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Inadequacy in corporate bonds: Many enterprises issue volume of bonds exceeding 100 times of equity

09:07 | 16/05/2020

VCN – The growth of the market size has proved corporate bonds have actually become an effective capital raising method. However, the "hot" development of this market recently has posed a question for managers that needs solved soon.

inadequacy in corporate bonds many enterprises issue volume of bonds exceeding 100 times of equity
The scale of the corporate bond market has exceeded the target of 7% of GDP by 2020,approved by the Prime Minister. Source: Internet

Continuous growth

The corporate bonds market in recent years has grown rapidly, helping businesses raise capital to develop, gradually reducing their dependence on bank credit; supporting commercial banks and enterprises in all fields to mobilise long-term capital to meet capital adequacy criteria; reducing capital mobilisation pressure for commercial banking system; orientation towards medium and long-term investments instead of short-term savings deposits.

The size of the corporate bond market is growing and developing rapidly. If it reached 6.29% of GDP by the end of 2017 and 9.01% of GDP at the end of 2018, it reached 10.38% of GDP by the end of 2019 (equivalent to about VND 640,000 billion, increased by six times compared to 2011). Particularly in 2019, businesses issued more than VND 315,000 billion.

The scale of the corporate bond market has exceeded the target of 7% of GDP by 2020,approved by the Prime Minister. It showed corporate bond issuance has become a capital raising channel enterprises are concerned about for selection.

To support and develop enterprises in the spirit of Resolution No. 35/NQ-CP of the Government, step by step reach balanced development between capital markets and bank credit markets, the Government has issued Decree No. 163.

According to the evaluations of enterprises, experts and members on the bond market, Decree No. 163 has helped remove difficulties for businesses in raising capital for developing production and business, positively affectingthe development of the corporate bond market, improving the initiative in raising capital and increasing publicity and transparency in raising bond capital of enterprises, protecting the rights and benefits of investors.

Appearing a phenomenon of "dodge the law"

In recent times, businesses shifting capital mobilisation from bank credit channels to bond issuance with large volumes showed signs of "hot" development. In addition, there is also the phenomenon that some individual investors buy by following a herd mentality which is only interested in interest rates but do not care about the operation of the business whether it is safe or not.

Evaluating the management and monitoring process, the Ministry of Finance pointed out some major shortcomings. Firstly, the ministry noticed the phenomenon of " dodge the law " on issuance via private offering, after that extensively distributed in a secondary market. The increase of individual investors, including small and retail individual investors, when they lack sufficient access to information on the purpose of issuance, financial situation, solvency and at lack the ability to evaluate so it causes risks for those investors. In case that the issuance enterprise fails to fulfill its commitments to investors, the affected scope will be very large, causing instability for financial and social markets.

Besides that, current provisions of law on securities and corporate law are not limit the volume of capital mobilised by businesses through bond issuance. This has led to the phenomenon of businesses issuing bonds with a volume exceeding the amount of equity.

According to statistics of the Hanoi Stock Exchange, in 2019, there were 28/217 enterprises issuing the volume of bond issuance in excess of three times the equity, including 11 enterprises had the issuance volume of bonds exceeded 50 times of equity, six enterprises issuing volume exceeded 100 times of equity. Among enterprises issuing large volumes of corporate bond, some have not disclosed specifically the purpose of using capital or the plan for allocating sources of bond principal and interest payment.

On the other hand, there is a phenomenon of small enterprises issuing a large volume of bonds with collateral assets in the form of structured financial products (securitisation products) in accordance with the Civil Law. Due to the fact there are no regulations on trust and securitisation, it is difficult to determine the rights and obligations of parties, leading to risk when deploying corporate bond products in this form.

In terms of issuance interest rate, current provisions of law do not limit the interest rates on corporate bond mobilisation. Bond interest rates are issued by businesses and investors. Therefore, recently, some businesses have issued bonds with high interest rates, especially real estate businesses. The issuance of bonds with high interest rates may cause a negative impact on the interest rate level in the market, causing risks for both issuers and investors.

All these shortcomings have been recognised by the Ministry of Finance and will be submitted to the Government to amend and supplement Decree No. 163 to make it appropriate with reality.

By Hồng Vân/Thanh Thuy