing process;

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the data sources are highly complementary and the recommendation by researchers
that a good case study may want to use as many sources as possible.
In this study, data was collected from various sources: documentary sources,
archival records and direct observation.
6. Data analysis
The study focuses reviewing all of necessary documentations, archival records
relating to the bonds transactions and observing directly all of issuing process.
These multiple source of evidence is what made the study more valid.
7. Significance
This study contributes some certain meanings to the economy in generally and
the firms in particularly.
To the economy: the study introduces a new effective way of mobilizing fund
to meet the capital demand for developing economy as well as exploit maximally
internal and external capital resources. From that reducing the pressure on the bank
system to supply loans, also reducing risk in banking activities, especially in
mismatching maturity.
To the firms: the study introduces a new effective way of raising fund to
finance business activities and provides a commonly standard model of issuing
bond in the market which the firms can apply to raise fund.
8. Limitations
The study only focus on issuing local bond which issued denominated in
Vietnamese dong. Meanwhile the demand for issuing international bond which
issued denominated in other currencies are increasing dramatically. However, the
study build a common standard model of issuing bond which results in experience
from both foreign and Vietnam issuances could provide some important lessons.

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The study raise a case of special firm, it is a bank. The issuing process of a
bond issued by a bank is more quite complicated than a real corporation. However,
basically it is the same. When a corporate wants to issue bond, it should pay more

Amsterdam was the financial center of the world in the 17
th
century. In order
to finance companies‟ business, the market innovated debts instruments such as
annuities and perpetual bonds. It is said that Debt instruments build value like the
proverbial tortoise races the hare – slow and steady.
Bond market plays important role in the economy. Firstly, it complements
bank financing and contributes to the development of multi-layered financial
systems. The businesses not only expect loans from banks but also could raise funds
from issuing bonds. Issuing bonds will help the business avoid complicated
documentaries the banks request, however, this way requires a certain credit rating
of the issuers. If the issuer is rated higher, it will be in an easier position to issuing
bonds. Secondly, the bond market help mobilise domestic long-term savings to
finance investment for growth without excessively relying on external borrowing.
1.1.1. Bonds and corporate bonds
1.1.1.1. Definitions and terminologies of bonds
A bond is a contract of an institution which 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 far
value have the same meaning. It indicates the nominal dollar amount assigned to a
security by the issuer. It is usually the amount borrowed and repaid to the investor
when the bond matures.
Maturity is the length of time before the principal is returned on a bond. It is
also called term-to-maturity. At the time of maturity, the issuer is no longer

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obligated to make interest payments. Maturities range significantly, from 1 month
for some municipal notes to 40+ years for some corporate bonds.
When evaluating your goals, keep in mind that bonds of different maturities
will behave somewhat differently. For example, bonds with long-term maturities

 Listed
 Usually fixed rate
 Rating preferable – drives pricing
and relative value
 Little flexibility on drawdown and
repayment
 Prepayment very restricted (but can
include issuer calls)
 Generally fewer covenants
 Not confidential or discrete unless
private placement
 Broad investor base, enhanced
visibility and debt capacity
 Diversification – retain bank
capacity for other funding
 Onerous documentation and
disclosure for certain markets
 Typically shorter maturities
 Usually a non-tradable instrument
 Non-listed
 Usually floating rate
 No rating required
 Flexible structure, drawdown &
repayment to suit client
 Can be prepaid generally without
penalty
 Generally more covenants
 Confidentially
 Speed-generally a faster
documentation and marketing process

Although some bonds trade on a formal exchange most bonds are traded over
the counter in a network of bond dealers linked by a computer quotation system. In
practice, the bond market can be quite “thin”, in that there are few investors
interested in trading a particular issue at any particular time.
1.1.2. Types of bonds
1.1.2.1. By currency and place of issue
- Domestic bond issued by a borrower resident in the country and denominated
in its local currency. For example, EVN issues bonds denominated in Vietnam dong
in Vietnam.
- Foreign Bond issued by a borrower non-resident in the country in which the
bond is being issued. For example, General Electric USA issues bonds denominated
in Singapore Dollars and sells them in Singapore. These bonds are given colorful
names based on the countries in which they are marketed. For example, foreign
bonds sold in the United States are called Yankee Bonds. Yen-denominated bonds
sold in Japan by non-Japanese issuers are called Samurai bonds. British pound-
denominated foreign bonds sold in the United Kingdom are called Bulldog bonds.

