Opening the door to developing the corporate bond market - Chapter 1: An important capital channel for the economy

Corporate bond is an important capital channel for the economy. Source: Internet

In 2017-2020, besides positive factors, the overheating development of the corporate bond market has revealed limitations and shortcomings. To help this market to develop sustainably, the Government has completed the legal corridor for the market for openness, transparency and limiting risks for investors. The remaining issue is the compliance of market participants.

The strong growth of the corporate bond market has reduced pressure on the banking system in providing long-term capital to the economy, reducing the ratio of using short-term capital for loans in the medium and long term, promoting production and business activities of firms as well as the development of the economy.

Strong growth in scale and value

Along with the development of the economy and the financial market, the bond market, including the corporate bond market, has been formed and developed to meet the capital mobilisation needs of the Government, State-owned policy banks, local authorities and firms. Established in 2000, the corporate bond market has two components, namely private placement and public offerings. However, the corporate bond market was really developed until 2011. Along with the improvement of the legal framework, the diversity of products and goods, the development of intermediary institutions, etc. in 2011-2020, the bond market had developed in both dimensions. In particular, the corporate bond market achieved an average growth rate of 26% per year, higher than the average growth rate of the bond market in general (24% per year). The scale of corporate bond market had also continuously grown, especially from 2018 onwards.

The annual report on Vietnam's bond market from the Ministry of Finance showed that, if in 2011, the scale of corporate bond market reached 3.75% of GDP, it had strong growth in 2019 compared to other years, up about 31.2% compared to 2018, reaching about 10.85% of GDP. This figure demonstrated that firms had become more and more interested in the bond issuance channel to mobilise capital instead of bank credit loan channel. The scale of the corporate bond market was estimated to reach more than 15% of GDP by 2020.

The corporate bond market reached about 7% of GDP in 2020

According to Do Bao Ngoc, Deputy General Director of Vietnam Construction Securities Joint-Stock Company, corporate bonds were a very important capital channel for enterprises as well as the economy. In particular, when businesses did not have too many choices because not all firms is eligible for buying public offerings shares and bank credit flows had limited medium and long-term capital into real estate.

The Ministry of Finance reported that, in terms of issuance value, in 2011-2018, the total volume of corporate bonds issued hit VND 643,524 billion, the average issuance volume was about VND 80,440 billion per year. In 2019, the total volume of corporate bonds issued reached VND 332,852 billion, of which private placement reached VND 309,352 billion, accounting for 92.9% of the issuance volume, and public offerings was about VND 23,500 billion, accounting for 7.1%. Vietnam also had one firm that issued bonds to the international market with a volume of $300 million in 2019.

Do Ngoc Quynh, General Secretary of the Vietnam Bond Market Association, said that the volume of successful corporate bond issuance had exceeded the volume of government bonds in the past four years. On the other hand, in previous years, besides loosening the policies on conditions and issuance procedures, Vietnam allowed corporate bonds to choose the issuance method of individual bonds, which were offered to the public for both investors and non-professional investors on the secondary market after a year from the date of issue. This was the decision that led to an explosion of the corporate bond market in 2019-2020.

“We opened the capital channel; the corporate bond market was gradually formed and merged into the capital market and the financial market. Firms could choose bond capital channel with medium and long-term capital sources, as well as stable interest rates. Since then, businesses had boldly invested in infrastructure, factories and business activities in long run, helping the economy to develop," Quynh said.

Reducing the burden on the banking system

According to the Vietnam Bond Market Association, data presented on the HNX showed the total value of successfully issued corporate bonds was VND 368,000 billion in 2020. This was the first time the corporate bond market has surpassed the government bond market in terms of issuance volume (the number of Government bonds issued by the State Treasury hit VND 333,000 billion in 2020).

From the perspective of bond-issuing firms, the Vietnam Bond Market Association said that in 2020, credit institutions and real estate enterprises were still the two types of the largest bond issuance, taking up 34% and 29% of the total issuance value respectively.

According to experts, although it was not new, the corporate bond market had developed clearly in the past few years, especially when the State Bank (SBV) restricted credit in the real estate sector, leading to the strong promotion of capital mobilisation through corporate bond channels by real estate firms.

Financial expert Nguyen Tri Hieu said that corporate bonds were not only an important capital mobilisation channel for businesses but also a tool to reduce the burden on the banking system. According to the SBV, outstanding loans of the economy GDP per capita were very large, about 150% of GDP and most of it comes from the banking system. In that context, corporate bonds opened a new way out instead of going to banks to borrow money, firms could issue bonds by themselves to mobilise capital.

According to research conducted by the credit rating organisation Fiin Ratings, in fact, many large firms such as Novaland (NVL), Vinhomes (VHM), An Gia Real Estate (AGG), World Real Estate Ky (CRE) had shifted the loan structure from banks to corporate bond channels in the last two years. Specifically, in the loan structure of Novaland Group in 2019, loans borrowed from corporate bonds accounted for 37%, while in 2020 it was 53%. This figure of Vinhomes was increased from 57% to 63% respectively. Regarding An Gia Real Estate and Century Real Estate, 100% of the debt in 2019 was a loan borrowed from the bank, but in 2020, the loans borrowed from corporate bonds of the two firms were 50% and 55%, respectively.

Tran Van The, Vice Chairman of Deo Ca Group, said that in the previous period, businesses concentrated and depended on credit mainly, however, due to the increasingly limited credit room for transport infrastructure, the bank tightening loans for BOT projects.

“Therefore, this was the time to deploy the plan of corporate bonds issuance to implement transport projects in the form of public-private partnership (PPP). Deo Ca would issue corporate bonds in September and October to implement traffic projects that have just won from bidding. In particular, there were many national key projects. Typically, Cam Lam - Vinh Hao project - a component project of the North - South highway with a total investment of VND 9,000 billion, Huu Nghi - Chi Lang project about VND 7,500 billion, Dong Dang - Tra Linh project of VND 12,000 billion," The said.

According to Fiin Ratings, the corporate bond channel would continue to play an important role in the strategy of restructuring capital and diversifying mobilisation sources for businesses. Firms needed to have more time and capital to recover production and business activities as well as debt restructuring because the short-term cash flow of firms was weakened by the impact of the pandemic, meanwhile, it was difficult for banks to provide long-term capital for firms. Therefore, continuing to seek long-term capital from the corporate bond channel would continue in 2021.