Bond issue - Term 1: Why must real estate businesses get into the race?

Only in the first eight months of 2019, the total amount of bonds issued by businesses has increased to over VND 140,000 billion, almost equal to the whole of 2018. Especially, among them, enterprises in real estate and construction occupy The rate is quite high. Besides, the bond interest rate is also the highest, up to 14.5%. So why do real estate businesses rush into a bond issuance race?

Real estate businesses are in need of capital

According to the Ho Chi Minh City Real Estate Association (HoREA), in the first six months of 2019, only three commercial housing projects were proposed by the Department of Construction to recognize as investors, decreasing 84.2% over the same period of 2018. The Department has also proposed the City People's Committee to approve investment in 10 commercial housing projects, decreasing 82.2% compared to the same period in 2018. The statistics showed that Ho Chi Minh City market was in a very difficult period.

HoREA President, Le Hoang Chau, said that in the past time in Ho Chi Minh City, over 150 projects were reviewed and inspected. Although most of the projects have been operating normally, the impact of this review is still significant. Recently, a series of leaders of Ho Chi Minh City who have been involved in land-related problems have greatly affected the implementation of projects. Therefore, many projects of real estate giants related to public land have to stop the construction.

In addition, the real estate market after a number of years of booming development has stopped. Currently, housing prices in Ho Chi Minh City are at very high levels, so they have made "speculation" of speculators, and people who have real demand for housing, most do not "reach". Therefore, even if the project is legally completed, the sale is not easy for many real estate businesses.

Source: Internet

As a result of the above phenomenon, many real estate businesses are in a difficult situation. Hundreds of trillions of dong of real estate businesses have poured into the project but cannot continue to deploy and cannot sell. Against this backdrop, many real estate businesses are in a state of lack of liquidity, cash flow from operating activities is insufficient.

The most obvious evidence is that the cash flow from business activities of many real estate businesses is in large shortage. For example, Dat Xanh Group Joint Stock Company in the first six months recorded a negative cash flow from operating activities of VND 653 billion, and VND 996 billion in the same period last year.

Similarly, Phat Dat Real Estate Company (PDR) in the first six months of 2019 also recorded negative cash flow from operating activities to VND 1,337 billion, and VND 618 billion in the same period last year. Another big enterprise in the field of real estate is Van Phu Investment, the cash flow from operating in six months was negative to 1,527 billion dong, the same period last year was also negative 418 billion dong.
Spleen credit barriers?

Many real estate businesses are "hungry for capital", but it is not easy to borrow bank. The reason is that banks are now very cautious in lending to real estate businesses, because in the coming time, the State Bank may raise the risk ratio of real estate loans from the current 200% to 250%. With this provision, if the real estate lending ratio is high, the bank's CAR will be reduced to not meet the minimum requirement of the State Bank of 9% or Basel II standards.

Besides, lending capital is also limited because according to Circular 19/2017/TT-NHNN, the ratio of short-term capital for medium and long-term loans decreased from 45% to 40%. The reduction in the ratio of short-term capital to medium and long-term loans forced banks to consider lending to risky projects in the current period.

Commercial banks own about 35.5% of corporate bonds. In addition, about 40.85% is owned by securities companies, certainly a significant proportion of this capital originates from banks. This shows that a very high percentage of bonds is owned or directly owned by the bank. Source: VCBS

Another important factor is that many real estate businesses will find it difficult to "transparent" the use of capital when borrowing, because many real estate businesses have to raise new capital to pay off old debts. Once projects "freeze" due to inspections, or the real estate market is in trouble, cash flow from business is difficult to repay due debts. Therefore, businesses must reverse debt to avoid bad debt is indispensable and it is also difficult for businesses to lend to "reverse debt".

In addition to the above reasons, the bank's lending also faces many obstacles because it is limited to the ceiling credit growth.

Specifically, right from the beginning of 2019, the SBV determined the credit growth target for 2019 at 14%. As a result, many banks have been subjected to a relatively low "room" so they cannot extend credit too aggressively. Recently, some banks have become "easier to breathe" when the SBV opens "room". Specifically, VPBank is raising its credit growth target from 12% to 16%; Techcombank increased from 13% to 17%; MB increased from 13% to 17% and ACB was raised from 13% to 17%.

For these reasons, banks and businesses both "prefer" bonds over credit. When buying bonds, banks are not subject to the strict conditions prescribed by the lending. For businesses, with the mobilization of bonds, many cases also do not need guaranteed accounts, are "disbursed" immediately and not subject to the strict conditions of capital use as when borrowing credit. Therefore capital can be used for many different purposes.

Currently, the bank most prefer the bonds, especially Techcombank. According to the bank's financial report, by the end of June 2019, Techcombank's total investment in corporate bonds amounted to more than VND 60,000 billion. The majority of Techcombank's bonds are invested through its subsidiary, naming Techcombank. Techcombank holds the most bonds related to corporations such as Vingroup, Sun Group, etc. For example, recently, Techcombank bought VND740 billion of 7-year bonds with an interest rate of 10.3% from Ba Na cable car service JSC.

Banks with other large amount of bonds are SHB with 24,000 billion dong, BIDV with 22,600 billion dong. In particular, a significant part (more than VND 6,000 billion) of BIDV bonds is a debt restructuring bond of Hoang Anh Gia Lai. Other banks also have a relatively large amount of corporate bonds: Vietinbank of about VND 18,900 billion; District Bank (MB) VND 15,000 billion.

Some businesses that are short of cash flow in their business activities must issue bonds such as Phat Dat Real Estate (PDR). In the first six months, PDR issued three bonds, of which VND 200 billion of 1-year bonds issued in March had interest rates of up to 14.5%, two bonds were issued in May with VND 100 billion of 1-year bonds with interest rate of 12% and VND 550 billion of 5-year bonds with 10.5% respectively. Van Phu Investment (VPI) issued VND 1,000 billion; Khang Dien Housing Business (KDH) issues VND 900 billion with an interest rate of 12%.

According to Hoang Nam