A study on issuing corporate bond the case of bank for investment and development of Vietnam -BIDV

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

Hanoi - 2007
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








Major: Business Administration

Code: 60 34 05



Master of business administration thesis




Supervisor: DR. vu xuan quang





Hanoi – 2007

iv
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

3. Scope of work 4
4. Methodology 4
5. Data collection method 4
6. Data analysis 5
7. Significance 5
8. Limitations 5
9. Findings 7
10. Outline 7
CHAPTER 1. THEORETICAL PART 7
1.1. Bonds 7
1.1.1. Bonds and corporate bonds 7
1.1.2. Types of bonds 10
1.2. Types of issuance 14
1.3. Methods of Issuance 15
1.3.1. Auction 15

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1.3.2. Underwriting: 15
1.3.3. Agent 17
1. 4. Corporate bond issuance: 17
1.4.1. Key players in the transaction: 17
1.4.2. Bond documents 22
1.4.3. Market selection 25
1.4.4. Model of issuing process: 29
1.5. Issuance experience 33
1.5.1. Malaysia’s experience on developing bond market 33
1.5.2. Japan’s experience on empirical pricing 35
1.6. Sum-up 37
CHAPTER 2. DEVELOPMENT OF CORPORATE BOND MARKET 41
2.1. Vietnam’s corporate bond market overview 41

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

4.2.1. Time of issue: 84
4.2.2. Choosing underwriter from the candidates: 85
4.2.3. Selecting appropriate market 87
4.2.4. Preparing offering documents 87
4.2.5. Marketing process 87
4.2.6. Building book 88
4.2.7. Pricing and allocating bonds 88
4.2.8. Time for paying proceeds 89
4.3. Solutions for developing primary bond market 90
4.3.1. Supply-Side Strategies 91
4.3.2. Demand-Side Strategies 92
4.3.3. Developing Infrastructure 93
CONCLUSION 96
REFERENCES 99


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LIST OF ABBREVIATIONS

ADB Asia Development Bank
AICPA American Institute of Certified Public Accountants
BIDV Bank for Investment and Development of Vietnam
Bn billion
BOD Board of Directors
BOM Board of Managements
Bps Basic points
DB Deustche Bank
E&Y Ernst and Young audit company
EUR Euro (currency)
GAAP Generally Accepted Accounting Principles

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)

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LIST OF TABLES

Table 1.1. Differences between Bond and Loan 9
Table 1.2. Sample due diligence question topics 25
Table 1.3. Quantitative selection criteria 26
Table 1.4. Qualitative selection criteria 27
Table 1.5. The different issuance formats 28
Table 3.1. List of BIDV outstanding bonds 53
Table 3.2. Government and Corporate local bonds 56
Table 4.1. Capital demand of economy 83
LIST OF FIGURES

Figure 1.1. Market selection 26
Figure 1.2. Issuing process 29
Figure 2.1. Structure of bond market at the end of the third quarter 2006 43
Figure 2.2. Outstanding amount of bond from 2001-2006 43
Figure 2.3. Outstanding Volume of Local currency bonds 44
Figure 2.4. Ratio of Government bonds and Corporate bonds 45
Figure 2.5. Corporate bond market Development 45
Figure 3.1. BIDV Financial results in period of 2001-2006 52
Figure 3.2. Onshore – offshore investors structure 75
Figure 3.3. By Business Types 75
Figure 3.4. By Geography 75

