Opening door to developing the corporate bond market – Chapter 2: Hidden risks

VCN - Besides positive factors, the corporate bond market has been facing many limitations, causing risks for investors. One of the limitations that must be overcome is the publicity and transparency of the market.
, few corporate bonds were guaranteed for payment by banks, while most corporate bonds were issuance underwritten. Source: Internet
Few corporate bonds were guaranteed for payment by banks, while most corporate bonds were issuance underwritten. Source: Internet

Signs of risk in corporate bond market

With a competitive interest rate structure and unbinding, the corporate bond market quickly attracted cash flow and developed rapidly. The shift of cash flow has led to “overheating” development of corporate bond market in 2017-2020 and clearly reveal limitations and risks that need to be identified and adjusted by the regulator to ensure healthy and sustainable development.

Recently, corporate bonds have been issued mainly through the form of private placement while public offering accounted for a very small proportion. Commercial banks and real estate firms are the main issuers in the market. According to Fiin Rating, in 2020, real estate firms were the largest issuers with a value of VND 162 trillion, accounting for 38.5% of the total value of bonds issued. Commercial banks and financial institutions accounted for 31.6% of the total value of bonds issued.

In fact, many firms issue bonds with high-interest rates, with 1.5 times on average or even double compared to deposit rates of banks to attract capital while they have not had collateral, no issuance underwriting unit, no credit on "financial health" of the firms. Investing in this type of bond is like holding a knife because if the issuer encounters cash flow difficulties, investors will not only lose interest but the principal is difficult to recover. So not only will investors bear the risk but the financial environment is also severely affected.

Newly updated data from the Vietnam Bond Market Association showed that in June, about 72.4% of the volume of corporate bonds issued without collateral that is mainly in the banking and stock industry.

Nguyen Quang Thuan, Chairman of the Board of Directors of Fiin Ratings, noted investment in corporate bonds had to be spent in 5-10 years, even longer, if only looking at high-interest rates to invest without paying attention to information transparency, the investor would suffer risk when the firm faced problems even the safety of the system might be threatened.

According to financial expert Nguyen Tri Hieu, retail investors went after corporate bonds because they saw the shadow of a bank behind the bond. However, few corporate bonds were guaranteed for payment by banks, while most corporate bonds were issuance underwritten. Banks were not responsible for whether the firm could repay the bond principal and interest upon maturity or not. This meant that the risk of investors was very large if the issuer defaults. This expert warned that the number of corporate bonds in circulation was mainly without collateral or secured by shares, while stocks fluctuated following the market. Meanwhile, investors have no power to keep cash like a bank for other collaterals.

“Even when the firm defaults, the collateral would also have to be paid in order of priority: paying taxes to the Government; pay wages to employees; debt repayment to the bank then the buyer of the bond will be paid near the end. Currently, the corporate bond market had many potential risks due to Covid-19 pandemic, which made firms unable to operate but they still borrowed capital and all risks were concentrated on bondholders," Hieu said.

Do Ngoc Quynh, General Secretary of the Vietnam Bond Market Association said that although recently, firms had not seen the situation of insolvency, leading to the need to handle collateral. However, even as large as banks struggle to handle collateral to recover bad debts, ordinary individual investors who want to squeeze business assets will never have a door.

Acts of "bending the law"

According to Nguyen Hoang Duong, Deputy Director of the Finance Department of banks and financial institutions (Ministry of Finance), in 2019-2020, the Ministry of Finance has noticed signs of risks in the corporate bond market and offering many recommendations to target groups of market participants.

“In fact, there were firms that mobilise capital through issuing a lot of bonds on the principle of self-borrowing, self-paying and self-responsibility for the effective use of capital with high-interest rates but the inefficient use of capital or business operation facing difficulties, firms could not return bond principal and interest to investors, causing instability to the bond market and the financial market," Nguyen Hoang Duong said.

Along with self-issuance of corporate bonds, banks are also a group of investors who hold the majority of corporate bonds and are also distributors and underwriters of other companies' bonds. Fiin Ratings reported that banks owned 71.5% of the total value of corporate bonds in circulation at the end of the third quarter of 2020, while this figure in 2019 was 75%.

