Corporate bond market needs stringent adjustments

Although Vietnam's corporate bond market is the smallest among the six corporate bond markets in the ASEAN, it has recently developed extremely rapidly.

Real estate enterprises promote corporate bond issuance to mobilize capital. (Photo: SGGP)

Real estate enterprises promote corporate bond issuance to mobilize capital. (Photo: SGGP)

The report on the issuance of corporate bonds by the Hanoi Stock Exchange (HNX) and securities companies shows that the value of corporate bond issuance in the first seven months of this year was up to VND179.5 trillion, an increase of nearly 50 percent over the same period last year. In which, real estate enterprises led in the volume of bond issuance in the second quarter of this year and customers, who bought bonds of real estate enterprises the most, were commercial banks.

According to the SSI Securities Corporation, the group of real estate enterprises issued the most corporate bonds in the second quarter of this year, reaching VND71.6 trillion, accounting for 41.8 percent of the corporate bond issuance volume and increasing nearly 60 percent over the same period last year. Noticeably, commercial banks bought VND28.2 trillion of real estate bonds on the primary market, accounting for 40 percent of the issuance volume of these enterprises. However, the actual volume of corporate bonds purchased by commercial banks may be higher because many issued lots of corporate bonds were only listed as buying by domestic organizations.

Statistics of securities companies show that, by the end of the first quarter of this year, the volume of corporate bonds held by 18 commercial banks on the market was up to VND165.2 trillion, an increase of VND37.2 trillion compared to the end of 2019. Of which, Techcombank and VPBank held the most. Amid the difficult economic context due to the impacts of the Covid-19 pandemic, real estate enterprises have also been affected in structuring finance. Along with that, banks tightened their real estate lending, so these enterprises have promoted the issuance of bonds to mobilize capital. Although the bond channel is promoted to reduce dependence on banks' capital, commercial banks bought the whole lot in many corporate bond issuances by real estate enterprises. This has raised concerns that the phenomenon that banks are providing real estate loans through the purchase of corporate bonds can cause lots of risks.

According to financial and banking expert Nguyen Tri Hieu, to ask for loans directly, enterprises must be eligible to borrow money and must have collaterals. Meanwhile, if a bank buys corporate bonds, it is purely in the form of trust, so the risks on commercial banks are extremely high. 

‘According to regulations, buying corporate bonds is not considered as an investment, so banks still have to add corporate bond purchases to the loans on the books. However, banks often separate the bond purchases of real estate enterprises from their outstanding loans to reduce the outstanding balance on the books,’ Mr. Hieu said.

To further explain the fact that commercial banks hoard corporate bonds, an expert said that maybe behind the purchase of real estate corporate bonds of commercial banks is a story of debt restructuring. Many loans are on the verge of turning into bad debts, not excluding the possibility that enterprises issue bonds and banks buy them. Real estate enterprises use the money collected from bond sales to pay debts to banks and this is a form of debt rollover. This also causes risks to the economy, so the State Bank of Vietnam (SBV) needs to have special supervision on the bonds of real estate companies that banks are buying.

Although Vietnam's corporate bond market is the smallest among the six corporate bond markets in the ASEAN, it has recently grown rapidly. The value of Vietnam's corporate bond market accounted for from 9.01 percent of gross domestic product (GDP) in 2018 to 11.3 percent of GDP in 2019 – much higher than the target of 7 percent of GDP set by the Government for 2020, making Vietnam become the fastest-growing corporate bond market in Southeast Asia. In the rapid development of the corporate bond market, especially in 2019 and the first half of 2020, there were many cases with a large issuance scale compared to equity and unusually high-interest rates. Besides, the participation of individual investors tended to expand. This poses many risks in the context that the market lacks information transparency, and there is no credit rating for the issuers.

Amid this context, the Government and the Ministry of Finance have issued more stringent adjustments and amendments, creating a safer corridor for both enterprises and investors to participate in the market. Decree No.81/2020 supplements some articles of Decree No.163/2018 of the Government, regulating the issuance of corporate bonds officially effective from September 1. In which, the total number of bonds issued by enterprises must not exceed five times of equity and the interval between two issuances must be at least six months. Each enterprise only issues 1-2 times per year. The bond issuer must declare the issuance purpose and make a clear business plan for the investor to monitor the use of capital. These regulations, according to many experts, will cool down the corporate bond market, especially limit the risk of the bond settlement of real estate enterprises.

According to the HNX, in July this year, many real estate enterprises have issued many large lots of corporate bonds. Of which, many deals of real estate enterprises were worth up to VND1 trillion. However, the issuance of corporate bonds in July this year significantly decreased compared to June. The number of registered issuances in July this year was 294 times, with the total value equivalent to more than VND75.59 trillion. In which, the total value of successful issuance merely reached a quarter of the registered volume at about VND19.94 trillion, down 53 percent compared to June this year and down 38 percent compared to the same period last year.

The representative of VNDirect Securities Company said that the decrease in demand for corporate bonds in July was because of some reasons. Since the beginning of June, the Ministry of Finance has continuously given warnings of risks after corporate bond issuance suddenly surged in May, and the proportion of individual investors participating in private placement tended to increase, causing investor sentiment to be a bit more cautious in June and July. The recurrence of Covid-19 at the end of July has made the need to hold cash increase to prevent risks, especially for institutional investors, who are the main entity participating in the corporate bond market, weakening the demand.

Moreover, the regulations of the Ministry of Finance, as well as the amended Law on Enterprises passed by the National Assembly on June 17, officially prohibit nonprofessional investors from buying and selling corporate bonds issued through private placements from 2021, reducing the demand from individual investors. Experts of SSI said that, after September 1, when Decree No.81/2020 comes into effect, bond issuance through private placements will drop drastically, most of them will have to switch to the public offering. Along with the fact that SBV extends the schedule to reduce the ratio of short-term capital for medium and long-term loans, the credit channel of commercial banks will return to become the main funding channel for businesses, especially real estate enterprises.

By Nhung Nguyen – Translated by Bao Nghi

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