1
INTRODUCTION

1. The necessary of research
For some recent years, the bond market has been developing very actively. As

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

2
financial risks more efficiently and quickly than bank credit departments, based on
swifter flows of various information, thereby providing more expedient and
appropriate financing decisions; and third, more effective capital markets deepens
the financial base which has far-reaching positive implications for development
resource mobilization in developing countries.
Year of 2006 is opening and dynamic year in the primary bond market
because a series of big corporations such as BIDV, Vinashin, ACB, EVN, … issued
a huge amount of bonds. However, the demand for capital in the economy still so
big, therefore, issuing bonds will be a potential channel and the bond market will
play an important role in the economy. Many Vietnam businesses consider issuing
bonds is one of effective fund mobilization channels in order to get short-term and
long-term financial objectives.
Vietnam officially enters World Trade Organization (WTO) in November
2006. This is the opportunity to internationalize the bond market. Vietnam
corporations could issue its bonds in offshore markets; conversely, foreign investors
could enter the Vietnam bond market, both issuing bonds and trading bonds as well.
From the reasons, the final thesis titled “A STUDY ON ISSUING
CORPORATE BOND - THE CASE OF BANK FOR INVESTMENT AND
DEVELOPMENT OF VIET NAM”. The study provided a real case and updated
international issuing model, hence, it will bring some lessons for corporations also
other beneficiaries in issuing bonds and a picture overview of bond market.
BIDV is one of the biggest banks in Vietnam and BIDV bonds would be the
landmark in the primary bond market, which presented new method of issuance, it
is underwriting with best effort and bookbuilding. BIDV‟s strategy is to become the
leading commercial bank in Vietnam with a diverse ownership, a diverse business
platform, a well-regarded and a strong financial position similar to that of other
banks in the South East Asia region. As part of its restructuring process, the Issuer
formulated a business model which involves developing from a bank specializing in

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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;

4

- Bring some lessons for corporations also other beneficiaries in issuing bonds;
help them have a guide on how to issue bonds effectively.
- Give out some solutions to improve primary corporate bond market
effectively in the future.
3. Scope of work
The study is conducted in BIDV senior bond issuance in 2007 as a sample of
Vietnam. BIDV bond is a bond issued by BIDV, a bank, a little bit different from
bond issued by general corporations. There are more levels of control for bank bond
other than general corporate bond, however, in basic points, there are no differences
in issuing process between them. That is the reason the study choose BIDV bond
issuance to analysis as the sample for general corporate bonds.
There are many types of bonds such as senior or subordinated bond or secure
and unsecured bonds, convertible or callable bond But the study only focus on
senior and unsecured bond which is the most popular in the market.
Also the study focuses on local bond or bond issued in VND denomination,
and issued to onshore and offshore investor under Regulation S and Prive placement
via underwriting with best effort and bookbuilding.
4. Methodology
Methodology is used in this study is applying theory in analysing a case study
which will be described in the chapter three of the thesis.
5. Data collection method
There are some data sources from which information can be garnered for a
case study. It includes interview, documentary sources, archival records, participant,
observation, physical artifacts and direct observation. Of those resources, extensive
use is made of interview; documentary sources such as information obtained from
organization, direct observation and occasional references to archival materials for
the present today. Each of these data sources has strengths and weaknesses. Since

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no single source of data has a complete advantage over all the others and given that

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.

6
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

attention to the use of proceeds.
9. Findings
 The study introduces new method of corporate bond issuance which
applied popular in the world.
 The study also highlights some main results in the corporate bond
market in Vietnam right now;
 The study raises a case study of issuing bond: BIDV case which will
introduce issuing process as well as give some analysis about it, from that build a
common standard model of issuing bond could apply for all firms;
 After all, the study gives out some recommendations to improve
effective issuing corporate bond as well as solutions for developing bond market.
10. Outline
The thesis is divided into two three chapters. The study would like to
introduce purpose of choosing the thesis topic, the outline for the entire thesis and
the scope of work in the opening part before the first chapter that reviewed all
literature of bond and normal practice of bond issue. The second chapter will review
corporate bond market in Vietnam right now, in which raise some obstacles prevent
developing corporate bond market as well as the potential development. Chapter
three contains a within case introduction including case study method, analysis and
findings of BIDV bonds issue. This chapter also focuses on giving out successes
and failures from the case study analysis. Moreover, in chapter four, the study will
give out some recommendations and solutions to develop the bond market as well
as improve effectiveness of issuing corporate bond and the conclusions will be
presented in finally.

