1. Assessment and policy considerations
This chapter provides an assessment of various factors influencing the functioning of corporate bond markets, including the regulatory and supervisory frameworks, credit risk assessment, secondary market liquidity, investor base and instruments to attract a large pool of investors. Additionally, it examines the government's role in promoting these markets. Under each of the above-mentioned areas the chapter also formulates policy considerations for Asian regulators addressing the key challenges identified.
Small and medium-sized enterprises (SMEs) represent the vast majority of firms in Asia. In 2021, micro, small and medium-sized enterprises represented on average 98.9% of all corporations and were responsible for 46.1% of employment (ADB, 2022[1]). Within SMEs, growth companies are usually defined as medium-sized companies with the potential to rapidly expand, create jobs, increase productivity, push the frontiers of innovation and challenge the status quo with new products and business models. Therefore, these companies play an important role in stimulating the economy by being at the front of innovation. However, in many bank-dominated Asian economies, growth companies still face substantive barriers to access financing. Due to a lack of history and other information, growth companies are generally required to provide large collaterals or are charged higher lending interest rates compared to large established firms (Yoshino and Taghizadeh-Hesary, 2018[2]). Moreover, bank lending is typically short-term not providing enough support for long-term investment by these companies.
High dependence on bank lending increases the fragility of the corporate sector by amplifying the impact of external shocks, especially when banks reduce their risk tolerance and tighten lending conditions. This was evident in the global financial crisis, where the downturn was greater in bank-based financing systems than in market-based systems (Gambacorta, Yang and Tsatsaronis, 2014[3]). Moreover, underdeveloped capital markets with few opportunities for long-term financing also contributed to the spread of the Asian financial crisis. Importantly, the significant use of bank financing also drives the accumulation of non-performing loans. Although non-performing loans ratio have been stable and low in Asia since 2005, the reliance on bank loans exposes economies to the risk of a rapid deterioration in loan quality, possibly locking up resources in unproductive businesses (OECD, 2022[4]).
The growth of capital markets, especially corporate bond markets, can bolster sustainable growth for Asian firms by facilitating long-term financing and enhancing their resilience. Since the Asian financial crisis, regional authorities have acknowledged the significance of robust capital markets and have taken measures to reduce dependence on bank funding. Consequently, various reforms have been implemented across Asian jurisdictions to foster corporate bond markets. Although Asian firms have increasingly utilised corporate bond markets, their development varies across jurisdictions. Notably, these markets primarily cater to a handful of large companies, as only a limited number possess the size and reputation to issue bonds.
A well-functioning corporate bond market requires various factors to operate effectively. Initially, adequate market infrastructure, markets offering price transparency and discovery, and deep and liquid government bond markets, are essential. The presence of robust corporate governance frameworks and a code of conduct for market participants are also enabling factors. Additionally, fostering the development of corporate bond markets requires authorities to ensure the existence of appropriate regulatory and supervisory frameworks, adequate and independent credit risk assessment for companies of all sizes, improved secondary market liquidity, a diversified investor base, and instruments to attract a large pool of investors and diversify risk. All these aspects will be discussed in the following sections.
To operate effectively, corporate bond markets rely on several key factors. Firstly, they require an open financial market with robust infrastructure and deep, liquid government bond markets to efficiently allocate capital and mobilise savings. Once these foundational elements are established, facilitating access for larger companies to corporate bond markets builds credibility and trust while fostering a culture that encourages participation by growth companies.
Safe and efficient financial market infrastructures contribute to maintaining and promoting financial stability. These infrastructures, which encompass trading systems, central counterparties (CCPs) and securities settlement systems (SSS) are instrumental in enabling market participants to fulfil their obligations with confidence and in a timely manner. Marketplaces are also part of the market infrastructure. In particular, off-exchange markets such as alternative trading systems (ATSs) and multilateral trading facilities (MTFs) function in many developed markets following non-discretionary rules. These markets play a significant role alongside stock exchanges in facilitating trading activities. Although the predominant platform for trading debt securities is over-the-counter (OTC), listing bonds on stock exchanges can provide essential safeguards for investors while enhancing transparency and the price discovery process.
The development of robust government bond markets is essential within capital markets for several reasons. Firstly, government bonds are highly liquid and considered risk-free instruments at the local level, and therefore used as a benchmark for pricing various financial instruments including corporate bonds. A well-developed government bond market contributes to overall market liquidity and stability, and is pivotal for the proper functioning of capital markets, facilitating the smooth transmission of monetary policy and fostering investor confidence in the broader financial system.
