The last few months of this year will witness a bumpy road for real estate businesses with heavy mature bond burdens.
According to projections made by Vietcombank Securities Company (VCBS), a large number of corporate bonds will mature over the next couple of years. Some $6.74 billion worth of corporate bonds are to become due before the end of this year. Specifically, real estate businesses account for 44.8 per cent of the figure, while credit institutions make up for 29.4 per cent.
|Careful bond maturation action urged, illustration photo
“The volume of corporate bonds maturing in 2023 and 2024 is estimated at nearly half of outstanding bonds, which may entail the need for issuance to ensure the capital needs of businesses in the market. Maturity volume and ability to pay principal and coupon, as well as the ability to raise capital, will be factors to watch in the coming time,” Tran Minh Hoang, head of Research at VCBS, told VIR.
Hoang elaborated by saying that there is still time for businesses to prepare capital and resources before bond maturity.
Meanwhile, private placement is still the most popular approach, accounting for 90 per cent of total placement and offerings, because of strict requirements on public and international offerings. The enterprises choosing public placement are banks while those who offer bonds internationally are conglomerates such as Vingroup and Novaland.
According to KB Securities, credit institutions, securities companies, investment funds, and insurance groups are the main buyers of initial bond offerings, while retail investors only account for 10 per cent due to restrictions on resources and approaching barriers.
“Despite increasing significantly during the past few years, Vietnam’s corporate bond market scale is still relatively small in terms of outstanding credit balance/GDP in comparison to that of Thailand, Malaysia, or Singapore and well below the current target of the government. In general, the default risk posed to the economy is still not imminently troubling,” KB Securities noted.
It is expected that over the next month or so, the State Bank of Vietnam will expand the credit room for the banking system to fulfil the target of 14 per cent credit growth in 2022, it added. “The cash flow of real estate companies will be positively affected by this occurrence to some extent, as businesses now have access to other funding mechanisms to help them satisfy their bond repayment obligations. However, only businesses with fresh projects and high-quality assets should choose this course of action,” KB explained.
Issuing new bonds may be a bumpy experience due to stringent legal frameworks and lower demand. In terms of policy, the fifth draft amendment to Decree No.153/2020/ND-CP regulating the offering of corporate bonds was recently announced with changes in the direction of further tightening for issuers and investors. The proposal, if approved, would prevent financially strapped businesses from issuing bonds.
The real estate sector ranked second in terms of value despite experiencing a sharp drop in recent times. Apart from Vingroup’s $500 million international bond offering, the placement value in 2Q is equal to only 16 per cent of that during the same period the previous year. The total corporate bond value over the total outstanding credit balance fell from 15.2 per cent by the end of 2021 to 14.2 per cent by the end of June this year, equivalent to the drop of total corporate bond value over GDP from 18.9 to 18.3 per cent.
According to the Ministry of Finance, many enterprises exercised bond buybacks prior to maturity with values amounting to $2.7 billion. Particularly, the Q1 bond buyback value stood at $556.5 million while that of Q2 rose sharply to $2.13 billion after the Tan Hoang Minh auction withdrawal debacle in Ho Chi Minh City at the start of the year.
Hoang of VBSC noted, however, that the Vietnamese corporate bond market should develop at a stable pace, contribute to promoting economic development, and fulfil the strategic goals of the capital market for the rest of the decade.
“The new legal documents will create the foundation for the development of the market. This means that in 2022, the market will gradually move to a stable growth phase,” Hoang highlighted. “A new set of legal documents will provide the groundwork for a healthy, stable market and private placement will still be the primary type of issuance. On the other hand, it will take more time for the market to be familiar with credit rating services.”
The last few months of 2022 and 2023-2024 will be a difficult period in terms of cash flow for real estate companies with heavy mature bond burdens.
Especially for small- and medium-sized enterprises with low asset quality, they will face many difficulties in finding capital to rotate. Bank loans will be difficult to access; capital from bond issuance is to be tightened; and the absorption of the real estate market in 2023-2024 is not high due to the environment of rising interest rates and the risk of the economic recession.
Regarding large real estate developers, the level of difficulty will be at a lower level thanks to having better quality projects and more ability to raise capital. However, due to the need of raising new money flows to pay the maturity obligations of the bonds issued in previous years, these groups have also had to constantly accumulate and implement new projects to be able to raise more debts despite periods of rapid market growth.
This will also cause an imbalance in cash flows and deteriorate operational efficiencies in the coming years.Source: KB Securities.
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