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Kingdom’s first sovereign bond on track for 2018

Content image - Phnom Penh Post
Global sovereign ratings according to Standard & Poor’s, 2011. Photo supplied

Kingdom’s first sovereign bond on track for 2018

The Cambodian government plans to issue its first-ever sovereign bond within two years in a move aimed at raising funds for the country’s development and clearing a path for long-awaited corporate bonds, a financial expert advising on the public offering has said.

The proposed sovereign bond would be denominated in US dollars and issued on the Thai capital market, which would give it wider exposure to international investors than launching it on Cambodia’s relatively obscure and undeveloped capital market.

Twin Pine Consulting, a Bangkok-based financial firm advising the Cambodian government on international bond issuance, is working toward a proposed 2018 issue date. Adisorn Singhsacha, the company’s managing director, told the Post he has recommended a smaller issue to test the waters.

The plan is to “start small – say $100 million – and move from there,” he said.

This would be Cambodia’s first time to offer a sovereign bond, a debt instrument issued by national governments to finance infrastructure projects, social programs and other expenditures when taxation is not enough. The bonds, usually denominated in a foreign currency, come with an obligation to pay periodic interest payments and to repay the face value on the maturity date.

Jayant Menon, lead economist for trade and regional cooperation at the Asian Development Bank, described the first issuance of a sovereign bond as an important step toward weaning Cambodia off its dependence on foreign aid.

He said the country currently enjoys access to relatively cheap finance from its bilateral and multilateral donors, but that could soon change.

“As Cambodia continues on its path of rapid growth, it must prepare for the future where graduation will mean having to rely on other sources of funding,” he said. “In this sense, Cambodia’s first sovereign bond offering in the Thai market, proposed for 2018, is a welcome development.”

Menon said the benefits of sovereign debt extend beyond access to finance, as the preparation for a bond issue will help enhance the whole of Cambodia’s financial sector. “The long-term benefit comes from the creation of the facility or the financial infrastructure, and the learning process associated with it, as much as access to the extra funds itself,” he said.

The decision to raise funds through the Thai capital market aims at maximising investor interest, and follows a model Twin Pines previously used in managing the issuance of five sovereign bonds for the Laos government, three of which were unrated.

According to Singhsacha, the limited liquidity and exposure of Cambodia’s capital market has made neighbouring Thailand a far more attractive place to issue the sovereign bond. Better infrastructure – namely a developed financial sector with experienced regulators – more market depth, ample liquidity and attractive pricing compared to international markets, were cited as some of Thailand’s advantages.

While Twin Pines recommended a Thai baht-denominated bond for several Laotian issues due to the close links between the two countries’ economies, Thailand’s economic troubles have increased the currency exchange risk of cross-border fundraising.

“For Cambodia, given its dollarisation, I recommend issuing the bond in US dollars,” Singhsacha said. “We advised and executed a dollar-denominated transaction for the Lao government in December last year. A similar bond offering may suit [Cambodia] better.”

International ratings agency Moody’s assigned Cambodia a B2 sovereign bond rating in March 2014, while Standard & Poor’s previously rated the country’s sovereign credit as B. However, there is a high possibility that Cambodia’s first sovereign bond issue could be unrated.

Singhsacha said the earlier ratings could provide “a good reference point for investors,” but the government would take a closer look at two options.

“Cambodia has the choice of issuing an unrated bond, in which case the investor base may be lower, or alternatively appointing a Thai ratings agency to do the rating and tap a wider market,” he said.

Svay Hay, president and CEO of Acleda Securities, said ratings were an important gauge of a sovereign bond’s creditworthiness, and the absence of a rating would lower its value.

“A bond’s rating indicates its credit quality and the level of default risk,” he explained. “When it’s unrated, the bond tends to be offered at a discount.”

Additionally, Singhsacha said, as a first-time issuer of a potentially unrated sovereign bond, Cambodia will need to price its bond “at a slight premium” to attract investors. Twin Pines previously recommended the government offer a bond with a coupon rate of about 5-6 per cent and three-to five-year maturity.

“I still recommend a shorter tenor, as this will [attract a] wider base of investors,” Singhsacha said. “The expected coupon rate will depend on the market at the time of launch.”

The success of the first sovereign bond could ultimately pave the way for Cambodian companies to offer corporate bonds, giving these firms an important tool to raise capital.

“Once the government has led the way and established a benchmark, it’s easier for leading local companies to follow,” Singhsacha said. “They will have better access to international capital markets and, thus, improved funding alternatives.”

A previous version of this article inadvertently and incorrectly said Twin Pines Consulting had been appointed to manage the bond's issuance.

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