Some of the important components of a well-developed government bond market include extending the yield curve, informing the public regularly about the calendar of issuances to improve transparency, increasing the disclosure of information on public debt issuance and statistics, holding regular meetings with dealers, institutional investors and rating agencies, introducing a system of primary dealers, and establishing a repurchase (repo) market for the government bond market. Each of these features plays a crucial role in enhancing the efficiency and effectiveness of the market. Extending the yield curve, for instance, provides a broader range of investment options for market participants, while issuance calendars and increased transparency contribute to better-informed decision making and improved market confidence. Regular engagements with key stakeholders foster communication and understanding, which promotes a healthy and responsive market environment. Introducing primary dealers and establishing a repo market further bolsters liquidity, enabling smoother trading and facilitating effective monetary policy implementation.
Moreover, a well-developed government bond market is closely interconnected with a robust money market. A liquid money market is imperative for facilitating short-term borrowing and lending, providing a crucial avenue for market actors to manage liquidity efficiently. Additionally, it plays a key role in the transmission of monetary policy, allowing central banks to influence interest rates and maintain both price stability and financial stability within the broader economic framework. Thus, the interconnectedness between well-developed government bond markets and money markets is instrumental in fostering a resilient and dynamic financial ecosystem.
Efficient capital allocation and mobilisation of savings are primary objectives of capital markets. A robust capital market effectively connects savers with entities in need of capital, fostering a dynamic environment for wealth creation and efficient resource allocation ensuring that savings are channelled toward productive investments. However, some of the main elements required for the integrity and functionality of broader capital markets are the liberalisation of interest rates and capital movements. Liberalisation of interest rates ensures they reflect a more accurate picture of the market conditions, while unrestricted capital movements enhance market efficiency and investor confidence by allowing capital to flow freely. In the mobilisation of savings, institutional and retail investors are important players, each contributing uniquely to the market’s depth and breadth (discussed further under the Section 1.5).
Encourage adherence to and enforcement of a robust code of conduct among market participants to ensure the proper functioning of the marketplace. This with the aim to promote fairness, transparency and integrity, fostering trust among market participants and ensuring the proper functioning of the marketplace.
Improve systems and venues for clearing and settlement systems to meet the needs of a wider range of investors.
Ensure market intermediaries have sufficient technical capacity and knowledge since they play a key role in safeguarding the robustness of the market infrastructure, and in any listing or trading processes.
Ensure the availability of alternative trading systems. This could help companies to gain familiarity with the capital market environment and gain exposure to a larger investor base.
Prioritise the development of a robust government bond market for the development of wider capital markets. This could include improving the liquidity of the yield curve and extending its maturity. To enhance transparency, announcing an issuance calendar and having regular meetings with primary dealers in the government bond market could improve communication and improve market confidence.
Ensure efficient capital allocation and the mobilisation of savings in the economy. Additional efforts could be directed to promote a savings culture and increase savings rates in the economy. In this respect, authorities could consider progressively removing any barriers to the movement of capital, while providing flexibility to cope with situations of economic and financial instability as recommended by the OECD Code of Liberalisation of Capital Movements (OECD, 2023[5]). Additional efforts could be directed to promote a savings culture and increase savings rates in the economy with the help of policies on financial education, saving instruments and supportive policy measures.
Regulatory and supervisory frameworks play a crucial role in fostering the development of robust corporate bond markets. They should be designed to ensure investor protection, maintain market integrity and mitigate systemic risks in corporate bond markets. While integrating these elements, it is important that regulatory requirements do not create unnecessary impediments on companies’ use of corporate bonds and investors’ investment in corporate bonds. This consideration is especially critical for growth companies, given their limited resources and capacity to comply with regulatory requirements.
According to the OECD Survey, legal and regulatory provisions in most jurisdictions require registration or approval by regulators, with some jurisdictions mandating both. Common requirements include submitting a prospectus, historical financial statements and ongoing disclosure of information. The prospectus provides crucial information for investors about the securities that companies are issuing and the issuing company itself, and it is required in the 19 jurisdictions. Setting a short timeframe for prospectus approval enables corporations to get a clearer outlook on their issuance schedule. Two-thirds of the surveyed jurisdictions set a time frame within their regulatory frameworks for the regulator’s approval process. Among these jurisdictions, the average time for the regulator’s approval is around 40 days, with a varying time period across jurisdictions.
