Booming corporate bonds
According to SSI Securities Company data, by the end of November 2019, the amount of corporate bond issuance was about 237 trillion dong (equivalent to $10 billion), 5.8 percent higher than the whole of 2018.
In particular, commercial banks issued 94 trillion dong, accounting for 45.5 percent of the whole market. Real estate businesses followed with a total of 71.312 trillion dong, contributing 34.5%.
It can be said that in 2019, the corporate bond market entered a period of “boom”. Credit growth has been increasingly strictly controlled, medium and long-term loans are tightened, so capital mobilisation through banking channels decreases. To meet the demand for capital, businesses turned to bond issuance. Moreover, the current regulations on corporate bond issuance are quite clear, in which only businesses with audited financial statements are entitled to issue bonds.
According to statistics, 44 out of 108 large enterprises in the real estate sector have issued bonds in 2019. If the average interest rate of banking group bonds is only 6.5 percent per year, the group real estate up to 10.24%. This interest rate is considered to be much more attractive than that of savings. The interest rates of loans for medium and long-term are at 11-13 percent per year. Access to this kind of loans is not easy as the applicants must go through rigorous application evaluation, then subject to supervision on disbursement and use of capital. Meanwhile, corporate bond issuers do not suffer from these constraints. Therefore, many businesses have stepped up issuing bonds with high interest rates, especially enterprises in the field of real estate.
In addition, there are signs that businesses issue more bonds to repay bank debts. In fact, there are many corporate bonds bought out by banks. Therefore, many speculate that businesses have bank debts, but they are unable to pay on due. For a long time, it will become overdue and bad debt. To solve this problem, there is only one way to issue corporate bonds and lending banks to buy their bonds. As such, both parties will benefit. Businesses will have money to pay bank loans on time, and banks do not suffer from rising bad debts.
This is why businesses step up bond issuance. It is estimated that at the end of 2019, the corporate bond market will reach about 260 trillion dong, an increase of about 7 percent compared to 2018.
Risk aversion
The corporate bond market that increases fast also contained many risks. According to economic experts, the most worrying is that the information transparency of many Vietnamese enterprises is not high. Therefore, investors may face risks when buying bonds of unprofitable and inefficient businesses.
In addition, many Vietnamese enterprises have limited financial capacity, inadequate business projects or plans, and low payback. Not to mention, accounting work is not professional with low management level. Many businesses are still afraid to publish information, even hide information, and report unclear financial information, while transparency is one of the important conditions.
Moreover, businesses that issue bonds are not monitored for disbursement and capital usage, so the source of capital mobilised is not clear whether businesses invest in the project or use it to do other things, which is difficult to control.
With bonds issued by real estate businesses, there are usually collaterals in the form of land use rights. But whether land use rights matter, it is difficult to evaluate. Whether the land is in dispute, how legally, has the company used to borrow capital or contribute capital to any partner, has it been used for other transactions, and how has the land price been assessed?
Furthermore, real estate inventory is very large, many products are launched but not sold because it is related to the ability to repay debts to bond investors.
Authorities had to issue a warning to investors. In mid-2019, the State Bank of Vietnam (SBV) issued a written request to commercial banks to tighten investment activities of enterprise bonds, especially bonds of real estate businesses. In particular, the emphasis will be on strictly handling law violations related to enterprise bond investment activities.
At the end of November, the Ministry of Finance (MoF) also warned that corporate bond investors, especially individual investors, should not buy corporate bonds just because of high interest rates. With corporate bonds, debt instruments were issued by businesses, on the principle of self-borrowing, self-repayment, and self-responsibility for the efficiency of capital use. While the ability to pay debts of businesses depended greatly on the financial situation and business results. Therefore, investors needed to consider and assess risks before making decision.
Some of those risks, according to the MoF, are: businesses cannot carry out the terms and conditions of bonds due to their insolvency; failing to make full and timely payment of bond principal and interest; failing to fulfil commitments with investors on repurchasing bonds before maturity.
Besides, the maximum rate of short-term funds used for medium and long-term loans is also reduced, according to the latest regulations of SBV. Specifically, from January 1st, 2020, the rate will return to 40%, after two years of reducing the roadmap, until October 1, 2022 to 30%. This will make it harder to borrow mid and long term loans from banks, with higher interest rates.
Thus, businesses will have to mobilise capital from other channels such as issuing shares and corporate bonds. The corporate bond market in 2020 is forecasted to continue to be bustling with attractive interest rates than deposits.
However, economists recommend that, in order to buy corporate bonds, investors need to be aware of the information: bonds issued by any enterprise, brand, and reputation of that enterprise; release purpose; type of collateral; whether the bank guarantees payment; commitment of the issuing entity to bonds; term and method of repaying principal and interest; financial situation and use of capital from issuing bonds of issuing businesses.
