Business
Ratings needed to protect Vietnam’s corporate bond investors
Though the corporate bond market really needs to be developed in order to reduce the dependence of the economy on commercial banks, corporate bond issuance must be transparent and secure.
While Vietnam is seeing a boom in corporate bond issuance, a lack of ratings from independent agencies has posed risks to investors as they have to fully depend on the information published by the bond issuers, experts said.
According to Pham Hong Son, vice chairman of the State Securities Commission, enterprises last year successfully raised VND224 trillion (US$9.61 billion) worth of capital through bond issuances, an increase of 94.5 percent compared with 2017. The total value of bonds issued by the end of 2018 had reached VND474.5 trillion, or 8.6 percent of GDP in 2018.
Total corporate bond issuance in the first six months of 2019 reached VND60 trillion (US$2.58 billion). Most of the bond-issuing deals were private, not public.
The corporate bond issuance boom shows the high demand for capital and capital mobilization channels. The bond suppliers are commercial banks and enterprises. As corporate bonds have higher bond yields, they can attract attention from all investors, especially individual ones.
Previously, individual investors mostly paid attention to stocks, real estate and bank deposits. However, professional securities companies and fund management companies have succeeded in attracting individual investors’ money into corporate bonds.
Investors can expect higher interest rates if they invest in bonds than bank deposits, even if they sell bonds before maturity. Enterprises now issue bonds at interest rates of 11-12 percent per annum on average, while market makers distribute the bonds at the interest rates of 9-10 percent per year.
Normally, a Vietnamese corporate bond issuance involves three parties: enterprises (bond issuers), banks/securities companies (acting as consultants/distributors/underwriters), and investors (buyers). Among them, both enterprises and consultants/distributors/underwriters will benefit from the successful bond issuance. Therefore, when there is no ratings made by independent agencies, investors have to fully depend on the information published by the bond issuers and might bear many risks.
According to the current legal regulations, it is not compulsory for enterprises to have rating before issuing bonds. This is also a barrier to attract the participation of foreign investors, as well as creating risks for individual investors.
In the context of the strong development of the bond market, experts said the importance of domestic and foreign credit rating agencies will soon be promoted.
According to the Ministry of Finance, the amended Law on Securities that is expected to be approved by the National Assembly this year, mentions the connection between corporate bond issue and ratings. Therefore, after the law is passed, the ministry will try to promote the establishment of credit rating companies.
Tight control
Deputy Prime Minister Vuong Dinh Hue has recently also asked for stricter supervision on corporate bond issuance so that the finance and equity sectors operate properly and safely.
Accordingly, Hue requested the Ministry of Finance, the State Securities Commission and the State Bank of Vietnam to supervise the corporate bond market carefully and create a development plan for the corporate bond market, which must consist of lending limits, conditions and ratings.
The move came after a number of enterprises, especially property developers, have offered corporate bonds with high volumes and yield rates of 12-14 percent per annum, which puts pressure on the financial-banking system.
Though the corporate bond market really needs to be developed in order to reduce the dependence of the economy on commercial banks, corporate bond issuance must be transparent and secure.
High yield rates for real estate firms’ corporate bonds are something that must be closely watched as they may have impact on the government’s macroeconomic policies.
According to experts, bondholders should carefully analyze the performance and financial capability of real estate firms to avoid risky bonds.
Many real estate companies issued bonds at high yields of 12-14 percent per annum
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Total corporate bond issuance in the first six months of 2019 reached VND60 trillion (US$2.58 billion). Most of the bond-issuing deals were private, not public.
The corporate bond issuance boom shows the high demand for capital and capital mobilization channels. The bond suppliers are commercial banks and enterprises. As corporate bonds have higher bond yields, they can attract attention from all investors, especially individual ones.
Previously, individual investors mostly paid attention to stocks, real estate and bank deposits. However, professional securities companies and fund management companies have succeeded in attracting individual investors’ money into corporate bonds.
Investors can expect higher interest rates if they invest in bonds than bank deposits, even if they sell bonds before maturity. Enterprises now issue bonds at interest rates of 11-12 percent per annum on average, while market makers distribute the bonds at the interest rates of 9-10 percent per year.
Normally, a Vietnamese corporate bond issuance involves three parties: enterprises (bond issuers), banks/securities companies (acting as consultants/distributors/underwriters), and investors (buyers). Among them, both enterprises and consultants/distributors/underwriters will benefit from the successful bond issuance. Therefore, when there is no ratings made by independent agencies, investors have to fully depend on the information published by the bond issuers and might bear many risks.
According to the current legal regulations, it is not compulsory for enterprises to have rating before issuing bonds. This is also a barrier to attract the participation of foreign investors, as well as creating risks for individual investors.
In the context of the strong development of the bond market, experts said the importance of domestic and foreign credit rating agencies will soon be promoted.
According to the Ministry of Finance, the amended Law on Securities that is expected to be approved by the National Assembly this year, mentions the connection between corporate bond issue and ratings. Therefore, after the law is passed, the ministry will try to promote the establishment of credit rating companies.
Tight control
Deputy Prime Minister Vuong Dinh Hue has recently also asked for stricter supervision on corporate bond issuance so that the finance and equity sectors operate properly and safely.
Accordingly, Hue requested the Ministry of Finance, the State Securities Commission and the State Bank of Vietnam to supervise the corporate bond market carefully and create a development plan for the corporate bond market, which must consist of lending limits, conditions and ratings.
The move came after a number of enterprises, especially property developers, have offered corporate bonds with high volumes and yield rates of 12-14 percent per annum, which puts pressure on the financial-banking system.
Though the corporate bond market really needs to be developed in order to reduce the dependence of the economy on commercial banks, corporate bond issuance must be transparent and secure.
High yield rates for real estate firms’ corporate bonds are something that must be closely watched as they may have impact on the government’s macroeconomic policies.
According to experts, bondholders should carefully analyze the performance and financial capability of real estate firms to avoid risky bonds.