Introducing a template for corporate bond terms could provide companies clear guidance on the necessary requirements for issuing corporate bonds facilitating the procedure. This template can be particularly beneficial for growth companies, which often face constraints in financial resources and technical capacity. A template could additionally contribute to a more precise evaluation of credit risk and improve investors’ understanding about the corporate bond markets in general. However, these terms still need the oversight of regulators, and it is crucial to ensure that a template does not constrain the issuers’ flexibility in terms of the features that bond contracts could offer.
One common practice in corporate bond markets is to facilitate the issuance process for frequent issuers. In Asia, the majority of jurisdictions have a streamlined process for recurrent corporate bond issuers. These processes include allowing issuers to follow simplified procedures, to issue a simplified prospectus or a generic prospectus. Certain exemptions in the corporate bond issuance process could promote growth company’s access to market-based financing. However, such exemptions are not common among the surveyed jurisdictions. Only four jurisdictions1 waive certain requirements or procedures for growth companies.
Additionally, specific measures have been implemented in the region to promote access to corporate bond markets. It is noteworthy that measures tailored for growth companies are not prevalent in the region. Where they do exist, these measures generally aim to increase overall access to corporate bond markets by both large and growth companies.
Given that bondholders are often dispersed, challenges may arise in effectively exercising their rights, especially in insolvency procedures. Bondholders’ involvement becomes particularly significant in major decisions for the company following a default or other covenant violation. While mainly targeting the corporate bonds of listed issuers, the revised G20/OECD Principles of Corporate Governance state that “the exercise of the rights of bondholders of publicly traded companies should be facilitated” (OECD, 2023[6]).
Insolvency systems are associated with an increase in the general availability and cost of credit, and a higher recovery rate for creditors (World Bank, 2014[7]). For a formal bankruptcy process to be effective, well-designed insolvency laws governing formal procedures for financially distressed companies are crucial. Notably, the efficacy of an insolvency framework is heavily contingent on the efficiency of the judicial system within which it operates. Many Asian jurisdictions have improved their bankruptcy procedures to strengthen creditor rights and facilitate the process of corporate debt restructuring. However, the OECD Survey showed that the insolvency frameworks of only a small number of Asian jurisdictions have components such as out-of-court restructuring frameworks, hybrid restructuring regimes and fast-track reorganisation and liquidation procedures for SMEs.
Another component of corporate bond markets that supports the enforcement of the bond terms and protects bondholder rights is the bond trustee structure. Trustees’ duties are mainly to ensure timely bond interest payments and safeguard investor interests in the event of the issuer’s default. While the exact scope of a trustee’s activities is generally contractually defined, policymakers may enact regulation regarding the eligibility of a trustee and its duties prior to and during a default.
Implement robust regulatory and supervisory frameworks and strengthen investor protection efforts.
Reduce the time for approval or registration of bond issues. In this respect, authorities could further evaluate reducing the approval time for privately placed bonds, considering the capacities of investors already assessing the relevant risks. It could also be important to improve the level of technical skills and expertise of the regulator to effectively review corporate bond market processes.
Develop and implement a template for corporate bond terms to facilitate comparability and reduce execution time, in particular for corporate bond issuances by growth companies. Companies also could attach a sheet where they report which terms they comply with and explain on those they do not comply. In this respect, the role of industry-led bodies or associations could be considered in preparing these contract templates.
Facilitate the issuance process for frequent issuers, by allowing them to follow simplified procedures and/or issue a simplified prospectus or a generic prospectus.
Consider including certain exemptions in the corporate bond issuance process such as waiving or decreasing the number of historical financial statements for newly established corporations or permitting a simplified prospectus. In particular, waiving the submission of a prospectus for small and privately placed bonds could be considered.
Consider creating special frameworks for growth companies with less stringent requirements, cost-effective issuance processes and tax advantages.
Introduce systems that facilitate bondholders to exercise their rights. This may involve incorporating provisions in the corporate governance framework and relevant regulation related to the trustee structure to ensure its efficient functioning, and on how to facilitate co-ordination among bondholders and their participation in any required voting.
Authorities could consider enhancing bankruptcy and restructuring regulations. In particular, if lacking, out-of-court restructuring frameworks, hybrid restructuring regimes, fast-track reorganisation and liquidation for SMEs could be integrated to the insolvency frameworks for better functioning corporate bond markets.
