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Vietnam’s corporate bond market poses high risks

Vietnam’s corporate bond market poses high risks

Wednesday 22, 07 2020
Total number of corporate bonds issued in the first 6 months of this year increased by 50% compared to the same period last year, while there have not been many independent credit rating agencies in Vietnam…

Corporate bond market is growing too fast

According to the Ministry of Finance, from 2011 to the end of 2016, only 359 corporate bonds were issued with the volume of VND 129,636 billion, which means the outstanding balance of corporate bonds at the end of 2016 was only equivalent to 5.27% of GDP, and 6.29% of GDP in 2017 - much lower than the average of other ASEAN countries (equivalent to 22% of GDP).

However, after the Government issued Decree 163/2018 / ND-CP on issuance of corporate bonds, replacing Decree 90/2011 / ND-CP, with more open regulations, the corporate bond market developed too dramatically. Specifically, in 2018, corporate bond outstanding exceeded 9% of GDP - higher than the target set in Decision 1191 / QD-TTg dated August 14, 2017 approving the Bond Market Development Roadmap.

In 2019 alone, businesses mobilized VND 315,000 billion through issuing bonds, making the market size increase to 10.38% of GDP, equivalent to VND 640,000 billion, 6 times higher than in 2011. In particular, credit institutions accounted for 40% of the issuance volume, while real estate businesses accounted for 19%. 

In the first 6 months of 2020, the total amount of corporate bonds issued was estimated at VND 159 trillion, an increase of 50% over the same period last year.

In the first 6 months, commercial banks issued VND 42.5 trillion of bonds with an average interest rate of 6.72% / year and average term of 4.7 years. "Compared to deposit rates, this is a high interest rate and attractive for small investors," VEPR said.

Vietnam’s corporate bond market poses high risks

Breaking law

According to Ms. Phan Thi Thu Hien, Director of Department of Banking and Finance, Ministry of Finance, the development of the corporate bond market contributes to meeting the capital mobilization needs of businesses. However, so far, businesses have shifted capital mobilization from bank credit channel to large bond issuance channel, showing signs of drastic development.

Under the provisions of Decree 163/2018 / ND-CP, individual corporate bonds can only be issued to less than 100 investors, excluding professional securities investors, however, many businesses have circumvented the law by issuing bonds to less than 100 investors then distributing them in the secondary market to individual investors.

Most individual investors have very limited financial know-how and what they are only interested in is that interest rates will destabilize the financial market and face many risks (individual investors hold 26.8% of the amount of corporate bonds issued in the first 4 months of 2020).

According to Mr. Nguyen Hoang Duong, the increase in the number of individual investors including small and retail individual investors without access to sufficient information on the purpose of issuance, financial situation, ability to repay debts, etc. is the risk for investors themselves. If the issuing enterprise fails to fulfill its commitments to investors, there will be instability in the financial and social markets.

According to statistics of the Hanoi Stock Exchange, in 2019, there were 28 (out of 217) issuers with the volume of bond issuance in excess of 3 times the equity, of which 11 enterprises issued bonds in excess of 50 times of equity, and 6 in excess of 100 times of equity. In the first 4 months of 2020, many real estate businesses, due to their inability to access bank loans, have borrowed money from the financial market through issuing bonds with the amount of 30-47 times the capital. 

Risk of collapse

To protect investors as well as the bond market, the Ministry of Finance will replace Decree 163/2018 / ND-CP, which tightens individual corporate bond issuance conditions towards issuing bonds to professional securities investors only, etc.

However, according to VEPR, because there exist not many independent and reputable credit ratings agencies, the growth of the bond market can lead to interest rate competition and uneven corporate bond quality, which may make investors self-assess and evaluate on their own.

The research agency stated that, in the immediate future, due to the negative impact of the Covid-19 epidemic on production and business activities, the pressure on debt repayment of bond issuing businesses will also be pushed, increasing the risk of default.

In particular, real estate businesses are mobilizing capital through bond issuance, at the same time, securities companies and commercial banks are promoting the distribution of corporate bonds to individual investors, causing individual investors to buy corporate bonds.

"This will pose the risk of collapse," VPER warned.

What you need to know to mitigate credit risk

Source: baodautu

Vietnam Economy

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