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Will bond defaults occur in Vietnam?

The case of Tan Hoang Minh has caused many investors to shrink back for fear of the collapse of the corporate bond market.

 

According to economists, corporate bonds issued by enterprises is a kind of debt. A bond default occurs when bond issuers cannot pay the debts within specified periods when the bonds become mature. This happens in many market economies and it could occur in Vietnam. 

The Vietnamese corporate bond market has witnessed a boom since 2018 with the total value of bonds issued reaching VND1.2 quadrillion in 2018-2021, which accounted for 11.4 percent of total outstanding loans of the economy and 14.5 percent of GDP (gross domestic product) in 2021.

Analysts have warned about risks posed by the huge amount of bonds. Real estate firms, after two years of being affected by the Covid-19 pandemic, are seeing a cash flow depletion. Meanwhile, the liquidity in the real estate market is low. 

Local newspapers have recently repeatedly quoted experts as warning of risks in the hot corporate bond market which may lead to serious consequences.  

“Newspapers use the term ‘the three nos’ to describe the corporate bond market – no credit rating, no payment guarantee and no secured assets. But I am afraid there are fourth and fifth ‘nos’ – no good financial capability and cash flow, and no feasible business plans. The capital raised from bond issuance may also be used for wrong purposes,” said Nguyen Anh Vu from the HCM City Banking University.  

Huynh Anh Tuan, CEO of DongA Bank Securities, said the current bond interest rate is 12 percent per annum on average, and if counting the cost for the distribution and guarantee, the total cost would be 15 percent per annum. If enterprises have good financial capability, they will borrow money from banks at much lower interest rates, rather than issue bonds. 

Meanwhile, investors who lack sufficient knowledge and information, deluded by high interest rates (2-3 times higher than bank deposit interest rates), rush to buy bonds, despite high risks. 

Dinh Trong Thinh, a financial expert, warned that the ‘three no’ bonds account for 30 percent of total bonds issued, which is a serious problem. It is also a worrying problem that commercial banks buy a large proportion of bonds. In some cases, banks help enterprises do rollover, that is switch from lending with secured assets and strict control over capital use to lending with no strict supervision. 

Consequences 

If bonds are issued privately and not put under strict control and appraisal, and if the secured assets are not high and issuers may use capital for the wrong purposes at any time, it’s highly possible that issuers won’t be able to pay the money back to bond holders and a bond default will occur.  

There are two major groups of corporate bond buyers. The first includes commercial banks and securities companies, while the second is private investors (in the name of professional investors) who buy bonds through intermediaries. 

According to Saigon Securities Incorporated (SSI), of 15 large commercial banks which provide 75 percent of total credit of the whole banking sector (not including Agribank), the total balance of bonds invested in economic organizations as of December 31, 2021 had reached VND214 trillion.  

The average ratio of investment in corporate bonds was only at 3.1 percent, unlikely to have too great of an impact on credit quality. However, if default occurs, banks will lose capital, see bad debts increase, and see their prestige damaged.  

However, the problem doesn’t lie in the bonds issued to institutional investors, but to individual investors. Many banks and securities companies come forward and guarantee bond issuance. Individual investors buy bonds because they think the bonds are issued by banks and prestigious businesses. 

Under current regulations, privately issued bonds are only sold to professional investors. However, bond distributors have many methods to turn individual investors into professional ones. Many ‘professional investors’ cannot even read financial reporters and have little knowledge about bond issuers. 

Experts have warned that such hot growth may lead to serious consequences and the risks may start in 2022, when a large amount of bonds reach maturity.

Tran Thuy

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