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Risk warning in Vietnam’s corporate bond market

Risk warning in Vietnam’s corporate bond market

Monday 04, 10 2021
In the first eight months of 2021, there were 490 issuances of corporate bonds in Vietnam with a total value of more than 308,000 billion VND, which is an unprecedented high.

Another corporate bond “fever”

Recently, there has been a race for corporate bonds. Specifically, the report of the Vietnam Bond Market Association (VBMA) shows that, in the first eight months of 2021, there were 490 issuances of corporate bond in Vietnam with a total value of more than 308,000 billion VND, the highest level ever. Major issuers in this channel include commercial banks, real estate enterprises, securities companies, construction companies and energy companies, accounting for the largest proportion of which are banks and real estate companies.

Vietnam Bond Market Association

Notably, while the bond interest rates of banks only fluctuate around 5-6%/year, which is quite the same as the current deposit interest rates, many businesses in other fields offer interest rates from 9% to 13% per year for corporate bond.

This high interest rate has helped businesses attract a huge cash flow from investors. This is also the reason why in 2020 when growth of the bank credit channel grew by only 12.1%, that of corporate bond channel increased by 28.3% compared to 2019. As a result, the corporate bond market at the end of last year was estimated at 15.7% of GDP and 10.3% of total credit outstanding of the whole banking system.

After a period of hiberanting in early 2021, the corporate bond fever has recently returned when the Covid-19 epidemic broke out for the 4th time in Vietnam. Prolonged social distancing measures have had a negative impact on many fields, thereby affecting investment channels. This means corporate bonds are given special attention thanks to high yield and liquidity.

Specifically, in August 2021 alone, several real estate businesses announced successfully mobilizing thousands of billions of dong through the bond channel. Notably, the interest rates that businesses pay to investors are significantly higher than the current one-year term bank deposit rates. For example, Hoa Phu Thinh Joint Stock Company announced that it has collected 3,130 billion VND through the issuance of four-year bonds, the interest rate for the first year is up to 13.65%/year.

real estate businesses

Underdeveloped credit ratings system of enterprises

With attractive interest rates (sometimes twice as high as bank deposit rates) and high liquidity (can be converted, bought and sold at any time), corporate bonds have become an attractive investment channel for many individual investors. However, like other financial products on the market such as stocks, foreign currencies or gold, investing in corporate bonds also poses risks if the investment object is not well understood.

In essence, enterprises raise capital through issuing bonds on the principle of self-borrowing, self-paying, and self-responsibility for capital efficiency and debt repayment ability. However, the fact that enterprises issue a large amount of bonds with high interest rates but use capital inefficiently or face difficulties in production, leading to failure to return bond principal and interest to investors will cause instability to the bond market in particular and the financial market in general.

Meanwhile, the credit ratings system of enterprises in Vietnam is still underdeveloped, so it is not easy for investors to choose a safe issuer, because a bond issuer should be carefully assessed in terms of transparency, business prospects, management's reputation and financial position.

According to SSI Securities Company, the risks with corporate bonds are increasing, especially in the real estate and energy sectors. Currently only a very small percentage of bonds are secured by real estate while the rest is secured by assets that are shares or no collateral.

The guarantee of payment of bond principal and interest by shares does not make much sense, because when there are risks, enterprises become insolvent and the value of shares used as security (usually of the issuer or related to the issuer) will drop significantly.

It is also because the level of risk to the corporate bond market is increasing, in an official dispatch to the State Securities Commission (SSC), the Finance and Banking Department and the Vietnam Stock Exchange, the Ministry of Finance has noted the risks when businesses promote capital mobilization through the issuance of bonds with high interest rates.

State Securities Commission

On that basis, recently, the State Securities Commission has also issued Document 5225/UBCK-QLKD requiring securities companies to ensure compliance with Decree 153/2020/ND-CP dated December 31, 2020 of the Government on regulations on private bond offering and transaction in the domestic market and offering corporate bond to the international market in the provision of consulting services on bond offering documents; professional securities investor identification service; bidding services, guarantee, bond issuance agency; bond registration, custody and transfer services. The Commission said it will organize inspection of the service provision of securities companies related to corporate bonds and strictly handle violations in accordance with the law.

Source: thesaigontimes


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