Encourage credit rating culture to improve corporate bond quality

Mr. Phung Xuan Minh, Chairman of the Board of Directors of Saigon Phat Thinh Ratings Joint Stock Company

Recently, the corporate bond market has had strong development. From the perspective of a credit rating agency, how do you assess the development of the corporate bond market in recent years?

The Vietnamese corporate bond market has developed relatively quickly, undergone a transformation since 2006 and shows strong growth in the period from 2013 to 2021 with a compound annual growth rate of about 46%.

Corporate bonds started to explode in 2016 thanks to favorable market movements and positive growth in all sectors of the economy. The demand for medium and long-term capital to serve production and business activities, and carry out M&A deals has increased, and raising capital through corporate bonds has become urgent and promoted. In 2021, there was a total of 1,099 issuances of corporate bonds in the domestic market with a total issuance value estimated at more than VND706,937 billion, the average issuance value is about VND643,255 billion/issuance that was 2.7 times higher compared to 2020. Along with that, there were seven issuances in the international market that have a total issuance value of US$1.609 billion, equivalent to a scale of nearly US$230 million/issuance. In 2021, the total outstanding value of Vietnamese corporate bonds was approximately 14.77% of GDP (current price GDP), equivalent to more than VND1.24 million billion.

These statistics show that the corporate bond market has been paying attention and growing very quickly recently, and the room for growth is still very large for the next years. In particular, according to the Government's Strategy for Development of the Financial Market to 2030, the total outstanding debt of the corporate bond market must reach 20% of GDP by 2025 and aim for 25% of GDP by 2030.

One of the limitations of the corporate bond market is the lack of information transparency, especially accurate information about the financial health of the issuer. In your opinion, what is the solution?

This problem is actually happening due to three main reasons; more than 95% of corporate bonds are currently issued through a private placement channel in the primary market; the conditions for issuing corporate bonds are still quite open; and the issuer and debt instrument risk stratification corridor has not yet been clearly formed. These make information transparency in the market almost non-existent.

From international experience in countries with developed corporate bond markets such as South Korea, Malaysia, and Singapore, there are five essential factors for the healthy, safe and sustainable development of the corporate bond market.

Firstly, market information must be thoroughly transparent. Capital market participants must improve their capacity, self-responsibility and professionalism in related operations.

Secondly, in order to do this, it is necessary to have credit rating agencies. The task of the credit rating agency is to identify the type of standard investment or speculative bonds; clearly separate each type of bond with different risks and these risks are determined on the basis of the rating classification of the credit rating agency. From there, investors will preliminarily identify the segment of each type of bond, and decide to invest according to their own risk appetite.

Third, the primary and secondary markets must be developed to increase liquidity for the conversion of corporate bonds. The Ministry of Finance still wants to promote the centralized secondary corporate bond market.

Fourthly, investors must be professional and have high and strict standards, which are clearly regulated by the Law, specifically in Vietnam, the Law on Securities 2019.

Finally, the issuer of corporate bonds must be accompanied by an issuance statement or a commitment of the issuer on the purpose of using capital. Enterprises must fulfill their commitments; investors also have the obligation to supervise the use of capital by the issuing company.

As mentioned above, one of the important things for the corporate bond market right now is the creation of a credit rating culture. This is also the experience of many countries in developing the corporate bond market. In your opinion, how can this experience be applied in Vietnam?

An effective credit rating agency fills the information gap between the issuer, or debt instrument and the investor. Credit rating reports are in-depth analytics that clearly reflects the business's performance and ability to meet its debt obligations or financial commitments. Investors can rely on the standard rating scale of a credit rating agency to get a view of the risk level of the issuer or rated debt instrument. In countries with a developed corporate bond market, credit rating agencies are an important component in supporting information transparency for the market. However, for the Vietnamese market, this operation is still too new, and businesses do not really understand the process and benefits of this business.

Regarding the number of credit rating agencies, Saigon Ratings recommend that state management agencies refer to the experiences and practices of countries with developed bond markets in the region and the world. The international credit rating service currently has three units, namely Moody, Fitch, and S&P, accounting for nearly 95% of the global rating demand. In addition, through observations in developed markets, the number of credit rating agencies is not much; Japan has three units, Korea has three units, Malaysia has three units, and China has six units. With the development of the bond market and the current size of Vietnam's GDP, I believe that the licensed units basically meet the credit rating needs of the market. However, to ensure quality, the management agency needs to carry out annual monitoring, post-audit, and improve the capacity of domestic credit rating agencies to approach the standards of the domestic credit rating agencies. international credit rating agency.

Do you have any recommendations to the management agency on solutions and issues to pay attention to, in order for the corporate bond market to develop sustainably and safely?

To develop the corporate bond market sustainably, the authorities must construct the corporate bond market for the development but still have to closely monitor and control risks; enhance the transparency of market information; complete the legal corridor with the amendment of Decree 153/2020/ND-CP, Decree 156/2020/ND-CP, Law on Securities 2019 to upgrade professional investor standards and criteria. There should also be regulations on credit rating to help investors easily determine the quality of enterprises and the level of risk of the issued bonds; improve the infrastructure of the bond market, and establish a centralized secondary market with corporate bonds.

Furthermore, it is necessary to strictly handle market actors, and participate in the standardization of investors who are not professional and sophisticated in circumventing the provisions of the law to access inappropriate types of investment products.

For bond issuers and issuance consulting firms, it is necessary to improve the corporate governance system and encourage both the application of international accounting standards IFRS and culture of credit rating to improve the prestige and quality of issuers or quality for each bond issuance.

Particularly for investors, individual investors and professional investors must improve their own capacity and knowledge when participating in the capital market, promoting the form of investment trust in professional investment funds.

Thank you!