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Risk warning against buying corporate bonds

Wednesday 20, 11 2019
According to the Ministry of Finance, investors need full access to information, analysis and thorough assessment of the risks that they may encounter when buying corporate bonds.
Risk warning against buying corporate bonds
According to the Ministry of Finance, since 2017, the corporate bond market has grown rapidly to meet the capital raising needs of businesses. In the context where credit growth tends to slow down, the volume of corporate bond issuance increased sharply in the first nine months of 2019 compared to the same period in 2018.

The Ministry of Finance believed that the development of the corporate bond market showed a shift of mobilized capital from bank credit to bond issuance channel, for a more balanced development between capital market and bank credit channel and in order to reduce the pressure for banks according to the Government's policy.

Requirements for bond issuers

However, according to the Ministry of Finance, the rapid development of the corporate bond market made entities participating in this market subject to several requirements. Specifically, issuing businesses need to fully comply with the provisions of law when raising bond capital by publicly disclosing information on the financial situation and the purpose of raising capital from issuing bonds to investors.
In addition, investors need full access to information, analysis and thorough assessment of the risks that they may encounter when buying bonds. Bond issuers should provide sufficient information to investors and advise issuing businesses to comply with the provisions of law when issuing bonds.

Possible risks

Corporate bonds are debt instruments issued by businesses on the basis of self-borrowing, self-repayment, and self-responsibility for the efficiency of capital use and debt repayment capacity. However, the debt repayment capacity of the enterprise depends greatly on their financial situation and business results, which means investors need to consider and assess risks carefully before deciding to purchase bonds.

The Ministry of Finance also pointed out a number of risks that corporate bond investors may face, including the failure to meet the terms and conditions of bonds due to insolvency. In addition, chances are high that enterprises cannot fully and timely pay bond principals and interests; and enterprises cannot fulfill their commitments with investors on repurchasing bonds before maturity. Therefore, the Ministry of Finance recommends corporate bond investors, especially individual investors not to buy corporate bonds just because of high interest rates.

When buying corporate bonds, investors need to know the information including by which businesses the bonds are issued and the purpose of issuance; whether or not they have collaterals; commitment of the issuing entity to bonds; terms and methods of repaying principal and interest; financial situation and use of capital from bond issuance by issuing businesses.

Financial market practices show that corporate bonds, especially bonds issued in a separate form, are only suitable for institutional and professional investors. This type of bonds is not suitable for individual investors who are unable to analyze and assess risks. For small and individual investors with no financial capacity and investment experience, they should invest in professional investment funds to ensure safe and effective investment.

In order for the corporate bond market to develop safely and sustainably, the Ministry of Finance recommends issuing businesses, service providers and investors to understand and comply with the provisions of the law on issuance, investment and transactions of corporate bond. It is also necessary to understand the characteristics of bonds and the risks that may arise when investing in corporate bonds.
Source: Vietnambiz
 

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