Credit risk assessments of companies is an important tool for investors to understand and assess the risks involved in corporate bonds. A credit rating agency (CRA) uses a variety of public and non-public information to assess the creditworthiness of the issuer and formulates an opinion in an accessible and simple form. In general, easy and affordable access to get a credit rating and familiarity with the rating process significantly increases companies’ ability to use long-term debt securities (Çelik, Demirtaş and Isaksson, 2020[8]). According to the OECD Survey results, domestic and regional CRAs are operating in all jurisdictions, and alternative credit rating systems have been developed in some Asian jurisdictions. Importantly, the majority of Asian jurisdictions identified the assessment of the creditworthiness of companies as a main barrier to the development of corporate bond markets.
As credit ratings are only the opinion of the credit rating agency, it is important to ensure the accuracy, reliability, comparability and independence of the credit ratings. The availability of a range of rating providers in the market can enhance the credit risk assessment process while at the same time deepening the general understanding of credit risk in the markets. The requirement to have at least two credit ratings for corporate bond issuances could increase confidence and trust by market participants. Market confidence could be further improved by mandating rating agencies to publish their methodologies and historical transition and default rates of their credit rating categories in accordance with IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO, 2015[9]). This information could also assist to evaluate the performance of CRAs by investors and other users of credit ratings. In addition, rating actions by CRAs need to be timely and forward-looking.
Obtaining a credit rating for a bond issuance from CRAs typically demands technical expertise to understand and navigate the involved processes, which growth companies may lack. Additionally, considering the costs associated, it can also be unaffordable for smaller issuers to obtain a credit rating. To address this issue and support market-based financing for growth companies, some jurisdictions have introduced alternative credit rating systems where an institution other than a CRA provides rating services. However, while all CRAs share the common goal of assessing credit risk, alternative rating systems could exhibit differences in their methodologies. These differences emphasise the need for careful consideration and evaluation of the diverse approaches and capabilities inherent in alternative credit rating systems.
In Asia, efforts have been made to improve rating quality through mutual co-operation among domestic CRAs by the Association of Credit Rating Agencies in Asia (ACRAA). However, the rating scales and processes vary across jurisdictions, posing challenges in objectivity, transparency and the quality of the analysis. Harmonisation of credit rating practices of CRAs in Asia in line with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies could help to achieve a degree of comparability across rating agencies in terms of rating methodology, rating criteria, definitions, benchmarks and overall rating process (IOSCO, 2015[9]).
Ensure the existence of well-functioning diverse credit rating assessments for corporate bonds and other debt securities at affordable prices for companies all sizes.
Ensure credit rating agencies provide markets with accurate, reliable and comparable opinions. Moreover, they should follow rigorous standards, use solid methodologies, disclose their methodologies and be independent from market actors.
Support the establishment of domestic rating agencies to increase the availability of credit ratings assessment in markets where domestic rating agencies are not established or still developing.
Consider creating an alternative credit rating system for growth companies to provide credit risk assessments to the market. In this respect, existing authorities with the technical capacities and access to relevant data could be responsible for implementing an alternative credit rating system.
Consider introducing incentives specifically for growth companies, such as covering the full or partial cost of obtaining a credit rating to issue a corporate bond, until the corporate bond market reaches a certain level of development.
Encourage active participation in regional initiatives aimed at harmonising and improving the quality of the credit rating practices of CRAs in Asia to be in line with IOSCO Code of Conduct Fundamentals for CRAs. Enhancing the quality of the credit rating practices, disclosures and communications can contribute to attracting a greater number of cross-border investors.
A liquid market ensures an efficient price formation process, improves investor confidence and contributes to the overall functioning of capital markets. Corporate bond markets are inherently illiquid when compared with stock markets. This lack of liquidity could undermine the attractiveness of corporate bonds for certain investors and discourage companies to issue them in the first place. In Asia, corporate bond markets are characterised by low secondary market liquidity. Importantly, low levels of liquidity have been identified as the most important barrier to issue corporate bonds by 17 out of the 19 regulators responding to the survey.
To enhance liquidity in the corporate bond markets, it is essential to address various factors, including the functions of stock exchanges, OTC markets and derivative markets, as well as the engagement of market makers. Additionally, crucial considerations relate to ensuring the affordability of research on companies, the accessibility of price information, evaluating the cost of trading and appropriate taxation arrangements.
