A view of Vinhomes Smart City in Hanoi. Property developers' bond issuance accounted for 38 percent of the total in 2019 (Photo: vinhomes.vn) Hanoi (VNS/VNA) - The Government’s Decree 81, which comes into effect on September1, will help raise the corporate bond market standards and remove low-qualityissuers to better protect investors.
Accordingto SSI Research, local companies raised nearly 160 trillion VND (6.9 billion USD)from selling bonds in the first six months of the year with average annualyield of 6.72 percent and average maturity of 4.7 years.
The value of the corporate bond market increased sharply from 9.01 percent ofthe country’s total GDP in 2018 to 11.3 percent in 2019.
But risks are persistent as some companies have issued bonds with total valuesbeating their equity capital by 10-20 times.
Total issuance of real estate firms accounted for 38 percent of the corporatebond market with outstanding debt highly exceeding their equity capital, thuscreating potential risks for the market if the property market is volatile.
Since the beginning of the year, the Ministry of Finance has warned investorsand companies twice about potential risks on the market.
The State Securities Commission (SSC) chairman Tran Van Dung said corporatecapital often comes from bank loans and share issuances.
Share sales put companies under pressure of paying dividends while the bankingsector’s credit has kept declining in the last two-three years, creating theopportunity for the corporate bond market to develop, he said.
“The development of the corporate bond market should be healthy and inevitable.But the Ministry of Finance and the State Securities Commission have found somedeals are highly risky for investors,” the SSC chairman said.
“Some companies are small in market capitalisation, some don’t have transparentfinancial reports, or some don’t have good-quality, well-valued collateral,” headded.
“Those are the issues that investors should think about before deciding to buycorporate bonds.”
Decree 81 will raise the standards on corporate bond issuance, limit privateissuance to minimise the risks for individual investors, and the responsibilityof underwriters (financial-banking institutions) will be higher when evaluatingthe financial capacity of the issuers, Vuong Hoang Son, director of bond marketat VNDirect Securities Corp, said.
The decree will help remove low-quality issuers as they want to take advantageof the bond market to raise capital, he said.
“That will cut the number of companies issuing bonds and the market value inthe last four months of the year,” Son said.
“But in long term, transparent information disclosure will allow investorsbetter access to the corporate bond market as they will have more informationto compare, evaluate and make decisions, thus increasing the attractiveness ofthe market.”
Under the new decree, the total bond issuance of a company cannot exceed itsequity capital by five times and the gap between two bond issuances must be atleast six months. The bond issuer also has to declare its purpose and businessplan so investors can monitor the use of the capital.
The rules will slow down the corporate bond market growth in the remainingmonths of the year, Son said, adding private issuance will switch to publicissuance as companies will become more transparent.
Luu Minh Sang, financial-banking law lecturer at the University of Economicsand Law, the Vietnam National University in HCM City, said that the lack oftransparent information disclosure and independent credit rating amongbond-issuing companies are good conditions for risks.
The lack of independent credit rating on firms’ financial capacity and assetsallows them to compete by interest rates, he said.
It could be difficult for companies with good financial reports to raisecapital from bond selling because others with unclear reports will offer lowerrates, he added.
Even the consultancy firms cannot dig deep into the issuers’ financial reportsto foresee the risks and most of the consultants are underwriters of the bondissuance deals so their opinions are often biased, he said./.
VNA
