Markets in Cambodia cheer first bond issue

The Cambodian financial markets have welcomed with gusto the first issue of a corporate bond in the country, with a Phnom Penh-based microfinance institution, Hattha Kaksekar, listing its bonds on the Cambodia Securities Exchange (CSX) on Dec 6.

The long-awaited listing sent hopes soaring among local companies that they too could issue bonds to raise funds, and it released some of the pent-up demand for investment instruments among investors.

The bond issue had been in the works since 2012 when the Cambodian government published a Financial Sector Development Strategy (FSDS) for the period 2011-2020 and beyond.

The third largest microfinance bank in Cambodia, Hattha Kaksekar, a subsidiary of the Bank of Ayudhya of Thailand, raised 120 billion riel (US$29.8 million) through the issue, and it intends to use the funds to extend loans to farmers and owners of small businesses, most of whom lack access to banking services. The three-year bonds drew buyers from local financial institutions and the International Finance Corporation of the World Bank.

Even before the Cambodian ministry of economy and finance (MEF) could finalise the issuance of bonds, NagaCorp, which operates the only casino and hotel resort in Phnom Penh, became the first Cambodian issuer of offshore bonds in May this year. Hong Kong-listed NagaCorp announced it raised US$290 million through a three-year bond issue in Hong Kong to stimulate growth in its upper-end tourism business and to upgrade facilities at its resort.

The success of NagaCorp's debut occurred at a time of weak Asian markets that are known for their high yields, and indicated that it is possible to break into volatile and difficult markets if issuers are prepared to pay the price that makes investors comfortable.

"The new route to access capital (hitherto not available to NagaCorp) will support future growth regionally and locally," said Morgan Stanley. However, high interest rates on the bonds of 9.375 per cent could mean an annual interest expense of US$28 million, which was 11 per cent of profits in 2017.

The Cambodian MEF is expected to make a strong push to encourage more companies to issue bonds in 2019 following the Hattha Kaksekar listing.

The Asian Development Bank expects that a firmly established bond market should come into existence next year because the financial authorities had created a regulatory framework for the corporate bond market in August 2017. It is expected that potential issuers of corporate bonds are both listed and unlisted companies that intend to diversify their debt portfolio.

Besides corporate bonds, one of the goals under the FSDS (for the 2016-2025 period) is to develop the capacity of the MEF to issue government securities. The potential issuers of government securities include the National Bank of Cambodia (the central bank), the Debt Management Office of the MEF, government agencies and state-owned enterprises.

The central bank has been issuing negotiable certificates of deposit, or NCDs, since 2013. The NCDs are short-term, interest-bearing debt instruments that the central bank issues to banks and financial institutions under its open market operations in order to help manage their minimum reserve requirements. The issuing of NCDs is aimed at providing the banks with previously unavailable means to manage their excess liquidity.

There are severe obstacles and difficulties facing the Cambodian market authorities as well as issuers and investors. First, an Asian Development Bank report states that there is an absence of government securities. And the lack of a benchmark on yields presents a challenge for any potential issuer - and their underwriters - to properly determine the level of interest rates for issues in the corporate bond market.

As a result, the issuers must proceed carefully with their initial issues as they need to diligently determine a suitable level of interest rates in comparison to bank loans, which are presently the chief method of financing used by the corporates.

The bond market may be slow to start operating because of the high level of disclosure that is expected from the issuers of bonds. The issuers will take time to learn and adopt the required standards of disclosure.

Second, there is a lack of a Real-Time Gross Settlement System, which is considered an essential infrastructure for any financial market. Such a payment system that can efficiently handle high-value transactions is necessary, particularly for a bond market where transactions sizes are in the millions of dollars or the equivalent in local currency. The Cambodian central bank is developing an RTGS system, which it will eventually manage.

Third, there is a need to convince companies to develop a culture of corporate governance comparable to other markets. The issuers must satisfy the expectations of investors.

The Securities and Exchange Commission of Cambodia is making an effort to educate the public and to develop knowledge of the market in order to create reliable practices and standards. It is licensing more market participants such as securities firms, and accrediting custodian banks, credit rating agencies and bond-holders representatives in order to create a financial community.

Fourth, the Cambodian market authorities are keen for more local companies to list through initial public offerings and to issue bonds on the CSX. This process, however, requires a thorough education of the domestic companies to make them compliant with financial disclosure norms.

Fifth, most domestic companies face a challenge in order to become eligible to list on the CSX - they must provide at least two years of audited financial reports prepared by an accredited international accounting firm approved by the Cambodian government.

The CSX itself is being tested. It was incorporated in 2010 and began trading operations in April 2012, but it trades the stock of just five listed companies, and is keen to woo more companies to list. The CSX is a joint venture between the Cambodian MEF and the Korea Exchange, with each holding 55 per cent and 45 per cent, respectively.

Finally, investors rightly expect greater clarity in the taxation policies and practices governing the financial market, particularly relating to capital gains and withholding taxes.

The way ahead has been illuminated by the microfinance firm, Hattha Kaksekar and the casino-hotel operator NagaCorp. The Cambodian government has done well by adhering to its Financial Sector Development Strategy. The government must now address the outstanding issues that are impacting the fledgling bond market.