Executive summary

Following the Asian financial crisis, regional authorities recognised the importance of well-functioning capital markets and took steps to facilitate the use of market-based financing. Consequently, reforms were introduced in many jurisdictions to develop corporate bond markets as a source of financing for corporations and significant progress has been observed since then. Still, the level of development of corporate bond markets differs in the region and in most jurisdictions only large, high-quality issuers can issue bonds. In general, growth companies still face substantive barriers to access this type of financing.

This report formulates policy considerations to further develop corporate bond markets and to facilitate access by growth companies. This is informed by an overview of Asian corporate bond markets, including their functioning and challenges, and is based on information provided by 19 regulators via a survey, OECD databases and desktop research. Some of the key findings are listed below:

Corporate bond markets in Asia have grown significantly, however bank financing still dominates in the region. Corporate bond issuance has significantly increased in Asian markets, from representing 44% of the global issuance in 2000, to 85% in 2022. Corporate bond markets have also been offering increasing financing opportunities for growth companies. The issuance by growth companies increased from USD 5.7 billion in 2000 to USD 33.3 billion in 2022. Despite the rapid development of both public equity and corporate bond markets in Asia, corporations still rely heavily on bank financing, with market-based financing taking a secondary role. In Asia, bank credit extended to non-financial companies stands at 143% of GDP, much higher than the global number at 96%.

Corporate bond markets in Asia are at different stages of development. While some jurisdictions have developed their corporate bond markets for large and growth companies, some markets are at a very early stage of development where only large, highly-rated companies have access to financing. Relatedly, very few jurisdictions have exemptions or programmes to facilitate growth companies’ access to corporate bond markets. Indeed, 13 jurisdictions have implemented at least one measure to increase overall access to corporate bond markets, but not specifically targeting growth companies.

A well-functioning government bond market is essential to develop other securities markets. A domestic liquid, risk-free yield curve allows the pricing of risky securities, including corporate bonds. Not all Asian jurisdictions have a well-developed government bond market, and even where the market exists, there are significant differences in the size, depth and liquidity of these markets. Corporate bonds can be listed and traded on the stock exchange in 16 jurisdictions, while an OTC market operates in 13 jurisdictions.

Many jurisdictions have improved their regulatory frameworks. A well-functioning corporate bond market requires a robust regulatory framework that ensures investor protection, maintains market integrity and mitigates systemic risks. 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. Recurrent corporate bond issuers often benefit from streamlined processes. Regarding bondholder rights, trustee appointments are common, with 14 jurisdictions mandating this for corporate bond issues, while all require disclosure of material covenant-related information. Additionally, many jurisdictions have improved bankruptcy procedures to bolster creditor rights and facilitate corporate debt restructuring. However, only a few jurisdictions’ insolvency frameworks include components such as out-of-court restructuring frameworks, hybrid regimes and fast-track procedures for SMEs. Applying necessary requirements for bonds issued to qualified investors, eliminating overly burdensome requirements and tailoring proportional requirements for growth companies should be a priority to further improve corporate bond markets in the region.

Asian corporate bond markets are characterised by low secondary market liquidity. A liquid market ensures an efficient price formation process, improves investor confidence and contributes to the overall functioning of capital markets. Corporate bond markets in Asia are characterised by low liquidity, which is identified as the most important barrier to developing these markets. Despite regulatory provisions in several jurisdictions, inactive market makers and lack of investors are among the key factors hindering liquidity.

There are challenges to credit rating assessments. Difficulties evaluating the creditworthiness of companies undermine investors’ ability to accurately evaluate risks and affect their willingness to invest. The existence of various credit rating opinions enriches the information available to investors. All jurisdictions in Asia have registered at least one credit rating agency. Alternative credit rating systems have only been adopted in three jurisdictions. Nevertheless, the assessment of the creditworthiness of companies was identified as a key barrier to support and develop corporate bond markets in Asia.

A lack of investors is a significant barrier to the development of corporate bond markets in Asia. The composition and diversity of the investor base play a pivotal role in shaping the dynamism and resilience of corporate bond markets. However, several jurisdictions identified the lack of investors, as well as investor’s lack of interest, as major barriers for the development of corporate bond markets. In Asia, institutional investors are relatively large, representing a significant share of the world’s total assets of pension funds and insurance companies. Therefore, they have substantial investment capacity to play a more significant role in Asian capital markets.

Tax treatment of corporate bonds is broadly similar in structure in Asia. In most jurisdictions companies are allowed to a tax deduction for the interest paid to corporate bonds investors and other expenses. From the investor’s perspective, it is common to pay tax on the interest received from holding corporate bonds while capital gains are taxed in only 14 jurisdictions. A withholding tax for foreign investors is generally applied unless there is a double taxation agreement, which is common in many jurisdictions. However, there are differences in the rates and conditions applied. Overall, the use of tax exemptions to help attract issuers and investors is not common in Asia.

