The risks of excessive corporate bond issuance
The over-growth of the corporate bond market in the past two years poses threats for the Vietnamese economy in the 2024-2025 period, when these bonds will reach maturity.
If a number of small businesses fail to pay bond debts, it could spread fear and affect confidence in the bond market, which could lead to a credit crunch.
On December 3, the Government Office issued a dispatch to strengthen management, inspection and examination of corporate bond issuance.
Accordingly, the Ministry of Finance was asked to urgently inspect and supervise the issuance of bonds and use of capital raised from bonds, especially from real estate enterprises, credit institutions related to real estate enterprises, enterprises issuing large volumes of bonds with high interest rates, and enterprises with loss-making business resulting in bonds without guarantees.
The State Bank of Vietnam (SBV) was told to tighten inspection of credit institutions' corporate bond investment activities, promptly warn of risks and take measures to deal to ensure the safety credit institutions. The Ministry of Public Security was instructed to coordinate with agencies to detect violations to strictly handle them according to the law.
Also on December 3, Minister of Finance Ho Duc Phoc issued a written request to speed up the inspection and supervision of bond issuance, impose strict sanctions on bond-related violations and publish the information widely on the media. If it is determined that there are signs of fraud, appropriating investors' assets, these cases will be urgently transferred to the investigating agency. The Minister also requested to strictly control the large-scale issuance of bonds by enterprises.
Previously, on November 19, the State Bank of Vietnam issued a circular on the purchase and sale of corporate bonds by credit institutions and foreign bank branches, effectively curbing banks’ investments in this market.
According to the new regulation, Circular No 16/2021/TT-NHNN, banks are allowed to buy corporate bonds only when the bad debt ratio is below 3% according to the latest classification period. Banks are only allowed to buy bonds from enterprises without bad debts at credit institutions in the last 12 months. Banks are not allowed to purchase corporate bonds if those bonds are issued to restructure debts of the issuer, to contribute capital or purchase shares of other enterprises, or to raise the issuer’s working capital. The regulation will take effect from January 15, 2022.
In the context of the real estate sector leading the bond market in the first 10 months of 2021, with bond issues reaching VND163.9 trillion (US$7.1 billion), experts believe the new regulation is mainly aimed to curb banks pouring money into real estate enterprises.
Bank loans and bond issues are two key channels for real estate enterprises to finance themselves. Normally, bank loans are more difficult to take out because banks require borrowers to put up collateral and hand in business plans as well as repayment plans in advance. With such strict requirements in place, real estate enterprises thus take the easy way out and opt for bond issuance to raise money.
Unfortunately, many bond-issuing real estate enterprises are suffering from negative cash flows, except for the financial cash flows being supported by the growth of the stock market. If the stock market turns slightly unstable, the financial situations of those enterprises will worsen, adversely affecting their capability to service their debts.
Selling paper for cash
Many enterprises have recently issued corporate bonds with large volume and high interest rates.
In 2020, businesses successfully issued individual corporate bonds 2,228 times, with a total value of VND 403.4 trillion, an increase of 35.9% compared to 2019.
A report by SSI Securities Company shows that in January – November 2021, businesses mobilized over VND495 trillion from bond issuance, of which, corporate bonds issued privately accounted for 94.5%.
Many businesses issued bonds with a value that is many times higher than their charter capital. For example, Red Cyclo Trading Service Co., Ltd in HCM City, specializing in hairdressing services, completed the 10-year bond issuance on August 25, 2020, with a total value of VND738 billion, while its charter capital is only VND20 billion.
Some companies raised capital through bond issuance in a very short time after their establishment. VsetGroup Corporation in HCM City was established in 2014, with charter capital of VND1.6 billion (less than $80,000), but after six years of operation, its charter capital increased to VND500 billion. Between January and October 2021, this company illegally offered bonds worth hundreds of billions of VND to the market, without registering with the State Securities Commission.
Many real estate firms issued bonds 3-4 times within several months to raise VND100 billion ($5 million) up to VND1 trillion ($50 million).
Experts are also concerned about the "3-no" bonds (no credit rating, no collateral, no guarantor) that have been issued recently.
There is another concern: up to nearly 60% of corporate bonds issued in the first three quarters of 2021 are held by commercial banks and securities companies. Notably, a high percentage of the bonds belong to real estate companies.
"Cooling down" the market
Looking at the unusual growth of the corporate bond market in the past two years, it is forecast that the economy may face risks arising in the period 2024-2025, when the bonds reach maturity. If several small businesses fail to pay bond debts, it can spread fear and hit confidence in the bond market. That could lead to a credit crunch in the economy.
Easy issuance of bonds helps many businesses raise large amounts of money with just beautiful printed papers (bonds) while many bondholders are facing great risks, when the debt repayment ability of the issuer is still an open question.
The National Assembly’s Economic Committee said the uncontrolled issuance of corporate bonds with high interest rates can create an “asset bubble” and adversely affect the macro economy.
The Ministry of Finance has issued warnings about the risks when buying corporate bonds. The State Bank of Vietnam has issued regulations to tighten commercial banks’ investment in corporate bonds, especially bonds of real estate firms.
The authorities have begun to control the corporate bond market. Along with that, the central bank’s Circular 16 that will take effect from January 15, 2022 will contribute to restricting commercial banks from investing in corporate bonds.
Meanwhile, the Ministry of Finance is drafting a Circular to strictly control the issuance of corporate bonds. Accordingly, the bond issuer cannot be a public company (listed on the stock market), must have collateral, and must ensure payment of all principal and interest when due.
Experts predict that from the fourth quarter of 2021, the corporate bond market will "cool down" as the results of these measures.
As major buyers in the market, commercial banks are holding large amounts of corporate bonds, mostly realty bonds. The central bank has issued a warning about the risks with the bonds.
Some lots of real estate bonds issued under private offerings are expected to become due by the year end. The solvency of issuers amid the difficulties caused by Covid-19 remains questionable.