Investors tip-toeing around real estate risk

April 19, 2022 | 11:00
Vietnam is moving towards developing a balanced capital market and reducing the pressure on capital supply for banks – a process that requires dealing with internal problems such as corporate bond issuances as well as land-right auctions.

Financiers’ fears of losing investments partially eased last week, as Tan Hoang Minh Group announced it would refund a total value of around $435 million from the nine bond issuances cancelled with Decision No. 181/QD-UBCK from April 3 of the State Securities Commission (SSC).

However, the group is still required to pay mature debts in 2022 and 2023.

The SSC’s announcement on April 4 stated that nine bond offerings from July 2021 to March would be cancelled, affecting Tan Hoang Minh Group’s Viet Star Real Estate Investment Co., Ltd., Winter Palace JSC, and Soleil Hotel Service and Investment JSC.

Excluding the payables collected from the bond issuances, these three companies had liabilities of more than $634 million, as of December 31, 2020.

Investors tip-toeing around real estate risk
Investors tip-toeing around real estate risk. Photo: freepik.com

High interest

Corporate bonds continue to be an attractive financial tool in real estate, even if they come with high risk.

According to the Vietnam Bond Market Association, in the first two months of 2022, the market recorded eight issuances of corporate bonds to the public, with a total value of nearly $240 million, as well as 26 separate issuances with a total value of around $965 million.

The total value of corporate bonds issued privately was four times higher than the value issued to the public, with real estate alone accounting for nearly 60 per cent of the value and volume.

On financial websites, bonds of many real estate businesses always maintain high interest rates of around 10-11 per cent per year. In 2021, the companies under Tan Hoang Minh Group were mobilised with interest rates of up to 12 per cent per year – nearly three times higher than common bank interest rates.

The debt burden of real estate businesses in Vietnam threatens to impact the national economy if companies remain unable to repay or at least mature. The latest report from credit rating company FiinRatings shows that the outstanding bond balance of real estate businesses that must mature in the next 2-3 years amounts to about $6 billion.

About 73 per cent of these must meet the maturity point between 2022 and 2024. This not only creates great debt repayment pressure on the businesses but also affects the liquidity risk of distribution agents that commit to buying back bonds, which are financial institutions, securities companies, and banks.

Worse still, debts in VND are not the only problem. According to FiinRatings, outstanding loans in foreign currencies, including bonds of listed Vietnamese real estate companies, stand at around $4 billion. This number could have a significant impact on the economy and the overall growth of the industry.

FiinRatings warned that the situation could also affect Vietnam’s score in the international capital market, resulting in higher interest rates and reducing the competitiveness of domestic enterprises in relation to foreign-invested ones.

At the end of 2021, the scale of the bond market amounted to around $10.4 billion, accounting for only 2.16 per cent of total profitable assets and 2.63 per cent of the total outstanding credits of commercial banks in Vietnam. Based on these figures, FiinRatings believes that the current events in the market are unlikely to impact the credit quality of the commercial banking system.

However, many investors are increasingly worried and more focused on the debt repayment capacity of real estate businesses.

A representative of a local firm, who wished to stay anonymous, said, “Many companies bet on the increase of real estate prices, especially those that rely on loans and overpayments in land auctions.”

Low financial health

Nguyen Thi Thanh Tu, senior analyst at SSI Securities JSC said, “Difficulty in accessing credits is one factor driving the demand for capital mobilisation through bond issuances for many real estate companies.”

The number of issuing real estate companies increased from 141 enterprises in 2020 to 193 enterprises in 2021.

“The quality of their collateral is usually not high and they must maintain better interest rates than other sectors to attract investors,” Tu said.

In 2021, real estate bonds had an average interest rate of 10.36 per cent per year, down 0.3 per cent from 2020. The average maturity period in the last two years was 3.5-4 years. Therefore, the pressure to repay the principal gradually increases in the 2023-2025 period.

SSI’s data for 2021 shows that only about 27 per cent of real estate businesses participating in the bond market were also listed on the stock exchange, nearly three times lower than the average of other industries (70 per cent).