Targeted policies or programmes to support growth companies’ access to bond markets are not common. Most measures implemented in the region aim to increase the overall access to corporate bond markets and are not targeted to growth companies. Only a few jurisdictions with more mature markets have implemented targeted policies to facilitate growth companies’ access to corporate bond markets and, in general, growth companies still face substantive barriers to access this type of financing. Only four jurisdictions waive certain requirements or procedures for growth companies.

Against this background, this report formulates policy considerations for authorities in Asia to further develop corporate bond markets and enhance growth companies’ access to these markets. The policy considerations outlined in this report are centred around three main objectives. First, they aim to ensure that regional markets first develop the pre-requisites for well-functioning corporate bond markets. Second, they aim to develop the corporate bond market for large firms first. And third, they target the facilitation of growth companies’ access to corporate bond markets. Ensuring the enabling factors are in place and that the bond market is working for large companies, could provide a robust foundation for credibility and trust in the market, and foster a culture that encourages the subsequent participation by growth companies.

The policy considerations are grouped into the following seven areas: pre-requisites for well-functioning corporate bond markets; appropriate regulatory and supervisory framework; adequate and independent credit risk assessment for companies all sizes; improved secondary market liquidity; diversified investor base; instruments to attract a large pool of investors and diversify risk; and role of government and other initiatives.

Summary of policy considerations

1. Pre-requisites for well-functioning corporate bond markets
Code of conduct	Encourage adherence to and enforcement of a robust code of conduct among market participants to ensure the proper functioning of the marketplace.
Market infrastructure	Improve systems and venues for clearing and settlement systems to meet the needs of a wider range of investors.
Market intermediaries	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.
Alternative trading systems	Ensure the availability of alternative trading systems.
Government bond markets	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.
Capital allocation and the mobilisation of savings	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.
2. Appropriate regulatory and supervisory framework
Regulatory and supervisory frameworks	Implement robust regulatory and supervisory frameworks and strengthen investor protection efforts.
Approval or registration of bond issues	Reduce the time for approval or registration of bond issues.
Template for corporate bond terms	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.
Frequent issuers	Facilitate the issuance process for frequent issuers, by allowing them to follow simplified procedures and/or issue a simplified prospectus or a generic prospectus.
Exemptions in the corporate bond issuance process	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.
Special frameworks for growth companies	Consider creating special frameworks for growth companies with less stringent requirements, cost-effective issuance processes and tax advantages.
Bondholder rights, insolvency regulations	Introduce systems that facilitate bondholders to exercise their rights. Authorities could consider enhancing bankruptcy and restructuring regulations.
3. Adequate and independent credit risk assessment for companies all sizes
Credit rating assessments	Ensure the existence of well-functioning diverse credit rating assessments for corporate bonds and other debt securities at affordable prices for companies all sizes.
Accurate, reliable and comparable opinions	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.
Domestic rating agencies	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.
Alternative credit rating systems	Consider creating an alternative credit rating system for growth companies to provide credit risk assessments to the market.
Incentives for growth companies	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.
Harmonisation of the credit rating practices	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.
4. Improved secondary market liquidity
Marketplaces	Establish a dedicated segment on the stock exchange with less stringent requirements and/or making it only dedicated to qualified investors.
Price transparency	Ensure a level of price transparency that promotes efficient price discovery in corporate bond markets.
Reference pricing	Consider introducing systems to provide reference pricing and/or ensuring dissemination of market prices to the market.
Market making mechanism	Ensure a well-functioning market making mechanism to support secondary market liquidity in corporate bond markets.
Research on growth companies	Consider establishing a mechanism that provides independent quantitative research on growth companies to market participants at no cost.
Trading fees, and the tax treatment of corporate bonds	Ensure that trading fees, the tax treatment of corporate bonds and their related procedures do not discourage participation in the corporate bond market.
5. Diversified investor base
Institutional investors	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.
Foreign investors	Address regulatory obstacles, the cost of accessing the market and taxation issues for foreign investors.
Retail investors	Promote the direct or indirect participation of retail investors while ensuring the risks taken by these investors are well-understood and properly managed.
Financial literacy	Increase the financial literacy of retail investors.
6. Instruments to attract a large pool of investors and diversify risk
Securitisation	Introduce a securitisation mechanism to promote the development of corporate bond markets for growth companies.
Guarantees	Establish a guarantee scheme to support growth companies’ access to market-based financing.
Derivative markets	Continue developing the derivative markets to provide risk management tools to investors and intermediaries investing in corporate bonds.
Qualified investors	Develop corporate bond markets for growth companies to qualified investors first.
7. Role of government and other initiatives
Reform agenda	Establish a comprehensive reform agenda to promote growth companies’ access to corporate bond markets.
Taxation framework	Review the taxation framework to support growth companies’ access to financing and simplify tax declaration and payment procedures.
Segment for 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.
Industry-led bodies or associations	Enhance the role of industry-led bodies or associations in corporate bond markets.
Financial education	Establish dedicated and targeted financial education or awareness campaign to inform corporate executives and other relevant actors about the opportunities of corporate bond financing.