However, real estate businesses quickly jumped into the corporate bond market, while banks rushed to this market to buy the real estate bonds.
The total amount of corporate bonds issued in the last nine months of 2021 were valued at VND443,100 bn, up 18.6% over the same period in 2020. The winners were the real estate companies with VND201,900 bn, accounting for 45.5%; followed by the banking group with VND136,400 bn, accounting for 30.8%.
This situation has not only come about in the last nine months of this year but has maintained for last several consecutive years. Real estate businesses have rushed into issuing corporate bonds ever since the State Bank of Vietnam issued regulations to tighten the ratio of short-term capital for medium and long-term loans at commercial banks, which raised the risk co-efficient for real estate credit to limit capital flow into this sector. Therefore, businesses want to find capital, and this is the only way to redirect capital mobilization into the corporate bond market.
Real estate businesses that mobilize capital through any channel have used commercial banks to do so. According to the Finn Group, in the last nine months of 2021, more than 80% of the corporate bond value issued by the residential real estate industry belonged to unlisted enterprises. Most of these companies issue private placements to the main buyers, which are banks and securities companies. Behind the tremendous increase in the number of real estate bonds are ways for banks to bypass real estate lending without worrying about showing credit on the books, and capital adequacy ratios are still guaranteed with high profits and no need for making provisions.
Currently, commercial banks and securities companies hold nearly 60% of corporate bonds issued. In the last nine months, commercial banks bought VND124,400 bn worth of bonds, accounting for 27.3%, which was mainly from real estate enterprises. This explains why credit to the real estate business is low, but the operating capital of enterprises is still in abundance.
Change in position
In coming time, there may be a change in position in the corporate bond market, after the State Bank of Vietnam issued Circular 16/2021/TT-NHNN to tighten the purchase and sale of corporate bonds by credit institutions and foreign bank branches. This is a remarkable development after new regulations were issued on 22 November and the stocks of many large real estate enterprises dropped sharply. At the same time, small and medium real estate stocks were also sold strongly at floor prices. This is believed to stem from the response to Circular 16.
Firstly, the number of real estate corporate bonds is constantly increasing, while the debt repayment capacity of unlisted real estate issuers is very weak. The index of loan repayment capacity and leverage of this real estate group is at an alarming level. The financial leverage ratio as of June of unlisted real estate companies is 8.1 times, and listed companies are at 2.5 times. If calculated till the end of September, the level of leverage may be even higher when the value of newly issued bonds of unlisted real estate companies reached about VND100,000 bn, equivalent to 38% of the total assets at the end of 2020. According to an assessment, the ideal leverage ratio is 1/1, which is 1 dong of debt per 1 dong of capital. Level 2/1 is acceptable, 3/1 is quite high, 4/1 is very high risk and level 5/1 is at the risk of bankruptcy.
Secondly, after the effects of the Covid-19 pandemic, in addition to the real estate group, the issuance of corporate bonds to restructure debt can become a trick that is widely applied. In addition to the main reason of helping businesses invest in expanding their operations, businesses can also issue new corporate bonds to pay the debts of old corporate bonds or repay loans at credit institutions. In such cases, the balance sheets of banks will not be factual, and the State Bank of Vietnam will not be able to manage the credit of banks. Banks buying corporate bonds also do not need to make provision for such bad debts according to Circulars 02 and 09 so as not to affect profits. This will cover for bad debts.
The tightening of credit institutions to buy corporate bonds is not new. In 2018, the State Bank of Vietnam amended and supplemented a number of articles in Circular 22/2016 related to the purchase of corporate bonds by credit institutions. This regulation tightened banks to buy corporate bonds in potential high-risk areas, and at the same time required credit institutions not to buy corporate bonds issued for the purpose of restructuring corporate debts.
At this time, the bad debt of enterprises was quite complicated and there was a phenomenon of converting bad debts into corporate bonds for debt settlement as well as for banks to reduce the bad debt ratio. Bad debts are replaced by corporate bonds and the repayment term is also restructured because corporate bonds are issued for upto five years, ten years, or even fifteen years. After the warning bell is sounded, the governing body issued the above regulation. Now, the State Bank of Vietnam has once again stipulated similar issues, showing that the compliance of banks and enterprises in general as well as real estate enterprises, in particular, is still not serious.
For a long time, commercial banks have been a financial intermediary providing over 70% of capital to the economy but mainly mobilized by short-term capital. Therefore, the corporate bond market is expected to replace the burden of providing capital for the banking channel, but the reality is not as expected. When the burden of medium and long-term loans was relieved, commercial banks quickly jumped to buy bonds to pour capital into many businesses, including real estate enterprises. This is contrary to the wishes of the regulators and is hidden behind many unpredictable risks to financial markets and the economy.
Banks pouring capital into businesses has been the practice for many years. If this new regulation can somehow alter this capital flow is still an open question as banks are following the trend of linking securities companies, enterprises and banks. Accordingly, the banks will not directly buy in compliance with the regulations of the State Bank of Vietnam, but it is still possible to authorize units to buy and sell corporate bonds.