The National Assembly Economics Committee has emphasised the recent increase in high-interest rate corporate bond issuance by real estate firms which it says have risks.

Vu Hong Thanh, chair of the committee, mentioned the issue in the report on assessing socio-economic development plans in H1 and the solutions for H2.

He proposed that the Government assess the property bubble and the other risks for the macroeconomy, with thorough analyses on the large-scale corporate bond issuance by real estate firms.

According to the Vietnam Bond Market Association (VBMA), 306 domestic bond issuance campaigns were carried out in H1 with total value of VND186.683 trillion, including 293 private issuance campaigns, worth VND177.098 trillion and 13 public offerings worth VND9.584 trillion.

Commercial banks were the biggest issuers with VND68.113 trillion worth of bonds issued, followed by real estate firms with VND61.988 trillion.

While bank bonds had low interest rates of 3-4.2 percent per annum, real estate bonds, mostly issued by Sovico, Sunshine, BCG Land, Helios, Vinaconex, Tan Hoang Minh and Kinh Bac, had high interest rates of 8-12 percent per annum.

In late July 2021, a real estate firm in Hanoi issued VND1 trillion worth 4-year bonds with interest payment once for every 12 months. The committed interest rate is 11 percent per annum for the first payment period. The interest rate of the following periods is calculated by the average 12-month deposit interest rate of the big four banks plus 4.5 percent per annum.

Brokers are offering 12-48 month bonds issued by many real estate firms at high interest rates, which promise profits of VND50 million higher per annum than interest from deposits.

A HCM City-based business, which provides beauty services, automobile repair and maintenance, karaoke, restaurant chains and real estate, sends messages to individual investors, inviting them to buy bonds with the high interest rate of 18 percent amid Covid-19 and social distancing.

The total value of privately offered bonds in H1 increased by 3 percent over the same period last year.

Under Decree 153 which took effect on January 1, 2021, bond buyers at private offerings must be professional securities investors.

However, Ministry of Finance (MOF) pointed out that in many cases, bonds are distributed not to professional investors.

Some brokers promise to provide the service of obtaining a certificate on professional investors, if buyers want the bonds to be in their names. If not, buyers can sign contracts on investment cooperation, under which bond holders are third parties and they commit to pay interest to buyers.

Some brokers promise to provide the service of obtaining a certificate on professional investors, if buyers want the bonds to be in their names. If not, buyers can sign contracts on investment cooperation, under which bond holders are third parties and they commit to pay interest to buyers.

Commenting about the bond market in the first quarter of the year, SSI’s research team said the central bank’s request to tighten control over lending to risky sectors such as real estate will prompt businesses to issue more corporate bonds, especially businesses which have limited assets to mortgage for bank loans. The interest rates of real estate bonds, therefore, will move up, and will be more attractive than other bonds.

However, SSI has advised investors to be cautious with their investments, because the bonds with no mortgaged assets or mortgaged with shares have high risks.

A finance expert said many real estate firms are facing difficulties in cash flow. They have no other choice than to issue corporate bonds in many campaigns to maintain positive cash flow, with interest rates of the next campaigns higher than the previous ones. It is risky to attract investors with high bond interest rates.

According to Fiin Ratings, real estate firms mobilized VND162 trillion worth of capital through bond issuance. The bond interest rate was 10.5 percent on average and the average term was 3.8 years.

A survey of 17 listed real estate firms which issued bonds in late 2020 found that some could not make enough profits to cover interest rates.

Experts said real estate bonds account for a high proportion in the list of securities that mature in the next three years. Meanwhile, issuers’ solvency depends on the recovery of the real estate market.

Covid-19 developments are still complicated and if production and business become stagnant, the risks are very high for bond holders. The risk often falls at the time of bond maturity, especially for high-interest rate bonds issued by unprofitable businesses. Insolvency, if this occurs, will adversely affect the bond market in particular and the finance market in general. 

Tran Thuy

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