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- Euro Bond issued by a borrower who is non-resident in the country and
denominated in a currency different from the country where it is issued. For
example, Vinashin issues bonds denominated in US Dollars and sells them in
Europe.
1.1.2.2. By coupon Type
- Fixed rate: A fixed rate bond is a bond that carries a predetermined interest
rate. Usually, coupon rate is fixed before the issue and announce to the investors.
Most corporate bonds are fixed-rate bonds. The interest rate the corporation pays is
fixed until maturity and will never change.
- Floating rate: A Floating rate bond is a bond whose interest is pegged to a
benchmark, such as the Treasury interest rate and adjusted periodically. These
bonds do offer protection against increases in interest rates, but the trade-off is that

the bonds have the highest price; interest rates have decreased since the bonds were
issued, increasing the price. In many cases, the company will have the right to call
the bonds at a lower price than the market price. If a bond is called, the bondholder
will be notified by mail and have no choice in the matter. The bond will stop paying
interest shortly after the bond is called, so there is no reason to hold on to it.
Companies also typically advertise in major financial publications to notify
bondholders. Generally, callable bonds will carry something called call protection.
This means that there is some period of time during which the bond cannot be
called, also called redeemable bond, opposite of irredeemable bond or non-callable
bond.
- Secured versus Unsecured Bonds
Bonds can either be secured by some sort of collateral or unsecured.
Unsecured bonds, called debentures, are considered to be riskier than secured bonds
because they are simply backed by the issuer's word that it will repay the bonds.

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Secured bonds are backed by some goods that can be sold by the issuer to raise
money to pay off the debt in the event of default.
The most common form of secured bonds are mortgage bonds. These bonds
are backed by real estate or physical equipment that can be liquidated. These are
thought to be high-grade, safe investments. Other bonds are secured by the revenues
created by projects. If an issuer in default has both secured and unsecured bonds
outstanding, secured bondholders are paid off first, then unsecured bondholders.
Naturally, because unsecured bonds carry greater risk than secured bonds, they
usually pay higher yields.
- Convertible and putable bonds: Convertible bond carries a provision that the
bond can be converted into shares of common stock under certain circumstances.
Convertible bonds can be more attractive that bonds with no conversion provision,
depending on the price of the underlying stock. On the other hand, putable bond
grants the investor the right to sell the issue back to the issuer at par value on

And versus, Public offering means offering of securities for sale by any of the
following modes:
 On mass media, including internet
 Offering the securities to 100 or more investors, excluding professional
securities investors (or institutional investors)
 Offering of securities to unspecified number of investors
Private placement is way to offer bonds to limited number of investors. And
Private placement has fewer conditions for Issuance, such as size of company,
profitability, Government approval and disclosed documents. Today, many issuers
use Underwriting methods for private placement.

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1.3. Methods of Issuance
1.3.1. Auction
The term "auction" is usually associated with a U.S. Treasury bond aution, at
which the issuer sells bonds to the investing public. Bids are taken by the issuers
and securities are allocated on a high to low price basis.
Investors can use a "competitive tender" or a "noncompetitive tender" format.
The competitive tender bid specifies a purchase order at a specific price.
Competitive bids are filled by the Treasury from the highest price to the lowest
price. A noncompetitive bid is one that is submitted to the Treasury for purchase
without a specific price or yield. These bids are filled based on the price and yield
of the weighted average yield of the accepted competitive bids.
Dutch auction, started in Netherlands' farms, is a descending price auction for
multiple identical items. A true Dutch auction starts with a prohibitive price and is
bid lower. Early winners in a strict Dutch auction pay more and later winners pay
less till the Dutch auction ends. A more familiar variant of Dutch auction starts with
a reserve price. Bidders bid at or above that base price for the number of items they
want. In this Dutch auction, successful bidders pay only the price of the lowest
accepted bid. The Dutch auction in an Initial Public Offering (IPO) is actually a

Following convention, we refer to this type of negotiated offering as “book
building.”
Under book building, the underwriter seeks indications of interest, primarily
from institutional investors. The underwriter and the issuer determine the offering
price by negotiation, in light of the underwriter‟s due diligence and evidence on
demand derived through pre-marketing efforts.

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1.3.3. Agent
Agent means the act where the issuing company assigns a third party
institution to do bond issuance and/ or redemption activities on their behalf. Agent
is not used popularly today as before.
1. 4. Corporate bond issuance:
Herein the study will present one special method of corporate bond issuance:
It is underwriting method with best effort through bookbuilding that have applied
for most of all corporate bond issuance in the market economies.
1.4.1. Key players in the transaction:
1.4.1.1. Key players with access to non-public material information:
- Issuer: Final authority in decision making process throughout the bond
transaction. Major responsibility of the management team is to present the credit to
investors during group presentations and one-to-one meetings during the roadshow.
The issuer takes responsibilities:
 Negotiate and agree terms and conditions of the bonds, including
covenants;
 Provides all information required and facilitates due diligent sessions;
 Prepare disclosure documents with the assistance of issuer‟s legal
counsel;
 Participate in investor marketing roadshow;
 Agree pricing and size of bond issue;
 Issue bonds and receive net proceeds of issuance.