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Risk warnings of real estate corporate bonds

Risk warnings of real estate corporate bonds

Monday 15, 11 2021
More than 80% of issued corporate bond value of the residential real estate sector belongs to unlisted enterprises which have alarmingly weak financial health.

Huge money poured in real estate corporate bonds

In the past 5 years, bonds have become an important mobilization channel for real estate businesses, with an average issuance value of approximately 100,000 billion VND per year, contributing from 30% to 40% of the total value of corporate bonds issued.

In the first nine months of 2021, the issuance value of real estate bonds reached 172 trillion VND, equivalent to the same period last year and accounting for 40% of the total mobilized value of corporate bonds in the market.

value of real estate

By the end of the second quarter, outstanding loans of corporate bonds of listed real estate companies had reached 116 trillion VND, equivalent to 17.3% of outstanding loans for real estate businesses in the banking system.

Notably, according to a credit rating company in Vietnam, in the first nine months of this year, more than 80% of issued corporate bond value of the residential real estate sector belongs to unlisted enterprises which have alarmingly weak financial health.

Most bonds of unlisted companies were issued privately to banks and securities companies, the majority of which have collateral assets or third-party guarantees.

Nevertheless, having collateral does not mean “safe”. When giving credit ratings for a real estate corporate bond issuance, collateral is of insignificant use. In fact, collateral can only put pressure on businesses to meet debt obligations, while the recovery value is very low due to the complexity of financial handling procedures.

This can be clearly seen from the case of Evergande in China. Evergande's issuances are backed by collateral or bank-supervised cash flows. However, it has been proven that when the business collapses, the collateral will take a long time and profits will not be as expected.

In Vietnam, the scale of credit through the corporate bond channel has become quite large, accounting for about 12% of bank credit balances and about 15% of GDP (if the bank bonds are excluded, the outstanding value of bonds will account for about 7.8% of GDP).

Real estate GDP

While bank credit is more tightly controlled with specific regulations, the risks for corporate bonds are much greater.

Individual investors are the main risk bearers in corporate bond market, because institutional investors such as banks and investment funds are able to manage risks, even if they accept high risks, the interest rates they will enjoy are also high.

Credit ratings is essential

The strong development of the corporate bond market shows that there has been a new capital channel to help businesses diversify capital mobilization. However, a fast-growing market also brings about many risks.

Dr. Nguyen Duc Do, Deputy Director of the Institute of Economics and Finance, Academy of Finance, said that there is an asymmetry in information between buyers and sellers in the trading of corporate bonds.

Dr. Nguyen Duc Do

“Sellers hold more information but do not disclose transparently to buyers. This leads to a mismatch between price and quality, posing risks to investors. In the last 2 years, the corporate bond market has developed strongly and the number of individual investors has also increased sharply. These investors do not have a lot of information and their understanding of corporate bond issuers is also limited, which creates many risks for the market”, Mr. Do said.

Dr. Nguyen Tri Hieu, an expert in banking and finance, assessed that the risks of the corporate bond market are reflected in the fact that bond interest rates are very high, or bonds are issued by real estate companies without collateral.

Individual investors who buy corporate bonds do not know whether the money raised from the issuance is used for the right purposes, and they also have very little ability to analyze financial ratios that can help understand the debt repayment capacity of the issuer. Therefore, the risk is very high.

In order to protect the interests of investors, there should be an intermediary who can monitor and evaluate corporate bond issuers to provide investors with necessary information that can help them anticipate possible risks.

In its assessment report on Vietnam's corporate bond market, ADB stated that Vietnam is lacking credit rating agencies that can contribute to increasing operational efficiency in terms of both investment supply and demand in the market, helping investors to be better aware of the financial capacity and debt solvency of the bond issuer, as well as to know possible risks.

According to the Ministry of Finance, from January 1, 2023, when businesses offer bonds, credit ratings are mandatory for issues of great value. After bonds are issued, they will be listed and traded on the stock market.

Source: ADB, theleader

Compiled by VietnamCredit

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