Developing the local currency bond market in Vietnam – the catalytic impact effect

Vietnam’s local currency corporate bond market has achieved robust growth over the past 10 years. Whilst it remains dwarfed by the government bond market, the corporate bond market has rapidly grown achieving 112.6 percent year-on-year growth between Q1 2021 and Q1 2022. ^[1] Vietnam has much potential to further develop its relatively nascent bond market as a potent alternate / complimentary source of debt capital in the coming years especially as the country embarks on massive infrastructure development including commitments made at COP26 in Glasgow.

GuarantCo, part of the Private Infrastructure Development Group (PIDG), has been actively contributing to the development of the local capital markets by supporting infrastructure companies in raising long-term local currency debt financing through the bond markets. GuarantCo, being rated internationally AA- by Fitch and A1 by Moody’s, is well placed to extend guarantee support to help infrastructure companies that are facing challenges to raise sustainable, long-term, local currency financing for their projects.

GuarantCo’s first transaction in Vietnam was in the affordable housing sector (Nam Long in June 2018) followed by another transaction in the road infrastructure sector (Ho Chi Minh Infrastructure Investments in March 2019). Whilst the first two transactions were 100 percent guaranteed for bond investors such as Manulife, Prudential, AIA, etc., the third and most recent transaction that GuarantCo has closed is a landmark, first of its kind which has potential for replicability. GuarantCo provided a partial (two third) credit guarantee for EVN Finance, a private sector non-bank financial institution, to help raise USD 75 million (equivalent in VND) internationally certified green-bond, a first in Vietnam. GuarantCo also has a strong pipeline of transactions in the country, in renewable energy, water and financial inclusion. The company has seen an increased appetite from institutional investors, local banks and infrastructure project developers to engage in local currency bond guarantees especially if the instrument is well-structured and offers a sustainability angle.

Supporting affordable housing: Nam Long

Vietnam has a significant shortage of sustainable, high quality affordable housing projects.  The supply-demand gap is getting further exacerbated due to demographic factors including urbanisation and the need for improved living conditions. For example, in Ho Chi Minh City alone, against the predicted population increase of approximately 340,000 per year, it is expected that only about 25,000 new affordable houses will be developed annually.

In 2018, Nam Long Investment Cooperation (Nam Long), a local residential real estate developer with a focus on affordable housing, had set out a target to deliver an average of 5,000 units per year over the next 10 years to reduce this gap. To support Nam Long in achieving this ambitious target, GuarantCo extended the 100 percent guarantee for Nam Long’s 7-year fixed rate corporate bond of VND 660 billion (circa USD 30 million) to build the core infrastructure for the first phase of the Waterpoint affordable housing project (total development area of 355 ha), the largest project undertaken by Nam Long. This was GuarantCo’s first transaction in Vietnam and also the first guaranteed bond for Nam Long. GuarantCo’s guarantee helped Nam Long raise funds from long- term international institutional investors like Manulife, AIA and Generali.^[2]

By the end of 2021, Nam Long had delivered 893 affordable housing units as part of the Waterpoint project and continues to remain focused on the affordable housing segment with a view to developing larger scale projects in phases. The company also has large land banks which are strategically located to develop affordable housing units but realising those will require additional funding in the coming years to build single-family/ affordable home estates.

Nam Long has historically tapped equity and local bank markets to support its housing development plans. However, GuarantCo’s support has enabled Nam Long to diversify its funding sources to include international investors and also build its profile and credibility in the local bond market. Subsequent to the GuarantCo guaranteed bond, Nam Long has raise funds through bonds without any guarantee support. In 2020, Manulife, AIA and Generali purchased another bond of VND 450 billion of Nam Long on an unguaranteed basis.^[3] As of 31^st March 2022, Nam Long’s bond portfolio has reached over VND 2,000 billion, accounting for 80 percent of total external debt – this is a clear shift from bank-based financing to mobilising the vast institutional capital available in the country.

As a result of GuarantCo’s continued support, Nam Long is on the path to raising funds without guarantees, which will be a mutually beneficial for both the company (which will save the cost of the guarantee fees) and investors (who will benefit from higher yields).

Nishant Kumar, Managing Director Asia at GuarantCo said: “Vietnam is a key country for GuarantCo and PIDG as we work towards deepening the local capital markets for developing sustainable infrastructure in the country. After getting a 100 percent guarantee on their first transaction with Nam Long, the replication of a follow-on bond transaction without any guarantee by the institutional investors is testament to the work done by GuarantCo, especially when the investors continue to closely follow the credit and monitoring framework. It is because of our strong emphasis on credit and governance, that in our third transaction in Vietnam, the same investors decided to come in for a two-third guarantee at the outset, a first-ever in the country. With our strong pipeline in Vietnam, going forward, we want to replicate more partially guaranteed bond structures in the country to help finance new infrastructure by crowding-in more institutional investors and banks.”

GuarantCo in Vietnam

GuarantCo’s first transaction with Nam Long in 2018 has enabled GuarantCo’s subsequent work in the country in terms of developing a deeper appreciation of the macro dynamics of Vietnam.  It helped GuarantCo build strong partnerships with key public and private sector stakeholders thereby allowing it to build on its initial momentum to support more transactions within the infrastructure sector in the country.

The success of the Nam Long transaction paved the way for GuarantCo’s transaction with Ho Chi Minh Infrastructure Investments, a prominent local infrastructure developer, in January 2019 where GuarantCo provided 100 percent guarantee for VND 1150 billion (circa USD 50 million) bond to fund the construction of 51km Trung Luong My Thuan expressway. Subsequently in July 2022, GuarantCo provided a partial guarantee in the country to support EVNFinance, a leading local non-bank financial institution, to issue the first-ever partially guaranteed, internationally certified green bond in Vietnam for VND 1,725 billion (circa USD 75 million)  to support the financing of projects eligible under the company’s externally verified Green Bond Framework.

Since GuarantCo’s transaction with Nam Long, the subsequent series of transactions have helped build the momentum and market confidence to develop the local currency bond markets and increasingly to direct financing towards sustainable infrastructure projects in Vietnam. To further build market understanding in sustainable financing, GuarantCo, with funding support from PIDG Technical Assistance, organised a Vietnam Green Capital Market Event in August 2021. The event provided attendees with an understanding of the importance of green and climate financing for Vietnam with the aim to further develop the local capital markets to support the local currency financing of sustainable infrastructure.

GuarantCo remains highly optimistic about the growth and potential of the Vietnam local currency bond market and its ability to increase the long-term debt financing for infrastructure development in the country. A more developed and mature local currency capital market will increase the overall resilience of the local financial system which would ultimately benefit local companies and local people whilst at the same time reducing the burden on local banks to finance new infrastructure. To further contribute to developing the capital markets and sustainable infrastructure, GuarantCo will build on the momentum to deepen partnerships with all stakeholders including governmental partners, local companies, financial institutions, infrastructure developers and institutional investors. We are looking forward to pushing boundaries and delivering more guaranteed bond transactions and high-quality sustainable infrastructure in Vietnam in the coming years.

^[1] Asian Bond Online, Vietnam Market Summary (June 2022)
^[2] 20220420 – nlg – cbtt bao cao tai chinh quy 1.2022 – rieng.pdf (namlongvn.com)
^[3] 20220420 – nlg – cbtt bao cao tai chinh quy 1.2022 – rieng.pdf (namlongvn.com)