In August 2019, the State Bank of Vietnam sent a document to domestic commercial banks requesting they control risks in corporate bond investment activities when a number of commercial banks had a corporate bond investment balance accounting for a large proportion of total assets and continues to increase rapidly. Risks pointed out are that the balance of corporate bond investment in the construction and real estate sectors are large when the real estate market has not recovered firmly; some commercial banks invest in bonds for other purposes at a high level and high volatility, difficult to control; some commercial banks continue to invest in bonds for the debt restructuring of issuers in 2019.

To protect investors, the new legal framework has tightened many regulations on corporate bonds. For example, the regulation on private placement can only be offered for sale and traded between professional securities investors. However, Nguyen Hoang Duong said there was an act of "bending the law" to become a professional securities investor to buy corporate bonds that are private placement but failing to assess and analyse the risks, not knowing the terms and conditions of bonds, even bonds have collateral or not, quality of secured assets. At the same time, he emphasised that there was a phenomenon of service providers (securities companies, commercial banks) soliciting and distributing corporate bonds to the wrong subjects who are professional securities investors. Those cases would be sanctioned in accordance with the law.

Nguyen Quang Thuan indicated that if looking at 3-5 years from now, the risk for Vietnam's financial market was this kind of bond. This was an issue that had to be monitored and completed to avoid collapse. Although it was small, with 15% of the total loan balance of the whole system, the corporate bond market deserves more consideration, especially in the context of Covid-19 pandemic that has caused cash flow disruptions for many firms.

By Hoài Anh/Thanh Thuy

Related News

Industrial real estate - "Magnet" attracting foreign capital

Industrial real estate - "Magnet" attracting foreign capital

VCN - Looking back at the development journey over the past 30 years, it can be affirmed that the model of industrial parks and economic zones has been playing an important role, as a driving force for growth and the process of industrialization and modernization of the country; a channel to attract investment resources, especially foreign direct investment (FDI), contributing to improving the business environment and enhancing competitiveness, ensuring sustainable development.
Crypto Assets should be managed rather than prohibited

Crypto Assets should be managed rather than prohibited

VCN – The issuance of legal regulations related to crypto asset management contributes to protecting investors, enhancing tax collection capabilities and improving the ability to control money laundering activities, according to experts.
Transparent and stable legislation is needed to develop renewable energy

Transparent and stable legislation is needed to develop renewable energy

VCN - Achieving net zero emissions by 2050 is a development goal that Vietnam has committed. This is mainly achieved through a strong energy transition and low-emission development. However, the transition to clean energy is not easy for Vietnam because building a clean energy supply system requires large investments. In addition, technology in the production and storage of renewable energy is still limited, making it difficult to ensure a stable energy supply.
Perfecting the legal framework to promote upgrading the stock market

Perfecting the legal framework to promote upgrading the stock market

VCN - After receiving comments from affected subjects including organizations, individuals, and market members, the State Securities Commission has just completed a draft circular amending 4 circulars regulating: stock trading on the stock exchange system; clearing and settlement of stock exchanges; operations of securities companies and information disclosure on the stock market.

Latest News

M&A activities show signs of recovery

M&A activities show signs of recovery

Mergers and acquisitions (M&A) activities in Vietnam have been showing signs of recovery in recent months as several large companies announced finished deals, which may create a ripple effect in the M&A market.
Fiscal policy needs to return to normal state in new period

Fiscal policy needs to return to normal state in new period

VCN - To recover the economy during and after the Covid-19 pandemic, fiscal policy has been flexibly and promptly managed, becoming a solid foundation to help businesses and the economy gradually overcome difficulties. After nearly 5 years, although there are still difficulties, the economy is gradually returning to a high growth trajectory. In that context, it is necessary to let fiscal policy return to normal state.
Ensuring national public debt safety in 2024

Ensuring national public debt safety in 2024

VCN - Since the beginning of the year, public debt management has been conducted proactively and effectively, meeting the need of raising capital for development investment. At the same time, debt indicators by the end of 2024 are guaranteed within the ceiling and safety threshold approved by the National Assembly, ensuring national financial security, increasing proactive response to risks arising from external and internal causes of the economy.
Removing many bottlenecks in regular spending to purchase assets and equipment

Removing many bottlenecks in regular spending to purchase assets and equipment

VCN - Decree No. 138/2024/ND-CP, which has just been issued, is expected to contribute to resolving bottlenecks in allocating funds for purchasing assets and equipment; renovating, upgrading, expanding, and constructing new construction items in projects that have been invested in and constructed in the past.