To have meaningful trading in the secondary market, a certain level of activity in primary corporate bond markets is essential. Measures aimed at developing marketplaces for issuing and trading corporate bonds will, in turn, support the overall development of corporate bond markets and support the liquidity of bonds in the secondary market. Moreover, stock exchanges also play important role in increasing transparency and the availability of consistent and comparable data, which are vital components in ensuring liquid markets. Corporate bonds are primarily traded over-the-counter (OTC). Globally, and in Asia, there is an increasing number of OTC markets managed by stock exchanges. In Asia, as part of the efforts to advance marketplaces for corporate bonds, 16 jurisdictions already have a dedicated segment for corporate bonds on their stock exchange and 13 have OTC markets. However, the level of activity in the markets calls for further efforts.
Ensuring an effective price discovery mechanism in markets requires price transparency in trading activities. This transparency could not only support investor confidence but also could increase investor participation in the markets. Numerous exchanges in Asia provide their participants with both pre- and post-trade information for listed bonds. However, the availability of information is less pronounced for bonds traded over-the-counter and on alternative trading systems. Moreover, the fact that most corporate bonds do not trade daily, makes it challenging to accurately price these instruments, possibly discouraging some investors to participate in these markets. This lack of accurate pricing makes it difficult to value these securities in investors’ balance sheets. In Asia, some jurisdictions have introduced systems to provide reference pricing or disseminate market prices to the market.
Corporate bond markets rely on a limited number of dealers to provide liquidity by maintaining an inventory of corporate bonds for intermediation. Over the past decade, there has been a substantial decrease in the corporate bond holdings of security brokers and dealers (Çelik, Demirtaş and Isaksson, 2020[8]). At the same time, large corporate bondholders such as pension funds and insurance corporations often adopt buy-and-hold investment strategies, reducing the market liquidity even further. Among the dealers, market makers play a crucial role in providing liquidity in corporate bond markets. In Asia, despite many jurisdictions have provisions regarding market makers in their legal and regulatory frameworks, the OECD Survey reveals market makers are not active.
The availability of affordable research on companies issuing corporate bonds could support the development of the market by filling the informational gap between companies and investors, and therefore encouraging investment and supporting informed trading. This is particularly important for growth companies as they often lack analyst coverage. To mitigate the information gaps between growth companies and investors, many jurisdictions have introduced measures to provide research coverage for growth companies.
Two additional factors that could influence corporate bond market trading are the cost of trading and the tax treatment of corporate bonds (see also Section 1.7). The trading fee levels, and, for example, capital gains tax rates should not discourage market participants from engaging in trading activities. Furthermore, the process of declaring and paying the related taxes should be simple.
The existence of well-functioning derivative markets allows investors to manage the risks associated with their investments, including corporate bonds, as well as supporting market liquidity (see also Section 1.6). This has been recognised in the results of the Annual AsianBondsOnline Bond Market Liquidity Survey that covers nine Asian jurisdictions.2 According to the survey, hedging mechanisms appeared as one of the most important structural issues requiring improvement for the development of corporate bond markets (ADB, 2022[10]).
Establish a dedicated segment on the stock exchange with less stringent requirements and/or making it only dedicated to qualified investors.
Ensure a level of price transparency that promotes efficient price discovery in corporate bond markets.
Consider introducing systems to provide reference pricing and/or ensuring dissemination of market prices to the market.
Ensure a well-functioning market making mechanism to support secondary market liquidity in corporate bond markets.
Consider establishing a mechanism that provides independent quantitative research on growth companies to market participants at no cost.
Ensure that trading fees, the tax treatment of corporate bonds and their related procedures do not discourage participation in the corporate bond market.
The composition and diversity of the investor base play a critical role in shaping the dynamism and resilience of corporate bond markets. As corporate bond markets serve as channels for companies to access capital, the presence of a diversified investor base is essential for fostering liquidity, stability and overall market efficiency. In Asia, the lack of investors and their lack of interest were identified as significant barriers to the development of corporate bond markets by 14 and 15 regulators, respectively.
