Bond Issue - Term 2: Potential risks lie ahead

Recently, the State Bank of Vietnam (SBV) has sent a letter to domestic commercial banks asking for risk control in corporate bond investment activities to restructure debt or enter the real estate company. This shows that the SBV is really concerned about the situation that many businesses issue bonds with high interest rates for banks. Thus, clearly the risk of bond investors even the economy, financial system is waiting ahead.


The corporate bond market is expanding


In many countries, bonds are one of the most important capital mobilization channels for businesses, with the size of bonds usually accounts for 20-50% of GDP. Investors in corporate bonds are usually investment funds and even individuals. In Vietnam, in recent years, corporate bond scale has grown quite fast. Many domestic enterprises have issued a huge amount of bonds to domestic and foreign investment funds, financial institutions.


Bond size versus GDP in some countries


The scale of Vietnamese bonds is growing fast, but compared to other countries it is still quite small. Therefore, the development potential of Vietnam's bond market is huge


According to data from the Ministry of Finance, in the first six months of 2019, total corporate bonds reached VND 116,085 billion, increasing 74% compared to the same period last year. Also according to data from the Ministry of Finance, by mid-August, 2019, the value of corporate bonds issued was around VND 130,000-140,000 billion. The total size of Vietnam's corporate bonds currently equals about 10% of GDP.


Compared to the credit channel, bonds still account for a relatively small proportion. The reason is that Vietnam's financial market is still at a relatively low level of development. Demand for capital mobilization is very large, but most of the businesses are quite small, financial data are not transparent. Therefore, it is difficult to create credibility with investors in order to raise capital easily.


In addition, organizations supporting the corporate bond market have not really developed. Vietnam lacks reputable corporate credit rating organizations to be able to rate corporate risks for investors to use as a basis for buying corporate bonds issued. Besides, the liquidity of corporate bonds in the secondary market is not high, so it does not attract small investors to participate.


Recently, the corporate bond market has had positive changes. Financial intermediaries such as securities companies and banks have been more actively involved in "distributing" corporate bonds to individual investors. Many securities companies have established a large scale bond investment fund.


For example, Techcom Bond Investment Fund has scale up to more than VND 7,000 billion. In 2018, Technological Securities Company distributed over VND 61,992 billion of corporate bonds, an increase of 79% compared to 2017, in which the majority of bonds were distributed to investors. There are also quite a lot of bond investment funds established.


There are quite a few businesses and domestic banks are also promoting the mobilization of capital by issuing international bonds. For example, in 2018, Novaland Group successfully raised USD 160 million from the issuance of international convertible bonds.


Risks are ahead


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 are owned by banks directly or indirectly. Source: VCBS


The development of the bond market is a very positive point for the financial market and the economy as a whole. The growing bond market helps investors to have more investment channels, businesses have more channels to raise capital, less dependent on too much bank loans. However, besides these positive points, uncontrolled and distorted development will lead to a lot of risks for the financial system in Vietnam.


Specifically, when capital flows are not strictly controlled, leading to the use of capital is more risky and more risky. The case of Mr. Bau Kien was once a typical case when Nguyen Duc Kien's companies used bond "matrices" to borrow money from banks to invest in stocks, gold investments... causing risks to the finance system. Although the buying of bonds is controlled, there are still many gaps.


For example, at the end of 2018, Sunshine Group issued VND 10,000 billion bonds. This amount of bonds is no collateral and is larger than the equity of this company. With the financial situation at that time, Sunshine Group was very difficult to get loans from banks. It is known that Vietnam Prosperity Bank currently owns over VND 1,000 billion and An Binh Bank owns VND 790 billion of these bonds.


Recently, the public also stirred up the fact that Norah Design and Interior Decoration Joint Stock Company of Van Thinh Phat Group has chartered capital of VND 1,200 billion, but has issued bonds worth up to VND 3,500 billion. So far, information about this investor has not been disclosed. Previously, another company belonging to Van Thinh Phat group, An Investment Group Joint Stock Company, successfully sold VND 15,000 billion of unsecured bonds.


In recent months, a series of real estate businesses such as Phat Dat and Van Phu have also raised trillions of dong through bond issuance. In particular, Phat Dat's 200 billion dong worth of bonds issued on March 18, 2019 had an interest rate of up to 14.5%, and the bond lots of Van Phu (VPI) also had interest rates of up to 12%.


The fact that many real estate businesses mobilize trillions of dong without collaterals, credit rating and corporate information is also considered very unusual. So far who is the "owner" of the amount of bonds remains a secret. However, perhaps the relationship between seller and buyer must be very "special". To a certain extent, the "lack of transparency" in this issue also poses a lot of risks because the use of corporate money will also lack transparency.


For real estate businesses, the recent massive capital mobilization with high interest rates shows that many businesses are lacking business capital. The real estate market is facing difficulties and many projects in Ho Chi Minh City and Da Nang are behind schedule due to inspection, which also affects the timely repayment of enterprises. Therefore, the capital mobilization may aim to restructure debt. This is a sign that the underlying risks in the economy are increasing.


According to Hoang Nam