Corporate bond ban may set back M&A progress

The upcoming bond changes will push enterprises towards issuing shares, photo Le Toan

From January 15, 2022, credit institutions will not be allowed to purchase such bonds for issuance in contributing capital or snapping up shares. The move is contained in Circular No.16/2021/TT-NHNN which regulates the purchase and sale of corporate bonds by credit institutions and branches of foreign banks, which was issued by the State Bank of Vietnam last month.

The regulation raises concerns because it will impact the capacity to mobilise capital for enterprises. At present, capital for merger and acquisition (M&A) transactions is almost always mobilised from bank loans, investment funds, or money from issuing shares and bonds on stock exchanges.

“This regulation will be a big barrier for enterprises to mobilise capital for M&A transaction, while the circular does not contain a stipulation for limiting other risky capital-using purposes,” a representative of The PAN Group told VIR. “When the circular comes into effect, a lot of enterprises will have to mobilise capital by issuing shares, which is a less effective way, or may look for ways to sneak around the regulation, which will just cause more difficulties in monitoring transactions.”

Local rating firm FiinRating’s insight analysis of the Vietnamese corporate bond market showed that with large long-term capital demand and the tightening of traditional credit channels, bonds will continue to be a vital medium- and long-term source of capital for real estate businesses if they want to acquire unfinished projects or cooperate with partners to develop new ventures.

On December 12, real estate developer Danh Khoi Group succeeded in issuing a batch of bonds worth VND1.6 trillion ($70 million), which will be used to implement capital contribution and share acquisition activities. On the same day, Sunshine AM JSC, a member of Sunshine Group, also issued corporate bonds worth $43.5 million, which will be used for M&A deals.

In late November, Novaland issued a bond volume costing the same amount, a part of which will be used to contribute capital with partners to develop the Cu Lao-Phuoc Hung urban project located in the southern province of Dong Nai.

In general, large-scale real estate developers are backed by banks to become partners, such as Techcombank and Masterise, VPBank with MIK, and HDBank alongside Phu Long.

Statistics published by SSI Securities Corporation showed that in the first 11 months of 2021, corporate bonds have been the key capital mobilisation channel for enterprises with 826 issuances and a total valuation of $21.5 billion. Credit institutions and real estate companies are the two groups issuing the largest bonds, making up 34 and 27.7 per cent, respectively. The remainder comes from commerce, services, and securities companies.

Although issuing corporate bonds is an effective capital mobilisation channel, major incidents heighten risks and force the authorities to be on alert. Earlier this month, Prime Minister Pham Minh Chinh asked the Ministry of Finance to check the bond issuance and the usage of capital mobilised from this channel, especially the issuance of individual bonds of real estate companies and banks with relationships with property companies.

Responding to this, Truong Hien Phuong, senior director at KIS Vietnam Securities Corporation, said that issuance of bonds is a debt tool.

“If enterprises manage and use money inflows effectively, and their M&A transactions go smoothly, they will not have to be so concerned about these debts. However, if enterprises do not have enough capacity, they cannot complete such deals despite having enough capital. Furthermore, when transactions do not bring the expected benefits, enterprises will be hard-pressed to arrange money flows to pay interest,” Phuong said.

FiinRatings’ analysis showed that considering the residential real estate companies that have listed their shares, bonds currently account for about 46 per cent of their total debts, indicating that bonds play a very important role in the capital structure of real estate companies.

Notably, since the majority of real estate corporate bonds are issued by unlisted companies, FiinRatings believed that the proportion of corporate bonds in the real estate industry in the whole market will be much larger.