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CHAPTER 1
THEORETICAL PART

1.1. Bonds

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

8
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

will be more sensitive to changes in interest rates. Shorter-term bonds are more
stable and, because you are more likely to hold it to maturity, are more predictable.
There are some circumstances where a bond will be "called" before maturity. In
conclusion, a bond‟s maturity is crucial for several reasons. First, maturity indicates
expected life of the instrument, or the number of periods during which the holder of
the bond can expect to receive the coupon interest and the number of years before
the principal will be paid. Second, the yield on a bond depends substantially on its
maturity. Third, the volatility of a bond‟s price is closely associated with maturity:
changes in market level of rates will wrest much larger changes in price from bonds
of long maturity than from otherwise similar debt of shorter life. Finally, there are
other risks associated with the maturity of a bond.
Also periodically before the maturity, the bond issuer agrees to make coupon
payment. The coupon is the interest rate on a fixed income security, determined
upon the issuance, and expressed as a percentage of far. The coupon payment is the
amount of money calculated by multiplying coupon rate and face value and made to
the bondholder. The coupon rate of bond also depends on the tenor, which is the
number of year the bond alive and calculate from the issue date to the maturity date.
As usual, the up-to-3-year bonds are short term bonds; the 3-to-5-year bonds are
medium term bonds and the over-5-year bonds are long term bonds.
A bond is simply a loan, but in the form of a security, although terminology
used is rather different. The issuer is equivalent to the borrower, the bond holder to
the lender, and the coupon to the interest. However, a bond is different from a loan.
This table will indicate the differences:

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Table 1.1. Differences between Bond and Loan
Bond
Loan
 Typical longer maturities
 Tradable instrument

 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

 Often lower costs due to
relationships
 Value or ancillary business
(Source: Barclays report, November 2006)
One important characteristic of a bond is the nature of it issuer. The three
largest issuers of debt are corporations, municipal governments and Government
and its agencies. However, each class of issuer features additional and significant
differences. Domestic corporations, for example, include regulated utilities as well
as unregulated manufacturers. Furthermore, each firm may sell different kinds of
bonds: some debt may be publicly placed, whereas other bonds may be sold directly
to one only a few buyers (referred to as a private placement); some debt is
collateralized by specific assets of the company, whereas other debt may be
secured. Municipal debt is also varied: “General obligation” bonds (GOs) that are
backed by the full faith, credit and taxing power of the Governmental unit issuing
them; “revenue bonds”, on the other hand, have a safety, or creditworthiness, that
depends upon the vitality and success of the particular entity (such as toll roads,
hospitals, or water systems) within the municipal Government issuing the bond.

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It is important for the investor to realize that, by law or practice or both, these
different borrowers have developed different ways of raising debt capital over the
year. As the result, the distinctions among bonds in yield, denomination, safety of
principal, maturity, tax status, and such important provisions as the call privilege,
put features, and sinking fund.
1.1.1.2. Corporate Bonds
A corporate bond is a bond issued by a corporation and it is a debt instrument
setting forth the obligation of the issuer to satisfy the terms of the agreement in
which the issuer agrees to pay a certain amount or a percentage of the pace, or
principle, par value to the owner of the bond, either periodically over the life of the
issue or in a lump sum upon the bond‟s retirement or maturity.

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

their yields are typically lower than those of fixed-rate securities with the same
maturity.
- Zero coupon: a zero coupon bond is a bond which the issuer does not pay
coupons or interest payments, to the bondholder. This is different from a regular
bond which does make these interest payments. The holder of a zero- coupon bond
only receives the face value of the bond at maturity. However. Zero- coupon
bondholders gain on the difference between what they pay for the bond and the
amount they will receive at maturity because Zero- coupon bonds are purchased at a
large discount, known as deep discount, to the face value of the bonds.
1.1.2.3. By coupon frequency
- Annual: an annual bond is a bond whose interest will be paid annually.
- Semi-Annual: an annual bond is a bond whose interest will be paid every six
months.
- Quarterly: an annual bond is a bond whose interest will be paid quarterly.
- Monthly: an annual bond is a bond whose interest will be paid monthly.

