Corporate bond activity welcome as market shocks persist unabated

June 03, 2020 | 08:00
The recent skyrocketing demand for corporate bonds, fuelled by lowered interest rates and ebb and flow of the economy, has raised questions of high-yield coming with high risks.
1494p20 corporate bond activity welcome as market shocks persist unabated
Corporate bond activity welcome as market shocks persist unabated, illustration photo

Vietnam has witnessed a surge in corporate bond issuances recently, with names such as BIDV, Masan, and TNR Holdings leading the way.

The trend, according to market watchdogs, is a welcome sign amidst volatilities hitting the financial markets as the global slowdown deepens.

“Bond issuance, one of the major sources of capital for businesses, is in accordance with the law. Bank loans cannot be the only permanent source for financing, especially for long-term capital,” said Truong Thanh Duc, chairman of law firm BASICO.

In the first four months of this year, Vietnamese companies issued bonds worth more than VND60 trillion ($2.6 billion), edging up less than 1 per cent on-year.

According to Yuanta Securities, the popularity of raising capital via bond issuance has been increasing, with some new sectors including household and personal products, food and beverages, tobacco, energy, and retail.

Specifically, unlisted firms were the key issuers in the first quarter, despite decreasing by 16.4 per cent on-year. Firms with high issuance value of more than VND2 trillion ($8.7 million) were mainly unlisted.

The spread of the COVID-19 pandemic has triggered simultaneous shocks to the whole economy. As a result, financing demand also experienced a sluggish road, pushing more companies towards opting for high-yield bonds to attract more funds.

“Restrictions from regulators on bank credit, along with loosening regulations on bond issuances, have boosted the development of other channels, particularly corporate bonds,” explained Nguyen Quang Tin, a member of the board of directors at Development Investment Construction JSC.

Given that the rebound in corporate bonds has been driven by increasing corporate demand to raise funds and investors looking for yield advantages, it is essential for local and international players alike to understand the rules, risks, and vulnerabilities evolving in this market.

There are more firms issuing high-yield bonds ranging from 10 to 14 per cent annually, which could be viewed as “pockets of vulnerabilities”.

For example, in the latest case, Hong Hoang Commercial Investment Trading JSC is offering bonds with an annual yield of 20 per cent – an abnormally high yield for corporate bonds.

“Low and falling government bonds yields can trigger a rush to add risk in order to lock in a higher level of yield. This is not bad in itself – as investors, we are paid a return in order for taking on a risk. However, not all risks are the same and some inevitably turn out to be landmines, especially when the economic cycle comes to an end,” noted Manpreet Gill, head of fixed income, currency, and commodity strategy at Standard Chartered Bank.

Meanwhile, the Ministry of Finance last month warned businesses to control their bond issuances. Previously, the State Bank of Vietnam also questioned the credibility of bond investment activities and warned of potential disorderly price moves and losses for investors.

“High-yield bonds often carry high default risks. Investors have to take it seriously when it comes to transparency of financial statements or the legality of upcoming projects of bond issuers,” said Duc of BASICO.

Tran Nguyen, analyst at Yuanta Securities noted, “The overly rapid development of a corporate bond market can cause systemic risks, due to the absence of credit ratings for these bonds.”

Moreover, many buyers are using corporate bonds as an alternative to cash. However, fewer dealers are willing to trade bonds in size, leading to liquidity risk. “If liquidity risk occurs, investors seeking to sell their bonds may not receive a price that reflects the true value of the bonds,” said economist Nguyen Minh Phong.

The corporate bond market has adopted greater transparency following the draft revision of Decree No.163/2018/ND-CP dated December 2018. This draft is likely to take effect with the Law on Securities 2019, on January 1, 2021. Although the revisions did not take effect immediately, the State Securities Commission of Vietnam has begun to tighten issuance regulations this year as follows:

- The total outstanding value via private placement must be less than three times a firm’s equity, according to the latest quarterly financial statements;

- The new issuance must be completed within 90 days from the date of releasing information. The minimum distance between two issuances must be at least six months;

- The direct selling method to investors will be abolished; and

- Only securities companies will be the issuance advisory organisations. In other words, banks and other financial institutions will not act as advisories.

By Luu Huong

What the stars mean:

★ Poor ★ ★ Promising ★★★ Good ★★★★ Very good ★★★★★ Exceptional