Corporate bonds are a risky stock, not bank deposits as many private investors mistakenly believed.
Therefore, investors must definitely evaluate the management, finance, cash flow, especially debt repayment ability of issuing businesses.
Mainly to roll over debt?
In the face of unusually vibrant corporate bond markets, Nguyen Hoang Hai, vice Chair of Vietnam Association of Financial Investors (VAFI), said that in the corporate bond market nowadays, sometimes the implementation of bonds was not really issuing but reversing debts. One-year bond with interest rate of 14 percent was impossible.
A few days ago, realising the risks, the State Bank of Vietnam (SBV) also issued notices to commercial banks on reviewing and controlling corporate bond investment activities. In particular, SBV strictly prohibited activities of buying corporate bonds to reverse debts.
Nguyen Tri Hieu, financial expert, said that the bank’s corporate bond purchase was similar to the bank’s direct lending business and must add this debt to the bank’s credit growth. If banks only considered bonds as investment assets and did not count on credit indicator to avoid bad debt, it was not affected by SBV’s ratio of short-term capital used for medium, long-term loan. That was dodging the law.
The director of a medium-sized joint-stock commercial bank that did not invest in corporate bond said that the bank’s purchase of corporate bonds was strictly regulated by SBV to avoid dodging law and hiding bad debts.
He said that in a positive view, corporate bond issuance was aimed at reducing dependence on bank capital, interest expenses (nine percent to 10 percent per year) were lower than bank loan interests (12 percent to 13 percent per year). And in general, when banks participated in buying corporate bonds, it was also pumping capital into the economy.
Data from the Ministry of Finance showed that the total amount of corporate bonds issued in the first six months reached 116.085 trillion dong, up 74 percent over the same period. In July 2019, the amount of capital attracted through the corporate bond channel reached 6.764 trillion dong and $300 million. By August, according to SSI Securities Corporation data, the total estimated corporate bonds issued was 117.142 trillion dong. Banks alone bought 7.41 trillion dong of real estate bonds and 3.75 trillion dong of other corporate bonds.
“Underwriting” does not mean payment guarantee
Currently, according to regulations, businesses are allowed to issue bonds when they have the minimum operating time of one year; have audited financial statements of the preceding year; have issuance plans approved by competent authorities; pay all principal and interest in three consecutive years before the bond issuance (if any).
This provision created conditions for small businesses to mobilise working capital and develop production. However, under the current conditions of Vietnam, small individual investors will be most at risk.
Nguyen Thi Kim Oanh, Chairwoman of Vietnam Bond Market Association (VBMA), confirmed that some individual investors had analytical skills and accepted high risks, along with high interest rates when choosing corporate bonds. However, some still confused that, when a securities company issued underwriting, those bonds were issued by the securities company and the parent bank issued the guarantee.
In fact, Nguyen Xuan Minh, Chair of the Board of Members of Techcom Securities Joint Stock Company (TCBS) said that the term “underwriting” was understood as when the security company guaranteed the best efforts to issue, the company would not commit to buy out when it was not issued; nor did it mean “guarantee payment” for investors to buy bonds.
Nguyen Xuan Minh also shared that in underwriting contract, the securities company must consider the issuance documents and take full responsibility for the accuracy of such information as: Business strategy, financial situation, plan of using bond capital, debt repayment plan, etc.
Financial statements usually represented only 20 percent to 30 percent of the overall. For example, when building a new factory, it was necessary to consider the installation progress, the accuracy of machines, the operating skills, etc. There were even businesses that no longer had bonds but still had to watch.
Corporate bonds are risky, not bank deposits
Chairwoman VBMA Nguyen Thi Kim Oanh emphasized when asked what recommendations to bond investors. According to Oanh, not only based on interest rates, professional or individual investors must also fully analyse, consult the issuer and the issue adviser to identify risks, then decide to invest.
The proportion of individual investors putting money into bonds currently accounted for more than six percent (the rest were professional and institutional investors). According to expert Nguyen Tri Hieu, with individual issuances, businesses only needed to open a conference at a hotel to attract investors. Recently, many banks and securities companies stood out as agents to buy in bulk and then resell to individual investors with the minimum purchase amount of only 10 million dong.
Nguyen Tri Hieu analysed that was only a debit note. When an investor purchased it, it was a civil transaction. It would not have to go through the Securities Commission when it issued separate bonds. Because the Securities Commission could not control it, the risk was higher. It was the absence of a credit score for the bond and the bond issuer. If the business used the capital for the wrong purpose, or the business lost money leading to bankruptcy, the bondholders were the ones who suffer.
In order to control risks for investors, make the bond market healthy, and become an effective medium and long term capital mobilisation channel for the economy, VBMA Chairwoman said that the Association would continue to control issuing and issuance consulting firms that must comply with the law. VBMA would also study foreign markets, from the selection and evaluation of issuers; advising on conditions for getting bonds; disclosure of investor information; ensure credibility, etc.
In the coming time, VBMA would work with regulatory agencies to participate in amending the Securities Law and legal documents to make the market more standard and transparent. At the same time, VBMA would make efforts for foreign credit rating agencies to soon create a credit rating company in Vietnam, contributing to establishing order in the market.
