Jordan Times
Thursday, March 4, 2004

Financial forum identifies initiatives to enhance Jordan's corporate bond market

More than 75 executives from 30 organisations including the Central Bank of Jordan, the Ministry of Finance, the Social Security Investment Unit, Jordan's commercial and retail banking institutions and the Insurance Commission participated in the forum.

“The Financial Markets Forum gave Jordan's financial and banking executives the opportunity to share knowledge, discuss strategies and formulate initiatives to expand Jordan's corporate bond market,” said Ali Al Husry, board member of the Association of Banks in Jordan. “One of the most important outcomes of the event is the industry's renewed focus on deepening the primary and secondary bond markets, a key element of improving Jordan's overall economy.”

Forum attendees agreed that in order for Jordan's primary and secondary fixed income markets to develop and expand, more instruments need to be issued and offered to the market, a credit rating agency should be established, a better yield-curve framework must exist through the development of the government bond market, and legislative reforms should be instituted.

A common theme throughout the event was the importance of designing Jordan's corporate bond market to appeal to retail investors and making the market more accessible to this category of investors.

In Jordan, developing a more active corporate bond market requires expanding the supply of new bond issues and issuers.

There are multiple investing institutions with ample liquidity that could use corporate bonds as a diversification tool; however, there is a very limited supply of corporate bonds in the Kingdom.

It was suggested during the Forum that there is a need to educate corporate financial managers of the benefits for corporate financing through the issuance of bond debt instruments in turn creating more issuers.

It was suggested that a forum specifically for Jordan's corporate finance managers be held to discuss financing strategies and options.

In addition, the introduction of collateralised bonds in Jordan will lead to a greater issue and selection of fixed income instruments.

Forum participants suggested regulatory reforms to permit collateral of various asset categories to be pledged in favour of bondholders.

Both educating corporate finance managers and permitting collateralised bonds will lead to more bond issues and issuers and a greater supply and selection of fixed income instruments with varied maturities and coupon rates.

The absence of an independent domestic credit rating agency is seen as an impediment to growth in Jordan's corporate bond market.

According to their formal investment policy, many institutional investors cannot invest in a fixed income instrument if it has not first been rated by an independent agency.

Forum participants suggested that a credit agency be established with assistance from the Association of Banks in Jordan and its members. Such a rating agency would provide a local rating scale to facilitate the issuance of new bonds and assist in investment decisions in all investor categories, including the general public.

Participants agreed that there need to be a better yield-curve framework within which the bond market can operate, both for pricing of primary issues, and for secondary market trading. Participants suggested that a more regular stream of Treasury bond issues with varied maturities and interest rates will provide a fundamental benchmark for pricing and rating of corporate bonds.

Of equal importance is the establishment of a primary dealer auction system for government issues which will reduce borrowing costs, create more liquidity in the market and ensure an active secondary market, accessible to all types of investors including private individuals.

Suggestions for legislative and regulatory reform identified by Forum participants include adopting a framework that defines commercial paper and the regulatory supervision of the instrument; developing new legislation to clearly permit collateral of various asset categories to be pledged in favour of bondholders (i.e. mortgage-backed bonds); and amending regulatory procedures for the approval of offering prospectuses in order to permit “book-building” by issue managers.

These initiatives would diversify the types of fixed income instruments permitted and attract more investors, specifically individual investors by developing a vibrant secondary market.

“The Association of Banks in Jordan is committed to working with Jordan's executives to implement these proposals,” remarked Al Husry. “Effective and swift implementation of the initiatives outlined will undoubtedly help Jordan's bond market flourish and develop, leading to increasing overall economic growth in the country.”

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