The investor base differs across jurisdictions and relates to the level of development of the domestic financial market. In most of the developed corporate bond markets, traditional institutional investors such as pension funds and insurance corporations are among the largest holders of corporate bonds. In these markets, pension reforms have contributed to their expansion, therefore, deepening the domestic institutional base for many types of financial products, including corporate bonds. While pension funds and insurance corporations are particularly well-suited for investment in corporate bonds with longer maturities due to the long-term structure of their liabilities, they typically invest in government bonds. The existence of regulatory requirements or self-imposed rules to manage the risks associated with their corporate bond investments limits the allocation of these investors to corporate bonds, often requiring a minimum credit rating for investments. Asian institutional investors are relatively large investors worldwide, as their assets represent a significant share of world’s total assets of pension funds and insurance companies, therefore they have the potential to become important investors in regional capital markets.
Moreover, the presence of traditional institutional investors does not guarantee investments in corporate bonds issued by growth companies. These companies often face challenges in attracting institutional investors, as the nominal amounts are small and/or investors favour higher rated instruments. According to the OECD Survey, 19 jurisdictions permit bond issuances to domestic qualified investors.
The state of economic resilience, political stability and efficiency of the regulatory framework are necessary for a well-functioning corporate bond market, particularly to attract foreign investors. Capital controls, investment restrictions and the availability of risk mitigation instruments could also limit their participation in cross-border activities. Additionally, burdensome administrative requirements and procedures may discourage them to participate in corporate bond markets. In Asia, several jurisdictions have liberalised capital flows to improve foreign investor participation. Bond issuances to foreign qualified investors are allowed in all of the surveyed jurisdictions, with 15 allowing corporate bonds to be issued to non-domestic retail investors. However, some restrictions exist for these investors, particularly when it comes to growth-company bonds. Certain markets do not allow corporate bond issuances to any foreign investor, and others prevent growth companies from issuing corporate bonds to foreign investors. The development of the local asset management industry also offers an avenue to foreign investors to participate in domestic corporate bond markets.
Corporate bond markets are often not targeted to retail investors. Their participation, either directly or indirectly via collective investment vehicles, can significantly contribute to diversify the investor base. While several advanced markets have actively promoted increased participation of retail investors, the lack of financial knowledge may still impede their investment in corporate bonds. In the OECD Survey, the lack of financial knowledge and awareness of investors in the region has been identified as an important barrier for the development of corporate bond markets by 12 jurisdictions surveyed. This impedes investors’ ability to assess the benefits and risks of corporate bond investments, thereby limiting the expansion of corporate bond markets.
Assess the legal, regulatory and institutional framework governing institutional investors, taking into account its impact on the capital available to growth companies. Continue reforming the pension systems and supporting the development of insurance corporations in the region.
Address regulatory obstacles, the cost of accessing the market and taxation issues for foreign investors.
Promote the direct or indirect participation of retail investors while ensuring the risks taken by these investors are well understood and properly managed.
Increase the financial literacy of retail investors. This could be done in collaboration with the private sector and stock exchanges by offering informative sessions to retail investors to raise awareness about the benefits and risks involved when participating in capital markets.
Lower-rated, unrated or smaller issuers face impediments when they access or intend to access corporate bond markets, primarily due to the costs associated with issuing corporate bonds and higher interest rates demanded by investors. Moreover, in markets with a limited understanding of risk, investors tend to exhibit greater risk aversion towards lower-rated growth companies, as well as those in their early stages of development or with limited track records. To address these challenges the development of securitised instruments, the establishment of guarantee mechanisms and the availability of risk management instruments could present opportunities for these issuers to access corporate bond markets and also can provide investors with opportunities to diversify risks when investing in growth companies.
The securitisation enables the pooling of a group of debt instruments issued by smaller issuers, creating a larger security-backed instrument issued by a special purpose vehicle (SPV). Typically, through this process companies’ idiosyncratic risks can be somewhat diversified. In addition, guarantees can also be used to enhance the credit quality of issuers allowing companies to pay a lower risk premium. Furthermore, by pooling smaller issuances into a large-securitised bond, makes the instrument more attractive to large investors. Notably, Korea has implemented a securitisation mechanism, in the form of collateralised debt obligations, enabling SMEs to collectively issue corporate bonds. Meanwhile, bonds issued via Italy's mini-bond framework are also securitised into basket bonds in some cases, where bond portfolios from a group of companies are transformed into a consolidated pool of securities and then issued by an SPV. In addition to securitisation, the use of guarantees could enhance the risk profile of some issuers. Guarantees reduce a company’s risk and increase investors’ appetite for these instruments.
