Benefits, Challenges And Ways Forward For Cambodia’s Bond Issuance
At the signing ceremony of a Memorandum of Understanding (MOU) between the Securities and Exchange Regulator of Cambodia (SERC) and the Credit Guarantee Corporation of Cambodia (CGCC) on August 30, 2024, a presentation and panel discussion were held on the subject of issuing bonds.
We break down some of the main points from the day’s discussion to explore the benefits, challenges and ways forward for Cambodia’s bond market.
Speakers on the panel included:
- No Lida, CEO of the CGCC (he was the Deputy CEO at the time of the MOU signing);
- Chea Sivlin, Financial Controller at Telcotech (a bond-issuing company);
- Tieng Sivansak, COO of Royal Group Securities (RGS);
- Freddie Wong, Chief Actuary & Corporate Development Officer of Prudential (Cambodia) Life Assurance Plc.
Read about the MOU: SERC And CGCC Sign MOU To Promote Guaranteed Bonds In Cambodia.
Issuing Bonds In Cambodia
Cambodia’s bond regulations were first adopted in 2017. A year later, the International Finance Corporation (IFC), a member of World Bank Group, supported the first-ever bond issuance in the country by investing USD 20 million in Riel-denominated bonds issued by the Cambodian microfinance institution, Hattha Kaksekar Limited (HKL).
As of 2024, Cambodia has more than 10 corporate bonds listed on the Cambodia Securities Exchange (CSX), which have raised between USD 1.5 million and USD 30 million from each issuance. Most of these are guaranteed bonds, however, other bonds previously issued include plain bonds, currency-linked bonds (FX-linked bonds), sustainability bonds, and guaranteed and plain green bonds.
The Cambodia Sustainable Bond Accelerator (CSBA) Program also selected three local bond issuers in 2024 to receive support for their inaugural green, social, and sustainability bond issuances – LOLC (USD 50 million sustainability bond), SCHNEITEC (USD 50 million Green Project Bond), and Wing Bank (USD 40 million social bond).
CGCC’s Bond Guarantee 2024
As Cambodia's only local bond guarantor, the CGCC was initially mandated to provide credit enhancement for loans in the banking sector. However, in 2020, the CGCC expanded its services to include the bond market.
As a state-owned entity, No Lida stated that the CGCC’s mission is not focused on profit maximisation but rather on developmental purposes.
“Our sustainability and developmental goals are what we strive to achieve. If we focus solely on costs, risks, and profits, we will miss the point of supporting the market and [Cambodia’s] economic development,” he said
Currently, the CGCC has the capacity to guarantee bonds ranging from USD 2 to 20 million per issuer. For bond issuances exceeding these, the CGCC will cooperate with international guarantors such as the Credit Guarantee Investment Facility (CGIF) and GuarantCo, Lida explained.
He further added:
The [CGCC’s] guarantee fees are always negotiable. We are not strict about costs. While our policy sets the fee range between 1 and 2.5 per cent, depending on the issuer's risk, we must balance this risk with our [bond market] developmental purpose.
When seeking guaranteed bond issuance from the CGCC, the organisation will evaluate the issuer's financial situation, management, governance, and environmental impact. The issuance must also meet the SERC's regulatory requirements to list on the CSX.
Benefits Of Issuing Debt Securities (Bonds)
- Issuing bonds allows companies to retain ownership while improving their credit rating. By issuing bonds, the issuer can enhance access to the bond market and increase access to diversified sources of funds.
- Investors can have more investment choices, protection against the issuer’s default, and increased confidence in bond investments.
- Furthermore, issuing bonds benefits the market itself. More bond issuances encourage further offerings, making investments in bonds more attractive, providing additional investment alternatives, and increasing liquidity in the bond market.
Bonds Offer Another Option From Bank Borrowing
No Lida stated that guarantees in the Cambodian banking sector can only cover up to USD 1 million in loan principal, however, some small and medium-sized enterprises (SMEs) and firms need larger amounts. Hence, if a firm wanted to raise, say, USD 30 to 50 million, the banking sector's guarantee would be insufficient.
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“Banks typically lend only a few million dollars, usually not exceeding USD 20-50 million. Therefore, borrowers must turn to the bond market to secure larger amounts of funding,” Lida stressed.
Success Story: Telcotech’s Bond Listing
Telcotech Ltd., a telecom infrastructure company under the Royal Group of Companies, launched its official USD 20 million bond on the CSX for the second time in early 2024, following its initial USD 20 million listing in 2021.
Speaking during the panel discussion, Chea Sivlin shared that the funds from the bond listing on the CSX has helped Telcotech report growth in its revenue in 2024.
“For us, without this funding, we could not make significant investments to attract more customers. Over the past eight months, we have invested in our fibre optic coverage throughout Cambodia and partnered with international firms to attract more international customers. Without this funding, we could not expand our business so quickly,” she said.
She added, “We have received full support and all the coordination needed from the SERC, CSX, our guarantor CGIF, and especially RGS, who have helped us from start to finish, ensuring we met all the requirements and successfully issued the bond through the entire process.”
Current Challenges In Cambodia’s Bond Market
Speaking on the topic of guaranteed bonds, Tieng Sivansak explained that typically, plain bonds have a higher coupon rate. However, there is a chance that no investors will be willing to invest in such bonds because they prefer investment-grade or highly rated bonds known as Guaranteed Bonds.
Additionally, the Cambodian bond market currently has its limitations as it is still in the development stage. According to H.E. Ros Seilava, Secretary of State at the Ministry of Economy and Finance (MEF), the market is facing major challenges such as low liquidity, high interest rates, and a narrow investor base.
Proposed Incentives To Improve Cambodia’s Bond Market
The panel discussion raised a number of additional incentives that could be provided to deepen the investor base in Cambodia's corporate bond market. These include:
- Tax incentives for investors: The government already provides tax exemptions for bond issuers, so extending similar tax incentives to bond investors could make the market more attractive.
- Regulatory incentives: The regulators could explore providing certain regulatory advantages or preferential treatment for institutional investors, such as insurance companies, that participate in the corporate bond market.
- Awareness and education programs: Expanding outreach and education programs to familiarise potential investors, both institutional and retail, with the benefits and mechanics of the corporate bond market could help build confidence and participation.
- Diversified bond structures: Developing a wider range of bond structures, such as ESG-focused or project-specific bonds, could appeal to a broader set of investors with different risk appetites and investment mandates.
- Liquidity support mechanisms: Establishing mechanisms to improve secondary market liquidity, such as market-making programs or bond buyback facilities, could make the bonds more attractive to investors.
On the whole, Lida concluded that more work is needed to promote the bond market in Cambodia, including diversifying the investor base beyond the current few institutional investors, and improving the issuance process to make bonds more competitive than bank borrowing.