Debt repayment pressure continues to weigh on corporate bond market

A customer conducts a transaction at an Agribank office. Around VNĐ5 trillion in corporate bonds is due in January. — VNA/VNS Photo

In the past few years, Việt Nam's corporate bond market has seen significant fluctuations, prompting concerns over the sustainability of debt levels and the overall health of the financial ecosystem.

The latest reports indicate that while the volume of bond issuances increased in 2024, the pressures associated with debt repayment continue to be an urgent issue for many companies, particularly at the start of 2025.

According to a recent report by the Vietnam Investors Service and Credit Rating Agency (VIS Rating), the corporate bond market recorded approximately VNĐ485 trillion (US$19.1 billion) in new issuances last year, up 40 per cent year-on-year.

This surge is primarily driven by the banking sector, which accounted for 70 per cent of the total issuances, while the real estate sector contributed 17 per cent.

Despite this growth, 2024 saw a significant level of payment delays, with 14.5 per cent of bonds facing late repayments.

Yet only 11 issuers were reported to have defaulted on principal or interest payments in 2024, compared to a staggering 79 in 2023.

This reduction in defaults, while encouraging, still raises concerns as we move into a new fiscal year during which an estimated VNĐ224 trillion in bonds will mature.

In 2025, the corporate bond landscape appears daunting.

An alarming 22 per cent of bonds maturing in January 2025 are at risk of defaulting on principal payments, according to the report.

The real estate sector remains the most vulnerable, with residential developers particularly at risk. Among the VNĐ5 trillion in bonds maturing this month, two bonds from this sector are flagged for potential payment delays.

Moreover, a staggering VNĐ110 trillion in bonds issued by real estate companies will come due in 2025, with VNĐ31 trillion already in arrears before the new year.

The overall debt burden is compounded by the fact that 94 per cent of the value at risk primarily stems from the real estate and tourism sectors, highlighting an urgent need for intervention and reform.

The deterioration in credit ratings across various sectors is alarming. VIS Rating's report indicates that 52 per cent of issuers have credit ratings classified as below average or lower, predominantly from the real estate and construction sectors.

Many of these companies are newly established, lacking core business operations and facing severe cash flow limitations.

To address these issues, the Ministry of Finance (MoF) has proposed amendments to the existing regulations governing corporate bonds.

These amendments are designed to enhance market transparency and encourage a culture of credit rating compliance. According to the draft regulations, all bond issuers must obtain a credit rating from a recognised agency approved by the ministry.

This move aims to mitigate risks by ensuring that investors have access to reliable information regarding the financial health of issuers.

The ongoing struggles within the corporate bond market are symptomatic of broader economic challenges.

The real estate sector, for instance, has been grappling with over-leveraging and liquidity issues. With many companies having thin capital buffers, the risk of defaults has escalated, raising alarm bells among investors and regulators alike.

The MoF's proposed regulations also include a stipulation capping the debt-to-equity ratio at four, excluding bonds issued for restructuring existing debt. This aims to safeguard financial stability and ensure companies maintain sufficient equity to meet their obligations.

As Việt Nam navigates these turbulent waters, the focus on regulatory oversight and transparency will be paramount. Investors must be more discerning, conducting thorough due diligence before engaging in bond purchases.

The government and regulatory bodies need to foster an environment that encourages responsible borrowing and lending practices.

Enhancing the credit rating process can also serve as a critical tool for mitigating risks.

By holding issuers accountable and ensuring they maintain healthy financial practices, the market can evolve into a more stable and trustworthy platform for raising capital.