Vietnam is preparing to issue its first sovereign bond in more than four years to take advantage of a Moody’s rating upgrade and an improving macroeconomic backdrop.
Deutsche Bank , HSBC andStandard Chartered have been mandated for the bond offering and began meeting investors last Wednesday.
The offering, expected to be launched as a 144A/Reg S US dollar-denominated 10-year benchmark, could be used to switch bondholders out of the US$750m 6.875% 2016s and US$1bn 6.75% 2020s.
Bankers on the offering and away from it expect Vietnam to achieve a yield in the low 5% area, which will allow the sovereign to lower its borrowing costs greatly from the coupon it pays on the old notes.
Moody’s upgraded Vietnam’s sovereign rating one notch to B1 from B2 in July, but still has some concerns about the government’s finances, which could be eased with proceeds from this issue.
“The deficit has widened from previous years and is causing some concern locally,” said Christian de Guzman, a senior analyst at Moody’s. “There is definitely a need for more financing and if they can issue internationally, at a lower rate than what they can onshore, it can help to keep debt servicing burden manageable.”
Vietnam’s US$1bn 2020s were trading around 4.15%, and fair value is seen at the 5.15% area considering that the curve extension to the 24s would require adding around 100bp.
Stable demand
Higher-rated countries like Indonesia would add roughly 80bp for that extra tenor, while the curves of lower-rated names, such as Pakistan and Mongolia, can add up around 110bp-120bp.
Confidence returns
The sovereign bond will ascertain if investors are ready to buy a frontier credit amid a lack of supply from that market this year.
The market was shocked in 2010 when state-owned shipbuilder Vinashin defaulted on a US$600m syndicated loan, despite implied government support.
However, the debt was restructured last year into new bonds with a government guarantee, helping to restore investor confidence in the country.
HSBC economists in an October 31 note described Vietnam as “among the best placed to benefit from China’s fading competitiveness in low-end manufacturing”, citing low labour costs and exports growing at roughly three times the regional average.
Despite a recent bout of volatility, one banker said investors had already shown strong interest in the deal even before they knew the terms at the start of the roadshow.
“There isn’t a lot of supply from Vietnam, and it’s rare even for a frontier credit since we’ve seen Sri Lanka come several times already,” said the banker. “The country is also on a positive ratings trajectory. We’re expecting demand to be particularly strong in the US.”
The robust interest comes even as the Federal Reserve said the US economy was improving, prompting investor to bet that interest rates would rise faster than expected.
“The Fed’s comments were more hawkish than expected, but there isn’t sufficient change in the language to prepare actively for an earlier Fed exit,” said Rajeev De Mello, a fund manager at Schroders. “It will not lead to any additional risk aversion and will not impact flows into dollar-denominated sovereign bonds.”
Yet, one banker away from the deal said, as markets remained fragile, it was better to do a straight bond instead of taking weeks to wait for investors to consent and swap their existing old bonds for new ones.
Improving finances
Moody’s said it upgraded Vietnam due to an emerging track record of macroeconomic stability and a strengthening in the balance of payments and external payments, while contingent risks in the banking sector were easing.
However, the credit rating agency said the government’s fiscal position had eroded over the past few years, due to a weaker revenue performance. Investors have not missed this point, and wished the finance ministry would give more details on how it planned to repair the country’s budget.
“The ministry officials could have provided potential investors with a bit more guidance on how the government planned to improve revenue growth, while containing expenditure without hurting the long-term growth of the economy,” said Arthur Lau, head of fixed income for Asia ex-Japan at Pinebridge.
“For instance, it would be useful if investors could have a bit more clarity regarding tax collection and expenditure targets.”
Lau also said he was unsure how a moderate global growth scenario would affect Vietnam’s foreign direct investment and exports.
Moody’s had also warned the sovereign was susceptible to fluctuations in the exchange rate because a large portion of the government’s debt is denominated in US dollars.
“If the Vietnamese dong depreciates in a big way, it will negatively affect their debt ratios because the value of their US dollar liabilities increases in dong terms,” said de Guzman.
The bond could come as early as November 6, after investor meetings wrap up in San Francisco a day earlier.
original source: http://www.ifrasia.com/vietnam-tests-frontier-appetite/21171297.article