Original sin in corporate bondmarkets
Eli Remolona
Guest Speaker Seminar
University of TokyoTokyo, 9 October 2018
This is based on joint work with Paul Mizen, Frank Packer and Serafeim Tsoukas.
The views expressed are our own and do not necessarily reflect those of the BIS.

RestrictedOriginal sin
Eichengreen, Hausmann and Panizza (2005):
Emerging market governments are unable
to issue offshore in their own currency

Restricted2Size and growth of local currency debt markets

Amount of debt securities outstanding as a percentage of nominal GDP, government andcorporate issuers, nine countries, 2005 and 2015

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Issues in developing local-currency bond markets
Benchmark yield curve• IMF and World Bank (2001) advice building benchmark government
yield curve• Does local corporate bond market need a government curve?

Role of credit ratings• To what extent can corporate bond market accommodate lower-rated
issuers?
• In some markets, investment regulations allow only highly rated firms“Original sin” or “shiri ga aoi”
• What firms find difficulty issuing in either the onshore market oroffshore market?

Restricted4Benchmark government bonds in eight countries

Maturities of 2 years or longer, de jure (= DJ) and de facto (=DF)
Maturities (years)
23457

Japan JGBs

DFIndonesia
Malaysia

PhilippinesThailand

1520253050DFUK Gilts
US Treasuries

10

DJ

DJ

DJ

DJ

DFDFDF

DF

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DJ

DF

DFDF

DJ
DJ

DJ

DJ

DJ
DJ

DJ

Source: Remolona and Yetman (2018): The rise of benchmark bonds in emerging Asia

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5Credit ratings for local-currency corporate bonds

Credit ratings by local rating agencies, as a percentage of number of localcurrency corporate bonds issued, 2010–Q3 2015

Source: Amstad, Kong, Packer and Remolona (2016): A spare tire for capital markets: Fosteringcorporate bond markets in Asia

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Number of issuers in onshore and offshore markets

Total number of issuers from seven home countries in emerging Asia, 1999-2012

450400

Number of issuers

350300250
200
150

1005001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
OnshoreOffshore

Source: Mizen, Packer, Remolona and Tsoukas (2018): Original sin in corporate finance: new evidence
from Asian bond issuers in onshore and offshore markets. University of Nottingham CFCM.

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Original sin in corporate finance: new evidence fromAsian bond markets in onshore and offshore markets

Why do some firms choose to issue offshore rather than onshore?

Empirically model two decisionsThe decision to issue

The choice of market in which to issue

Consider three sets of factors.
Country-specific structural factors



Global and local cyclical market conditions

Firm-specific characteristics

Data



5,500 financing decisions, matching bond issuance data with issuing
firm data
Seven emerging economies: Hong Kong SAR, Indonesia, Korea,Malaysia, the Philippines, Singapore, Thailand
Covering 1999-2012: 14 years of onshore market development

Restricted8Model of two decisions
The decision to issue

The choice of market

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9Market development variables

Restricted10Firm-specific variables

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The decision to issue

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The choice of market I

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The choice of market:
seasoning matters

The choice of market: seasoning matters

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Proportions of unseasoned issuers in onshore
and offshore markets

Percent of total number of issuers from seven home countries in emerging Asia, 1999-2012

60.0%

Proportions of unseasoned issuers

50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
OnshoreOffshore

Source: Mizen, Packer, Remolona and Tsoukas (2018): Original sin in corporate finance: new evidence
from Asian bond issuers in onshore and offshore markets, University of Nottingham CFCM.

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TakeawaysThe decision to issue
Individual and collective issuing experience counts



Taxes and availability of derivatives matter

The choice of market

Absolute size of onshore market is important, especially for
unseasoned firms

Openness helps onshore market as it gets larger



Firms violate uncovered interest parity

Shiri ga aoi

Even with onshore markets, unseasoned firms often find it
easier to issue offshore
Market development overcomes shiri ga aoi

Seasoning also overcomes shiri ga aoi, and seasoned issuers
choose market favored by interest differentialsRestricted16References

Amstad, M., S. Kong, F. Packer and E. Remolona (2016): A spare tire for capital
markets: fostering corporate bond markets in Asia. BIS Papers No 85 (June).
Eichengreen, B., R. Hausmann and U. Panizza (2005): The pain of original sin, in
Eichengreen and Hausmann (eds), Other People’s Money: Debt Denomination andFinancial Instability in Emerging Market Economies, University of Chicago Press.
IMF and World Bank (2001): Developing benchmark issues, Chapter 4 in Developing
Government Bond Markets: A Handbook, pp 117-150.
McCauley, R. (2001). Benchmark tipping in the money and bond markets. BIS
Quarterly Review.
McCauley, R and E Remolona (2000): The size and liquidity of government bondmarkets. BIS Quarterly Review.
Mizen, P., F. Packer, E. Remolona and S. Tsoukas (2018): Original sin in corporate
finance: new evidence from Asian bond issuers in onshore and offshore markets.
University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)
Discussion Papers 2018/04

Remolona, E. and J. Yetman (2018): The rise of benchmark bonds in emerging Asia
(work in progress, preliminary slides available from the authors).

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