More News

Continue to handle cross-ownership in banks

Continue to handle cross-ownership in banks

VCN - The situation of excess share ownership, cross-ownership between credit institutions (CIs), CIs and enterprises, although has decreased significantly compared to previous periods, is still complicated and requires continued inspection and control.
Striving for average CPI not to exceed 4%

Striving for average CPI not to exceed 4%

VCN - According to the report of the Ministry of Finance, there are still some factors that put pressure on price levels in the remaining months of 2024, so the Ministry has updated 2 scenarios of average inflation in 2024 increasing in the range of 3.7-3.92%.
Delegating the power to the government to waive, lower, or manage late tax penalties is suitable

Delegating the power to the government to waive, lower, or manage late tax penalties is suitable

VCN - Discussing in groups about the project "1 law amending 7 laws" in the financial sector according to the program of the 8th Session on October 29, 2024, National Assembly delegates proposed that the Government should be assigned to make specific regulations on decentralization, granting the right to exempt and reduce taxes, and handling penalties for late payment of taxes...
Removing difficulties in public investment disbursement

Removing difficulties in public investment disbursement

VCN - According to the report of the Investment Department (Ministry of Finance), the estimated disbursement from the beginning of the year to October 31, 2024 is VND 355,616.1 billion, reaching 47.43% of the 2024 plan, reaching 52.29% of the plan assigned by the Prime Minister.
State-owned commercial banking sector performs optimistic growth, but more capital in need

State-owned commercial banking sector performs optimistic growth, but more capital in need

VCN - According to the report sent to the National Assembly before the 8th Session of the Government on investment, management and use of state capital in enterprises nationwide in 2023, the business performance of the state-owned commercial banking sector achieved positive growth.
Stipulate implementation of centralized bilateral payments of the State Treasury at banks

Stipulate implementation of centralized bilateral payments of the State Treasury at banks

VCN - The Ministry of Finance (MOF) gathers feedback on the draft Circular regulating the management and use of accounts of the State Treasury opened at the State Bank of Vietnam (SBV) and commercial banks.
Rush to finalize draft decree on public asset restructuring

Rush to finalize draft decree on public asset restructuring

VCN - According to the Ministry of Finance, the draft Decree regulating the rearrangement and handling of public assets is being urgently completed by the Ministry of Finance to submit to the Government for promulgation.
Inspection report on gold trading activities being complied: SBV

Inspection report on gold trading activities being complied: SBV

The State Bank of Vietnam (SBV) has announced that inspections on compliance with legal policies in gold trading activities of credit institutions and gold trading businesses have been completed and an inspection report is being compiled.
Budget revenue in 2024 is estimated to exceed the estimate by 10.1%

Budget revenue in 2024 is estimated to exceed the estimate by 10.1%

VCN -The Government estimates that state budget revenue in 2024 will exceed VND 172.3 trillion, up 10.1% over the estimate, of which tax and fee revenue will reach 13.1% of GDP.
Read More

Your care

Latest Most read
M&A activities show signs of recovery

M&A activities show signs of recovery

Mergers and acquisitions (M&A) activities in Vietnam have been showing signs of recovery in recent months as several large companies announced finished deals, which may create a ripple effect in the M&A market.
Fiscal policy needs to return to normal state in new period

Fiscal policy needs to return to normal state in new period

VCN - To recover the economy during and after the Covid-19 pandemic, fiscal policy has been flexibly and promptly managed, becoming a solid foundation to help businesses and the economy gradually overcome difficulties. After nearly 5 years, although there
Ensuring national public debt safety in 2024

Ensuring national public debt safety in 2024

VCN - Since the beginning of the year, public debt management has been conducted proactively and effectively, meeting the need of raising capital for development investment. At the same time, debt indicators by the end of 2024 are guaranteed within the ce
Removing many bottlenecks in regular spending to purchase assets and equipment

Removing many bottlenecks in regular spending to purchase assets and equipment

Decree No. 138/2024/ND-CP, which has just been issued, is expected to contribute to resolving bottlenecks in allocating funds for purchasing assets and equipment
Continue to handle cross-ownership in banks

Continue to handle cross-ownership in banks

VCN - The situation of excess share ownership, cross-ownership between credit institutions (CIs), CIs and enterprises, although has decreased significantly compared to previous periods, is still complicated and requires continued inspection and control.
Mobile Version