Transcript No Slide Title

Regional Credit Guarantee
and Investment
Mechanisms
Masato Miyachi
Senior Advisor
Office of Regional Economic Integration, ADB
5 November 2005, Shanghai
Asia-Pacific Finance and Development Center
Topics
1.
2.
3.
4.
5.
6.
7.
Why Developing Asian Bond Markets?
Various Efforts in the Region
ASEAN+3 Asian Bond Markets Initiative
ABMI Working Groups
Regional Guarantee Mechanism Study
Case Examples
Preliminary Conclusions of the Study
Why Developing Asian Bond Market?
Prevention of Crisis
ASIAN CRISIS in 1997/1998
Bankdependent
financial
structure
Foreign
borrowing
without
hedge
Double
Mismatch
Problem
(Maturity +
Currency)
Increased
Risk of
Financial
Crisis
Why Developing Asian Bond
Market?
Recent Pattern of Capital Flows in Asia
• Huge current account surplus
 from capital importer to exporter
• Rapid increase in foreign reserves ($1.2
trillion)
• Import safe assets and export risky assets
 ASIA’S SAVINGS ARE NOT BEING
RECYCLED BACK INTO ASIA
Benefits of Recycling
Asian Savings into Asia
 Economic development
 Crisis prevention
 Diversification
 More choices
 Better return/risk
Asian Bond Market - Growing
Deepening of Asian Bond Market


Total local currency bonds outstanding in
major EMERGING East Asia (EEA) tripled
from $356 billion in 1997 to $1.2 trillion in
2003.
The share of local currency bonds in EEA’s
capital market is rising, from 13% in 1997
to 19% in 2003.
Asian Bond Market – Growing, but…
Market Size and Liquidity


