Japan - ASEAN+3 facility for E. Asia bonds to issue 1st guarantee in 3rd qtr

SINGAPORE (Kyodo) -- The chief of a new ASEAN+3 Facility for the East Asian bond market has said that the facility is ready to issue its first guarantee for local currency-denominated bonds in the third quarter of this year.

"We are ready to start guarantee operations, we have started working on potential transactions," Kiyoshi Nishimura, chief executive officer of the Credit Guarantee and Investment Facility, told Kyodo News in a telephone interview from his office in Manila this week. "The first transaction will be in the third quarter of this year."

The $700 million facility was established in November 2010 by the 10-member Association of Southeast Asian Nations, the so-called "plus-three" countries of Japan, China, South Korea, and the Asian Development Bank, which together contributed the capital.

It aims to provide guarantees on local currency-denominated bonds issued by investment-grade companies in these countries so as to promote financial stability and boost long-term investment in the region.

Nishimura said that the $700 million is to be used in the initial two years. He estimated that between two to three guarantee transactions could be done this year, with the size of each transaction expected to be in the range of $50 million to $140 million.

For the first two years, the CGIF will focus on five member countries of ASEAN -- Indonesia, Malaysia, Singapore, the Philippines and Thailand.

Although the CGIF is designed for the bond market in all the 13 countries, the focus will be more on ASEAN as the plus-three countries like Japan and South Korea already have thriving local currency bond markets compared to the bond markets in ASEAN countries, which are less developed and smaller.

For example, the size of the bond market in ASEAN countries as a whole is just around $1 trillion, but the bond market in the plus-three countries, mainly in Japan and South Korea, is more than $17 trillion.

The CGIF is expected to help make bond markets in the region more attractive in several ways.

For example, its guarantees will help creditworthy companies to extend their tenors to 10 years, which would be difficult for them to achieve by themselves.

It will also help the companies in ASEAN-plus-three countries that want to raise funds in other countries in the region but are constrained by a ceiling on the sovereign rating of their home country, and those companies that are less known to investors in the market where they want to issue bonds.

In the region, banks are still more dominant as a source of loans, with companies preferring to borrow from banks rather than from the bond market. There is also a strong reliance among international investors on international ratings agencies as local ratings agencies are not backed by sufficient default data.

Nishimura said the CGIF needs a bigger injection of funds to expand its activities in the next phase after the initial two years.

This includes expanding its activities to the less-developed ASEAN countries and also issuing guarantees to more structured transactions -- project bonds or securitized bonds. In addition, it also plans to begin its other role, which has yet to be fully defined, of equity investment in organizations which can help develop the bond market infrastructure.

He suggested that "several times" more will be needed to expand the fund's next phase of activities to develop the bond market in the region. "It is too small to be meaningful, at least a few times more is needed," he said.

The member countries decided to keep the size of the fund small for the initial phase as it is meant to test whether it will be successful.

"The concept of a regional guarantee mechanism is a very new concept and the contributors want to see whether this mechanism really works before they consider the expansion of the size of the CGIF. If there is a good track record in the initial phase, then they will consider how to expand," he said.

He said Japanese companies in ASEAN that need local currency funding can also utilize the CGIF guarantee facility, which is open to any ASEAN-Plus-Three company.

The CGIF is working to avoid the mistakes made at the time of the outbreak of the Asian financial crisis in 1997 when a lot of long-term investments in the region had been financed by short-term foreign currency borrowings.

That bitter lesson prompted the ASEAN-plus-three countries to start mobilizing long-term local currency savings to finance long-term investments in the region.

Nishimura was a senior banker with the European Bank for Reconstruction and Development before he was appointed as the first chief executive officer of the CGIF last year.

On the impact of the euro zone crisis, he said that although Asia has not been affected by the crisis and Asian markets are still flush with liquidity, investors have turned more cautious in their investment.

"Asian investors who used to invest in the Europe market look to invest in Asia instead while European investors think Asia is a safer area. But in general investors are now more cautious than before, institutions are cautious in investing in emerging markets, so that means the flow to Asia will be limited," he said.

Mainichi Japan

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