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1.1.2.4. By others
- Bullet and callable bond:
A bullet bond is not able to be redeemed prior to maturity. It is usually more
expensive than a callable bond, since the investor protected against the possibility of
the bond being called when market interest rates fall.
A callable bond is a bond which the issuer has the right to redeem prior to its
maturity date, under certain conditions. When issued, the bond will explain when it
can be redeemed and what the price will be. In most cases, the price will be slightly
above the par value for the bond and will increase the earlier the bond is called. A
company will often call a bond if it is paying a higher coupon than the current
market interest rates. Basically, the company can reissue the same bonds at a lower
interest rate, saving them some amount on all the coupon payments; this process is
called "refunding." Unfortunately, these are also the same circumstances in which

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

designed dates. If the bond‟s coupon rate exceeds current market yields, for
instance, the bondholder will choose to extend the bond‟s life. If the bond‟s coupon
rate is too low, it will be optimal not to extend; the bondholder insteady reclaims
principal, which can be invested at current yields.
- A junk bond is any bond that is rated below investment grade (BB or lower)
by Moody‟s or Standard & Poor‟s due to the high risk of default. A junk bond is
also referred to as a high yield bond. Prior to 1977, every junk bond was a
previously investment grade bond for a company that had saw its credit quality
erode. In that year, Bear Stearns underwrote an original-issue bond that started with
a junk rating. Drexel Burnham Lambert quickly followed suit with a series of junk
bond issues for companies that had been locked out of the bond market. Michael
Milkin, who is often referred to as the junk bond king, led the Drexel Burnham junk
bond initiative. The junk bond market peaked in 1989, when it was depressed by a

14
series of issuer defaults. Many corporate bond issues today are given junk bond, or
high-yield status, and even blue chip stocks have seen their bonds rated junk.
- Registered and bearer bonds: Bonds issued today are usually registered,
meaning that the issuing firm keeps records of the owner of the bond and can mail
interest checks to the owner. Bearer bonds are those traded without any records of
ownership. The investor‟s physical possession of the bond certificate is the only
evidence of ownership.
1.2. Types of issuance
On the basic, there are two type of issuance: Private Placement and Public
Offering. Private Placement means offering of securities for sale by any of the
following modes:
 Private solicitation (not through mass media including internet)
 Offering the securities to less than 100 investors, excluding professional
securities investors (or institutional investors)
 Offering of securities to specified number of investors

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

sealed-bid, uniform second-price variant. In the traditional IPO, the investment bank
allocates shares at deflated prices to select investors who make a good profit in the
secondary market. In the Dutch auction IPO, all applicants are on a level-playing
field and allottees pay a price only slightly lower than the highest bid. The issuer
collects more capital with a Dutch auction IPO.
1.3.2. Underwriting:
Underwriting means the act where underwriter agrees with the issuing
company to conduct pre-issuance activities, to distribute bonds to investors, and to
purchase bonds for resale, or to purchase the remainder of undistributed bonds.

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Most corporate debt and private placements are underwritten by investment
banks on a commitment basic. This guarantees that the issuer receives a certain
amount of proceeds from the bond issue. However, bond are typically underwritten
on a best efforts “bought as sold basic, reflecting the investor‟s discretion in
choosing among an entire program of maturities and structures.
Best effort:
In a best efforts agreement, the underwriter agrees to use all efforts to sell as
much of an issue as possible to the public. The underwriter can purchase only the
amount required to fulfill its client's demand or the entire issue. However, if the
underwriter is unable to sell all securities, it is not responsible for any unsold
inventory.
Best effort agreements are used mainly for bonds with higher risk, such as
unseasoned offerings.
Book building
In the US, Japan, and many other countries, firm-commitment offerings are
marketed and priced by a negotiation process that includes book building. The
underwriter “builds the book” by soliciting non-binding indications of interest from
investors and uses the information, along with information derived through its due
diligence on the issuer, to negotiate the offering size and the offering price.

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.

- Investment banking: Consult the issuer concerning its funding requirements
and advises the issuer on the best solutions to meeting those requirements. Directs