|Phung Xuan Minh - Chairman of the Board of Directors, Saigon Ratings |
From 2017-2021, Vietnam’s bond market climbed by an average of approximately 25 per cent per year. The bond market’s rapid ascent is very unusual, characterised by a lack of stability and security, with the vast majority of corporate bonds issued privately, about 96 per cent.
Public bonds only make up a negligible fraction (around 4 per cent) of the market, the polar opposite of developed markets, which consist primarily of public issuance and professional investors. Nonetheless, bond issuance figures during the first eight months of 2022 reveal a dramatic decline in market size, volume, frequency, and total value.
Bond issuance dropped drastically across the board in the first eight months of 2022, and the banking sector and the real estate sector account for the bulk of the total value.
Real estate developers saw a significant decline in their bond issuance value this year, down 76.7 per cent compared to the same period of 2021.
The root cause is Decree No.153/2020/ND-CP, which prohibits firms from issuing individual bonds to invest in the form of capital contribution, share acquisition, purchase of contributed capital or other enterprises’ bonds, or loans to other enterprises. Furthermore, the unprecedented cancellation of Tan Hoang Minh’s private bond sales damaged investor confidence and added fuel to the fire.
Both bond issuers and investors are taking a wait-and-see approach, at least until a new decree is published.
Our figures show that maturing corporate bonds from now to 2024 are projected to reach VND256 trillion ($10.8 billion). Thus, real estate businesses are compelled to pursue other methods of capital mobilisation, resulting in a precipitous decrease in bond issuance.
However, Saigon Ratings believes that real estate enterprises will need to issue bonds in the near and medium term to continue executing investment plans to develop projects on the pipeline or locate other financial sources to pay maturing debts.
In mid-September, Decree No.65/2022/ND-CP amending and supplementing Decree 153 on private placement of bonds was officially issued.
We anticipate that the government will maintain its strategy of updating and altering the Law on Securities in the near future to progressively strengthen the legislative framework and boost the market’s transparency and safety.
With the issuing of Decree 65, we anticipate that the bond market will rebound by early 2023 at the latest. The new decree is set to close the corporate bond market’s legal loopholes while providing a stricter, clearer and more transparent framework for state management agencies to monitor and sanction illegal acts of market participants.
Meanwhile, this also lays a concrete foundation for credit rating agencies as it imposes mandatory rating activities while protecting investor interests. Consequently, it will continue facilitating medium- and long-term investment capital flows for businesses.
On the other hand, we forecast that the banking sector will be the market’s leading issuer soon. The number of bonds issued in the first eight months of 2022 was about $4.4 billion, with issuance picking up steam as the year nears its close.
The banking sector was the only industry where the number of bonds issued did not fall significantly. We believe this tendency will persist and strengthen as demand for loans is anticipated to grow, based on the amount of debt coming to maturity.
In addition, Vietnam’s sovereign rating positive upgrade by Moody’s also bodes well for the country’s potential to attract investment from local and foreign businesses. Increased capital requirements are anticipated.
According to our estimation, the total value of bonds due by the end of 2022 is projected to hit $3.3 billion, with the real estate sector and banks accounting for 43 and 23 per cent, respectively.
Numerous real estate companies do not fit the criteria for bank loans, so they resort to issuing bonds with high-interest rates, even without collateral. During August and the first half of September, Fuji Nutri Food was the sole real estate firm to issue bonds.
The pressure of debt repayment is looming, but the cash source from real estate businesses remains a tough nut to crack
With Decree 65, we expect state management to become tougher and more effective, and the market will move in the proper direction.
The impact of the restricted credit line and the value of bonds expiring are causing widespread concern across the banking sector. If loan payments are consistently missed, bond issuer creditworthiness may suffer and may even be classified as bad debt.
This raises the question, will real estate bonds default? Lately, some commercial banks have been granted additional credit lines. However, banks sometimes struggle to provide the necessary capital due to stringent regulations and terms for businesses, so bond issuance still remains an efficient channel for them to raise funds.
To satisfy their short, medium, and long-term investment and growth goals, businesses need to actively plan for adequate lending and capital mobilisation.
Decree 65 will reduce the danger of capital imbalances in the financial system, and banks may benefit from this new regulation. Additionally, we believe risk premium is lower for businesses that boast a strong financial background. The compulsory ratings laid out in Decree 65 are predicted to reduce the information gap between issuers and investors, ensuring market transparency.
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