Clearing path for safer corporate bond market

Vietnam is being urged to foster a more transparent bond market. Photo: Le Toan

The revisions in question pertain to issuance regulations and September’s implementation of Decree No.81/2020/ND-CP, which revises some conditions in Decree No.163/2018/ND-CP on the issuance of corporate bonds.

By industry, realty businesses were the most active bond issuers in the first half of 2020, accounting for 35 per cent of the aggregate issuance amount, versus only 16 per cent in the same period of 2019. In the same period, the issuance value of real estate increased by 197.6 per cent on-year, of which the top three issuers were Vinhomes JSC, TNR Holdings JSC, and Sovico Holdings.

Corporate bond issuance in the first nine months doubled year-on-year to approximately $14 billion, equaling to 12.6 per cent of Vietnam’s GDP. Success rate of bond issuance has also witnessed an upward trajectory, of which the strongest was the real estate sector when it increased from 87.5 per cent in 2019 to 97.2 per cent in nine months of 2020.

“Amid unfavourable market conditions for new share issuance, listed companies have been issuing bonds as an alternative to capital mobilisation from stock markets, with new bond issuances soaring nearly 70 per cent on-year,” said Tran Nguyen, analyst at Mirae Asset Securities. “Rising financing demand after the lockdown period was in line with our expectation. We expect a revival of new issuances by corporates in the rest of the year to finance business recovery, fuelled by tightening banking credit standards for new loans.”

Experts calculate that the average interest rate of corporate bonds issued primarily range from 10.1-11.2 per cent per year for a period of 1-5 years. Thus, compared with the most competitive deposit rates, corporate bond yields are currently 0.8-1.7 per cent per year higher. Depending on the terms, corporate bond yields are also 1.8-4 per cent higher than the deposit rates of large commercial banks.

After Decree 81 took effect in September, brokerage SSI stated that private placements will drop sharply, and most of the businesses that need to make issuances will have to convert to public distribution.

Chairman of Ho Chi Minh City Real Estate Association (HoREA) Le Hoang Chau said that issuing bonds is a very effective channel for real estate businesses to mobilise capital from society and reduce their dependence on banks.

When issuing bonds, businesses often offer interest rates from 12-14 per cent, especially businesses that bring the bond issuance interest rates up to 18-19 per cent. With such high interest rate, there will be potential risks for the real estate market and for investors.

“In addition, the corporate bond market is not really transparent. Control mechanisms are not effective enough for private corporate bond issuance and transactions as there are not many qualified consulting units to evaluate the credit rating of bond issuers or assess the feasibility of bond issuance plans,” Chau explained.

Experts from law firm LNT & Partners noted in October that the outstanding amount of corporate bonds in the form of private placement (including the anticipated number of bonds to be issued) must not by five times exceed the equity of owners at the time of the issuance in accordance with the most recent quarterly financial report. Credit ratings can help issuers to secure more favourable terms including longer tenors and lower credit spread. This lowers borrowers’ cost of capital and spurs economic growth.

“However, ratings are sparse because Vietnam lacks a dominant domestic credit rating agency. Two agencies have been licensed, but both are nascent,” said Donald Lambert, principal private sector development specialist at the Asian Development Bank.

Elsewhere, domestic credit rating agencies have partnered with global rating agencies to gain that credibility and Vietnam should follow suit, according to Lambert.

HoREA’s survey showed that it is within reason when over 80 per cent of real estate businesses still issue bonds within 3-4 times of equity and leave interest rates between 10-12 per cent per year.

Nguyen Thien Quan, general director of Southeast Housing Development Company, reaffirmed that although it is only an auxiliary channel, corporate bonds are now becoming the major capital mobilisation channel of the business to lure more funds for project development.

Apec Group recently issued bonds to mobilise up to VND3 trillion ($130 million) named Happy18Bond, with coupon rates of 18 per cent. This has been attracting the attention of the market and investors, especially in the ongoing difficult economic context. With the abnormally high annual interest rate of 18 per cent, Apec is leaving other property giants in the shade. For instance, Novaland Group offers coupon rates of 10-11 per cent for its corporate bonds, while City Garden does 13 per cent, Phat Dat Real Estate 10-14 per cent, TNR Holdings 10.9 per cent, and Phu My Hung 7.15 per cent.

Currently, many investors are not able to analyse the financial situation of bond issuers, with this intangible creating great risks for the economy as many corporate bonds can turn into bad debts.