Bond repurchases to help prop up cash flow situation

Commercial banks are authorised to procure corporate bonds to supplement their working capital, Photo: Le Toan

According to the Vietnam Bond Market Association, the total volume of corporate bonds maturing in 2023 is around $12 billion. Given the current challenges faced by many issuers, particularly real estate companies, in maintaining adequate cash flow and the significant resale demand from bondholders, financial institutions participating in the repurchase of corporate bonds are expected to be a significant source of support.

“The draft amendment to Circular No.16/2021/TT-NHNN is aligned with the tenets of Decree No.08/2023/ND-CP, which enables credit institutions to procure corporate bonds to supplement their working capital. Furthermore, credit institutions are authorised to repurchase corporate bonds that were previously issued and sold between now and the end of 2023 to alleviate the burden arising from their distribution to investors when the issuer lacks the resources to repurchase them,” according to a BSC market report on March 28.

In tandem with this, the State Bank of Vietnam (SBV) has formulated more stringent criteria encompassing factors such as the debt-to-equity ratio, non-performing loan ratio, monitoring of capital usage purposes, and the absence of bad debt to enhance the safety of corporate bond procurement.

“This change has the potential to alleviate the pressure of maturation in 2023. However, the impact of the SBV’s initiative on this market remains restricted and requires a comprehensive resolution, with the involvement of multiple ministries and agencies in the future,” BSC recommended.

Similarly, as per a report by ACBS, the proposed draft is expected to have a positive impact on the corporate bond market by enhancing the appeal of corporate bonds to banks and consequently improving liquidity within the market.

“It is noteworthy that banks currently represent the most significant bondholders, with their holdings accounting for approximately 34 per cent of the total outstanding corporate bonds,” the report said.

However, ACBS has projected that the draft’s impact on the banking system will likely be marginal, considering that the outstanding corporate bonds represent a mere 2.5 per cent of the total credit outstanding of banks.

In the same vein, industry experts contend that the proposed changes may require more far-reaching revisions. As per the current draft amendment, commercial banks are authorised to procure corporate bonds to supplement their working capital, specifically for short-term periods of less than one year. However, business analysts have noted that issuing bonds with such abbreviated maturities is highly uncommon, with typical durations spanning 5-10 years.

“I see a potential inconsistency in the current scenario. There’s a contradiction in which a bond has already been established, indicating a medium-term maturity of over one year. However, with repurchases intended solely for the purpose of adding to working capital, such an approach lacks coherence,” said Pham Xuan Hoe, former deputy director of the Banking Strategy Institute at the SBV.

Furthermore, while this is highly expected by the market, credit institutions are still not allowed to purchase corporate bonds that have been issued with the objective of restructuring the debts of the issuing enterprises. Experts have evaluated this restriction as potentially limiting the efficacy of debt restructuring activities, contrary to the intent of Decree 8 pertaining to corporate bonds.

“For example, when a bank buys back corporate bonds, and it becomes a bad debt, we have regulations on restructuring bad debt. We don’t need to make a separate provision in terms of buying back bonds,” said Vu Duy Khanh, director of Investment Analysis at SmartInvest Securities.

Meanwhile, representatives from the real estate industry have put forth a proposal suggesting an extension of the effect of corporate bond redemption until the end of 2024, instead of only 2023 as stated in the revised draft. The reason for this proposal is that the issue of bond maturity is not limited to this year alone.

According to Le Hoang Chau, chairman of Ho Chi Minh City Real Estate Association, the total value of real estate bonds due between now and 2024 may amount to VND230 trillion ($9.8 billion).

“Therefore, it is recommended to temporarily suspend implementation until the end of 2024, so that businesses can engage in negotiations with bondholders to resolve mature bonds in compliance with the spirit and provisions of Decree 8,” Chau said.

Nguyen Quang Thuan - Chairman, FiinGroup There is an urgent need to refinance or restructure the corporate bond debt, which has not been addressed in the current draft, in the context of a steady increase in bond defaults. Currently, the default ratio of corporate bonds accounts for 12 per cent of the total value of outstanding non-bank bonds, with real estate bonds alone showing a late payment ratio of 20.17 per cent as of March 17, with a strong upward trend. Thus, if the proposed draft amendment to Circular 16 remains unchanged, it will have limited impact on resolving the issue of corporate bonds, particularly in real estate credit. This could also increase pressure on non-performing loans at commercial banks in the near future if not restructured. Despite being a technical measure in dealing with the current situation as the credit quality should be ultimately based on the possibility of the cash flow outlook, but the current outlook does not suggest any significant improvement. This situation can have a spillover effect on the credit quality of banks. Late payments on bonds can indicate the likelihood of late repayment of bank loans. To resolve the current corporate bond problem and reduce the risk of bad debt for banking credit, specific evaluations and policies must be implemented. The question remains whether banks can still increase their exposure to corporate bonds, including real estate credit. Out of the total number of non-bank corporate bonds, 28 listed banks own approximately VND253 trillion ($10.78 billion), accounting for around 29 per cent of the total bond value in circulation. Currently, the proportion of corporate bonds owned by banks accounts for approximately 2.95 per cent of the total credit balance of 28 listed banks as of the end of 2022. However, the total bank credit to real estate investors/traders reached VND807 trillion ($34.4 billion) by the end of 2022 (according to data from the SBV), accounting for approximately 7 per cent of the total credit balance of the entire system. In general, banks are the primary investors and market makers in the corporate bond market in any country. In Vietnam, credit institutions account for approximately 44-45 per cent of the total value of outstanding corporate bonds, including bank bonds, on the secondary market two years before 2021 and 2022. In other Asian countries, credit institutions own corporate bonds at approximately 20-50 per cent, while in Thailand, banks participate less in corporate bonds (only 4.9 per cent as of July 2022), with individual investors owning a large share (36 per cent), while funds, investment funds, pension funds, and insurance companies own the rest. It is important to note that in Thailand, not only professional individual investors but high-net-worth investors can also directly own individual corporate bonds. However, these bonds are quite transparent and non-bank institutional investors must invest in rated bonds only, so they do not have a similar problem to Vietnam right now.

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Bond rule tweaks loosen constraints To address issues of transparency and investor protection, the government has issued a new decree that introduces several key changes to the regulatory framework for corporate bonds in Vietnam.

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Clearing up the liquidity issue through amendments According to the Vietnam Bond Market Association, VND309 trillion ($13 billion) worth of bonds will mature in 2023, including VND119 trillion ($5 billion) issued by real estate enterprises. Most bond issuers, especially those operating in the real estate sector, will likely default on their obligations as they suffer from the poor liquidity in the real estate market and the loss of investor confidence.

500 bond codes issued by TCBS have been paid in full and on time From the beginning of last year to March 2023, about VND113 trillion ($4.79 billion) of bonds and principal due, corresponding to nearly 500 bond codes issued by TCBS, have been paid in full and on time.