Despite encouraging growth, local currency
bond markets in EEA remain small, about
3% of total local currency bonds worldwide
($40 trillion) and only 44% of EEA GDP.
Market liquidity, measured by trading
volume and turnover ratios, has increased
significantly in recent years, but remains
low in comparison to developed country
markets.
Main Problems – Asian Bond Markets
Lack of:
 Attractive Bond Issuers
 Bond Market Infrastructure
 Long-term Funds for Bond
Investment
Various Efforts in the Region
Various Efforts
 to Enhance Regional Financial Cooperation
after Asian Financial Crisis in 1997-1998
– AMF Proposal (1997)
– Manila Framework (1997)
– New Miyazawa Initiative (1998)
– Chang Mai Initiative (2000)
– Asian Bond Markets Initiative (2002)
Progress in Various Fora
EMEAP
Use of Foreign
Reserves
Discussed by
Central Banks
ABF I & II
APEC
Initiative on
Securitization &
Guarantee
Holding
Government
Bond Seminar
ASEAN + 3
Comprehensive
initiatives
ASEAN+3 Asian Bond Markets
Initiative (ABMI)
 Endorsed by ASEAN+3 Finance
Ministers in August 2003.
 Six (6) Working Groups were Voluntarily
Established
11
ASEAN+3 Asian Bond Markets
Initiative (ABMI)
Background and Issues
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High savings rate in many Asian countries
Short-term bank loans were the dominant
Underdeveloped bond markets in the region
Savings deposited in local banks  funneled
to international financial centers  back to the
region
Raise and invest local currency bonds as a
long-term capital without maturity and currency
risks.
Objectives of the ABMI
3 Key Objectives:
(i) Facilitate recycling of Asian savings
within the region
(ii) Develop local bond markets
(iii) Develop regional bond market
ABMI Working Groups
At the Inception of ABMI
1.
Creating New Securitized Debt Instruments
2. Credit Guarantee Mechanisms
3.
4.
5.
6.
Foreign Exchange Transactions and
Settlement Systems
Issuance of Bonds Denominated in Local
Currency by MDBs, Government Agencies
and Asian Multinational Corporations
Local and Regional Rating Agencies
Technical Assistance Coordination Group
ABMI Working Groups
Currently
1.
Creating New Securitized Debt Instruments
2. Credit Guarantee & Investment
Mechanisms (the “Mechanism”)
3.
Foreign Exchange Transactions and
Settlement Systems
4. Local and Regional Rating Agencies
+ Plus, Ad-hoc Support Team
ADB’s Involvement on Regional
Guarantee Mechanism (RGM)
Providing Technical Assistance (TA) to Working
Groups
 ASEAN+3 Regional Guarantee Mechanism
• Mechanism Works?
• Targeted Countries and Sectors?
• Demand Estimates
• Organizational Option and Choices
• Hurdles
• Market Consultation and Survey
Regional Guarantee & Investment Mechanism
Progress to Date
2003 Commenced the study with original scope of examine
the guarantee mechanism
March 2004 Expanded scope of the study:
- Consider additional business lines of loan and equity
investments in addition to bond guarantee
March 2005 Preliminary report presented
June 2005 Market consultation held in Hong Kong
September 2005 Final (draft) report to be presented
Rationale of the Mechanism
• Nurturing Bond Issuers
– Private sector to participate in & benefit from
the market development
• Broadening Long-term Investor Base
• Catalyzing Private Sector investment
• Ensuring Smooth Functioning of
Regional Bond Markets
– Building Market Infrastructure
Rationale of the Mechanism
Offers Advantages
 Focused mandate
 Systematic long term approach
 High credit rating
 Lower costs and better diversification from
economies of scale
Based on principles of additionality &
partnership
Business Lines & Products (preliminary)
• Bond Guarantees
– ABS, MBS, SME securitizations
– Project & Infrastructure bonds
– Corporate bonds
– Municipal bonds
• Loans
– Bridging loans, e.g. during construction
– Warehouse loans for securitizations whilst volumes assembled
– “Governance building” loans
• Equity Investments
– “Governance”
– Infrastructure – improve debt:equity ratio to support bond issue
– Support bond market infrastructure development
Are Existing Mechanisms Sufficient?
MDI Guarantees:
– Some MDI such as ADB, IFC and World Bank:
Provide Credit Guarantees in the Region
Scope of Services  Limited
Not purely focused on bond markets
Guarantees by Bilateral Institutions:
– Quite active  trade financing & cross-border investment
– Generally not very active  promoting regional bond markets
– Collaborate with partners on a case-by-case basis
No private guarantee companies offer:
– Credit guarantees on bonds in local currencies, or
– Investments to support development of bond market infrastructure
Business Philosophy (plan)
1. Development of local currency bond
markets in ASEAN+3 countries
2. Private sector focus
3. Focus developmental but based on
commercial principles – no subsidies
4. Principle of additionality and partnership
5. Well diversified business portfolio
6. Accordance with OECD standards of
corporate governance
Characteristics of the Mechanism
(Preliminary Idea)
 Active use of securitization and credit
guarantee to mitigate credit quality gap
 In Asia, credit and currency risks are the most
important factors impeding smooth recycling of
savings
 Securitization coupled with credit
enhancement is a good solution to
address this problem
 Can issue higher-credit securities than
collateralized assets enough to be accepted by
investors
Organizational Choices
Options
1. Establishing a new MDI as a subsidiary of
ADB
2. Expanding the existing facilities of ADB
3. Consolidating bilateral efforts
4. Establishing a new independent MDI
5. Private & Public Partnership (PPP) or
Private Entity
 Lesson Learned
Lesson Learned
Private Sector Examples
Failed examples
Public-Private Partnerships
ASIA Ltd.
AFIC
Lesson Learned
Private Sector Examples
What went wrong?
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Design and Refinement of Mission
Strategy
Business Modality
Lines of Products and Services
Capital Adequacy
High Credit Rating Maintenance
Risk Monitoring and Mitigation
Concentration of risk in low rated countries &
transactions
Corporate Governance
Operational Management
Case Example:
Potential Infrastructure Bonds
 Shanghai, PRC - Bus System
 Zhejiang, PRC – Wind Farm
 Thailand - Government Building
 Korea - Build Transfer Lease Projects
 Mekong Delta - Various Infrastructure
projects
Case Example: Residential MortgageBacked Securitization
Mortgage
Finance Co
Regional
Mechanism
Guarantee
Institutional
Investors
Mortgages
Securitization
MBS Vehicles
Mortgages
Equity & High Yield
Investors
Building on Existing Programs
–
–
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–
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Malaysia Cagamas
Korea Housing Finance Corporation
Hong Kong Mortgage Corporation
Singapore CMBS and Residential Pre-sales
China Construction Bank pilot MBS - authorized.
Preliminary Conclusions of the Study
1. Sufficient business for the Mechanism
2. Market gap to be filled
3. The Mechanism needs to invest in financial
infrastructure + Technical Assistance.
4. The success will depend on strong
management team + focus & clear objectives.
5. A mix of business products is advisable in the
initial stages.
6. It is essential to have a high investment grade
rating. (ideally, AAA)
Preliminary Conclusions of the Study
7. The Mechanism may not meet all the
demand in the region.
8. A number of organizational choices are
available for consideration.
9. There are regulatory improvements that can
be introduced by the member countries.
For More Information
Masato Miyachi, Senior Advisor
Office of Regional Economic Integration (OREI)
Asian Development Bank
[email protected]
+63-2-632-6832
Asian Bonds Online Website:
http://asianbondsonline.adb.org
ADB website:
http://www.adb.org
Thank You!
Question & Answer