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Vietnam’s corporate bond market: individual investors facing numerous risks

Vietnam’s corporate bond market: individual investors facing numerous risks

Monday 11, 04 2022
Most of the corporate bonds available on the market are privately issued to professional investors. However, they are then distributed indirectly to individual investors through banks and securities companies.

Vietnam’s corporate bond market

In the past 5 years, the corporate bond market in Vietnam has developed very strongly in terms of the scale of issuance and the number of participating enterprises. Authorities have repeatedly warned, but it seems that when there had not been any obvious consequences, investors still did not care about the risks that this product brings.

It was only when 9 lots of corporate bonds issued by companies belonging to Tan Hoang Minh Group were canceled due to "acts of disclosing false information, concealing information in private bond issuance activities", investors became more aware of the potential risks.

Before the case of Tan Hoang Minh, Apec Group and VsetGroup had also been sanctioned for improperly offering bonds for sale. At the same time, the sold stocks were withdrawn and investors were refunded with additional interest.

A few figure will show the real story behind corporate bonds:

corporate bonds

  • Only about 8% of corporate bonds issued are sold to individual investors while nearly 60% are held by banks and securities companies;

  • Corporate bonds account for about 46% of the total outstanding loans of real estate businesses;

  • Financial leverage of unlisted companies is 8x-10x while that of listed companies is 2x-3x.

Giving more detailed information about corporate bonds, Mr. Nguyen Minh Tuan - CEO of AFA Capital said that there are currently two forms of issuance in the bond market, namely corporate bonds issued privately and corporate bonds issued to the public. For each type of issuance, there will be separate regulations and conditions.

Specifically, to be able to issue corporate bonds to the public, enterprises must ensure that they have a charter capital of VND 30 billion. In addition, the company must be profitable in the year preceding the year of registration without accumulated losses and outstanding debts with a term of more than 1 year. Moreover, a credit rating for the company is also a must. While the condition for private issuance is much simpler: paying in full principal and interest of issued bonds or debts due within 3 years, safety ratio, audited financial statements. This means low transparency.

private issuance

"This explains why only 4.6% of bonds on the market are considered as corporate bonds issued to the public while over 95% are issued privately," said Mr. Tuan.

That is on the supply side, and on the buyer side, it is necessary to clearly distinguish investors who are allowed to buy bonds. For privately issued corporate bond products, investors must be professional, and for corporate bonds issued to the public, any investor can participate in trading.

However, very few investors can achieve the qualification of professional investor. Normally, most investors who are eligible to buy privately issued corporate bonds are banks and securities companies, a few are individual investors.

Risks facing individual investors

Reality shows that, through issuance channels from banks and securities companies, corporate bonds have been distributed to individual investors like corporate bonds issued to the public. In case the issuer uses the capital for the wrong purpose, leading to the inability to repay the debt, individual investors will be in danger.

“This leads to the fact that corporate bonds are issued privately but are almost issued to the public, while the issuance conditions are completely different. Most of the risks will be pushed towards individual investors,” said Mr. Phan Le Thanh Long, a financial expert.

individual investors

Talking about the situation that individual investors are still actively buying corporate bonds despite the risk warnings, Mr. Long said that banks and securities companies may make individual investors think that corporate bonds have been checked and evaluated by these organizations for safety before being introduced to them. This misunderstanding can make investors feel more secure and decide to buy bonds.

According to Mr. Long, the current problem of this market lies in the "3 no's" feature (no credit rating, no collateral and no payment guarantee). Banks and securities companies are just service providers, collateral management, or at best, underwriters, not payment guarantors.

This is completely reasonable because it can be seen through the 9 lots of bonds issued by Tan Hoang Minh that participating units such as SHB, Vietcombank, BVSC... all issued notices that they are not responsible. Thus, if there is a risk that the business will not be able to return the money, investors will "lose everything".

Source: theleader

Compiled by VietnamCredit

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