The existence of well-functioning derivative markets is crucial for enabling investors to effectively manage the risks associated with their investments, including corporate bonds, and to enhance market liquidity. Derivative markets have the potential to draw foreign investors to local currency corporate bonds by providing them with the means to hedge against the currency risks associated with their investments. Simultaneously, instruments like interest rate derivatives and credit default swaps (CDS) could help investors mitigate fluctuations in interest rates and manage default risks on their corporate bonds investment. Fourteen jurisdictions have a functioning derivative market to help manage risks associated with corporate bond investments. Both financial instruments for mitigating currency risk and interest rate risk are offered in 12 jurisdictions, while CDS are available in only eight jurisdictions. However, most of these markets have a limited number of participants and therefore limited activity.
Another practice in terms of risk diversification when investing in growth-company bonds is to only allow qualified investors3 to invest in this market. This ensures that only investors who have the financial sophistication and capacity to understand and manage the associated risks are participating in more complex or higher-risk investments. For example, in the mini-bond framework of Italy, SMEs can issue corporate bonds without a rating, however only qualified investors are allowed to invest in these bonds.
Introduce a securitisation mechanism to promote the development of corporate bond markets for growth companies.
Establish a guarantee scheme to support growth companies’ access to market-based financing.
Continue developing the derivative markets to provide risk management tools to investors and intermediaries investing in corporate bonds.
Develop corporate bond markets for growth companies to qualified investors first until the market reaches a certain size and is more developed.
Well-functioning capital markets can support sustainable economic growth by channelling resources to the corporate sector and by offering saving tools to households. Often governments incorporate capital market development and the diversification of funding sources for growth companies into their reform agendas including. As part of these reform agendas, one of the initiatives is improving the government bond market. Moreover, within their capacity, governments could make use of fiscal tools, introduce task forces, establish private-public initiatives and launch campaigns. Recognising the crucial role of collaboration in developing bond markets, authorities could also participate in regional initiatives.
Among the tools available to authorities, taxation could play a crucial role in the development of corporate bond markets. The tax treatment of corporate bonds can impact their overall attractiveness and cost-effectiveness. Excessive or disproportionate taxes can discourage companies from issuing corporate bonds and investors from investing in them. Governments often design tax policies that aim to strike a balance between encouraging capital market activity and ensuring the principles of sound fiscal management. According to the results of the OECD Survey, corporate bonds are taxed similarly in structure in the region with differences in the rates and conditions applied (see Section 3.4 in Chapter 3).
Appropriately designed tax incentives or exemptions could facilitate the development of corporate bond markets allowing a significant number of companies to access market-based financing therefore reducing their dependence on bank loans. Only a few jurisdictions in the region use tax credits and exemptions to encourage the use of corporate bonds. However, while these incentives and exemptions target all types of issuers, there is currently no specific tax incentive directly targeted at bond issuances by growth companies.
Corporate bond issuance involves many costs such as expenses related to preparing a prospectus, complying with new disclosure requirements, attaining a credit rating and direct issuance costs. These direct issuance costs cover regulatory fees, legal fees, underwriter fees and, if the bond is intended to be listed, listing fees. These direct and indirect listing costs typically impose a heavier burden on growth companies, often discouraging them from issuing corporate bonds.
An important example of supporting the use of corporate bonds by growth companies outside of Asia is the mini-bond framework in Italy. Authorities created a special framework that enables unlisted SMEs to issue bonds with less strict requirements, such as without a rating and with a less costly issuance process compared to traditional bonds. Issuers can also list their mini-bonds on a dedicated segment of the stock exchange reserved only for qualified investors. Additionally, mini-bonds come with tax advantages, which enhances their appeal as a financing option for companies and as investment option for investors. Notably, mini-bonds have also been securitised through SPVs, to create a diversified pool of companies available for institutional investors.
Stock exchanges globally are establishing dedicated segments tailored to meet the needs of growth companies. These segments, provide a platform for growth companies to access public funding, raise capital and enhance their visibility. Exchanges typically streamline the listing requirements for these segments, making them more accessible to smaller companies. The goal is to encourage entrepreneurship, support innovation and diversify investment opportunities.
Industry-led bodies or associations can play a valuable role in promoting the development of corporate bond markets, lifting the standards of the industry, improving the products offered to investors and creating a corporate bond market landscape that support bondholder rights. In eleven of the surveyed jurisdictions, there is an industry-led body or industry association that is active in relation to the corporate bond market. The role of these associations varies across jurisdictions from having a self-regulatory role in some of them to promoting and developing the debt securities market in others.