Meanwhile, the financial health of most unlisted enterprises remains at a low level. The proportion of enterprises issuing unsecured bonds is also relatively high, accounting for about 15.8 per cent of all issuers.

The government last week directed authorities to correct the bond market through tight control policies. However, stricter policies could limit the freedom to raise capital for businesses, possibly also affecting overall economic growth.

The Law on Securities 2019 and the Law on Enterprises 2020, as well as their guiding decrees, have regulated the separate management between the private placement and the public issuance of corporate bonds. Privately-issued corporate bonds may only be sold to professional securities investors with self-borrowing, self-paying, and self-responsibility.

Official Dispatch No.304 of the prime minister issued on April 7 directs the Ministry of Public Security, the Ministry of Finance, the State Bank, and relevant agencies to verify and strictly handle violations; regulations on the issuance, investment, and use of corporate bond capital; closely monitor developments in the financial and monetary markets; and supervise these activities.

In 2021, the total domestic corporate bonds issued reached over $28.6 billion, up 42 per cent. The market witnessed over 1,000 offers, 2.8 times higher than in 2020. This year, there were already four international issuances with a total value of $1.4 billion.

On April 3, the State Securities Commission issued Decision No.181/QD-UBCK to cancel nine offerings with a total value of over $430 million. At the same time, the authority requested to cancel bond issuances of Viet Star, Winter Palace, and Soleil of Tan Hoang Minh Group as they allegedly failed to disclose truthful information or concealed these in private bond issuances.

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Ho Duc Phoc - Minister of Finance

Investors tip-toeing around real estate risk

The corporate bond market has experienced strong growth, but there are still gaps that need to be addressed. If a business suffers a loss, with bad debts but little capital and no collateral, but still issues bonds, it will greatly affect investors and the economy.

To improve the legal framework, the Ministry of Finance (MoF) is proposing to amend Decree No.153/2020/ND-CP governing corporate bonds in the domestic and international markets to tighten the conditions on the issuance of corporate bonds without collateral and ensure transparency.

At the same time, it is recommended that the government and the National Assembly continue to amend the Law on Securities and the Law on Enterprises.

The MoF will continue to strengthen the management and supervision of activities related to the issuance and provision of services on corporate bonds from securities companies and related service providers to detect and strictly handle violations, ultimately enhancing market transparency and ensuring that the corporate bond market becomes a feasible capital-mobilisation channel for businesses.

Do Ngoc Quynh - General secretary, Vietnam Bond Market Association

Investors tip-toeing around real estate risk

The corporate bond market is hot and conceals many consequences for investors. Therefore, for businesses that do not comply with the conditions of such offerings, regulatory authorities need to quickly terminate these and require the business to buy back the bonds. In case an enterprise does not immediately redeem the bonds, state management agencies should immediately expedite legal procedures to handle the assets.

Corporate bonds issued in the market, whether privately or publicly, require a competent financial intermediary to monitor the compliance of the business with the offering conditions. They are also responsible for legal procedures, ensuring the interests of investors.

In developed markets, the corporate bond market is not open to small- and medium-sized enterprises, due to limited transparency. Businesses that want to participate in the bond market must meet certain criteria and conditions on the quality of the issuer, such as the operation scale, reputation in the market, and management capacity.

Assoc. Prof. Dr. Dinh Trong Thinh - Academy of Finance Ministry of Finance

Investors tip-toeing around real estate risk

Currently, there are many documents regulating the issuance of corporate bonds on the market. Yet, the loose management has led to risks, creating loopholes for unlisted companies to issue without collateral, credit rating, and payment guarantees, causing great risks for investors. The issuance of bonds is not in accordance with international standards, affecting the capital mobilisation of businesses, which is necessary for economic recovery.

The financial value of bonds is closely related to the financial capacity of a business. Unqualified bonds issued not according to the state’s regulations are highly risky, and investors may even lose the entire investment if the business cannot repay the loan’s interest.

Change is necessary, starting with policy and the mechanism for issuing corporate bonds, including regulations on supervision and sanctions to handle violators. Bond-issuers are subject to the state’s regulations on auditing regimes and accounting reports. They must also be transparent with their finances and must have assets as security when issuing bonds.

By Hai Van

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