Regional efforts to develop bond markets could contribute to and amplify initiatives at the country level. Importantly, they could foster financial integration, encourage cross-border investment and enhance the resilience of interconnected markets. The Asian Bond Markets Initiative (ABMI) has a main objective to strengthen and develop local currency bond markets in the region. Additionally, the Asia Securities Industry and Financial Markets Association (ASIFMA) plays an important role in promoting the development of bond markets in the region and internationally, sharing best practices and leveraging international experiences. ASIFMA has launched initiatives on critical issues such as bond issuance, credit ratings, transparency and electronification, tax and compliance.
Companies, in particular growth companies, also may lack financial knowledge about the benefits of corporate bonds and the technical capacity to use market-based financing in general. Therefore, financial education of company management is important, particularly in markets where the capital market development is in its early stage.
Establish a comprehensive reform agenda to promote growth companies’ access to corporate bond markets. This agenda could include various steps and clearly define the responsibilities of relevant authorities with a focus on growth companies’ access to corporate bond markets. This can be achieved by creating a task force, committee or a public-private programme that ensures regular follow-up on the implementation of identified measures.
Review the taxation framework to support growth companies’ access to financing and simplify tax declaration and payment procedures. Implementing tax incentives, such as the elimination or reduction of taxes and offering tax credits, could be beneficial for the market development, but have to be balanced with broader economic considerations. These incentives could be designed to be in place for a certain period of time and could target only certain segments of the market such as bonds issued by growth companies.
Establish a dedicated segment for growth companies on the stock exchange using proportional listing requirements and less stringent rules, while ensuring appropriate investor protection.
Enhance the role of industry-led bodies or associations in corporate bond markets. Reforms could include the creation of such bodies or associations and support these entities to develop corporate bond markets. This could involve, for example, developing a template for corporate bond terms, advocating for the better protection of bondholder rights and promoting good practices among market participants.
Establish targeted financial education or awareness campaigns to inform corporate executives and other relevant actors about the opportunities of corporate bond financing.
References
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[10] ADB (2022), AsianBondsOnline Annual Bond Market Liquidity Survey, https://asianbondsonline.adb.org/documents/abm/abm_mar_2022_abo_annual_bond_market_liquidity_survey.pdf.
[8] Çelik, S., G. Demirtaş and M. Isaksson (2020), Corporate Bond Market Trends, Emerging Risks and Monetary Policy, OECD, Paris, https://www.oecd.org/corporate/Corporate-Bond-Market-Trends-Emerging-Risks-and-Monetary-Policy.htm.
[3] Gambacorta, L., J. Yang and K. Tsatsaronis (2014), “Financial structure and growth”, BIS Quarterly Review, https://www.bis.org/publ/qtrpdf/r_qt1403e.htm.
[9] IOSCO (2015), “IOSCO Code of Conduct Fundamentals for Credit Rating Agencies”, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD482.pdf.
[6] OECD (2023), G20/OECD Principles of Corporate Governance 2023, OECD Publishing, Paris, https://doi.org/10.1787/ed750b30-en.
[5] OECD (2023), “OECD Code of Liberalisation of Capital Movements”, OECD, Paris, https://www.oecd.org/investment/codes.htm.
[4] OECD (2022), Corporate Finance in Asia and the COVID-19 Crisis, OECD, Paris, https://www.oecd.org/publications/corporate-finance-in-asia-and-the-covid-19-crisis-87861cf0-en.htm.
[7] World Bank (2014), Debt Resolution and Business Exit: Insolvency Reform for Credit, Entrepreneurship, and Growth, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/912041468178733220/debt-resolution-and-business-exit-insolvency-reform-for-credit-entrepreneurship-and-growth.
[2] Yoshino, N. and F. Taghizadeh-Hesary (2018), The Role of SMEs in Asia and Their Difficulties in Accessing Finance, https://www.adb.org/sites/default/files/publication/474576/adbi-wp911.pdf.
Notes
← 1. Australia, India, Indonesia, Singapore.
← 2. China, Hong Kong (China), Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand and Viet Nam.
← 3. Qualified investors refer to individuals or institutions that meet specific regulatory criteria allowing them to participate in certain financial activities or investments that are not readily available to the general public.