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Current status of Vietnamese corporate bonds
Posted date 19/08/2016
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Posted date 19/08/2016
19.300 view
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When the Vietnamese stock market was established (July 2000), government bonds were immediately listed on the exchange. However, after nearly 16 years of development, there is still a paradox: the uneven development between government bonds and corporate bonds.
MSc. Trinh Thi Minh Nguyet - Faculty of Finance
When the Vietnamese stock market was established (July 2000), government bonds were immediately listed on the exchange. However, after nearly 16 years of development, there is still a paradox: the uneven development between government bonds and corporate bonds. When the total value of government bonds reached 37 billion USD, corporate bonds were only 1.3 billion USD. And the total value of corporate bond issuance has never exceeded 2.5 billion USD, and is only concentrated in a few specific enterprises such as: ACB bank, Techcombank, Masan company, Tan Tao investment company... So what is the future for Vietnamese corporate bonds?
1. Development situation of corporate bond market in 2015-early 2016
Currently, the need for capital mobilization of enterprises in the form of bonds is urgent. In countries with more developed economies, the demand for corporate bond transactions is stronger. Investors always want to find stable investment channels with low risks to diversify their investment portfolio. Vietnam's corporate bonds have only reached a scale of 2.5% of GDP, compared to the average of ASEAN+3 region of 21.7% of GDP, so there is still a lot of potential. When the corporate bond market develops, it will help avoid maturity risks, reduce capital costs, help the capital market balance with the currency market, reduce transaction costs... and increase the competitiveness of Vietnamese enterprises.
In 2015, VND42,769 billion of corporate bonds were issued, according to statistics from the Ministry of Finance. Although the issuance volume of the entire bond market (government bonds, government bonds, government bonds, and corporate bonds) increased by 7% in 2015, the amount of corporate bonds issued decreased by 11%. The issuance of corporate bonds during the year was mainly for restructuring purposes. From the perspective of investors, mainly banks, the selection of issuers was quite careful, partly due to the pressure to lower the bad debt ratio. Therefore, these credit institutions mainly only invest in enterprises with good financial foundations. In 2016, the economy will continue the restructuring process. The stability of the domestic economy will face challenges from the world economy, especially China. In addition, the interest rate level will be under pressure from the exchange rate and the FED's plan to raise the operating interest rate. These factors will negatively affect the capital demand of the domestic market. Therefore, the volume of corporate bonds issued in 2016 is forecasted to be difficult to make a breakthrough compared to 2015. Investors, mainly banks, will still be cautious in choosing businesses with stable financial foundations and limited risks.
In the first months of 2016, the corporate bond market was more active with many large-value bond issuance deals such as Thanh Thanh Cong Tay Ninh Sugarcane Joint Stock Company (TTCS) issuing 1,000 billion VND in bonds purchased by TPBank and VIB for 600 billion VND and 400 billion VND respectively. Rong Viet Securities Company plans to mobilize 300 billion VND in regular bonds; Thong Nhat Investment and Production Joint Stock Company plans to issue 800 billion VND in convertible bonds... However, economic experts say that the number of corporate bonds issued is still quite modest.
2. Advantages of raising capital through issuing corporate bonds
Compared to bank loans, capital mobilization through bonds has some advantages such as not requiring collateral and being able to actively use the mobilized amount without bank supervision. Enterprises only have to pay interest for a term of 6 months or 1 year and only pay the principal at the end of the term. Enterprises will receive immediate and full disbursement instead of disbursement with a roadmap, in installments like when borrowing capital from banks, helping them to be more proactive in using capital. In some cases, especially when interest rates are low, enterprises can issue long-term bonds with fixed interest rates to take advantage of capital sources at low costs. Meanwhile, for the form of conventional bank loans, medium and long-term lending interest rates are often floating and will be reviewed and changed periodically. Regarding the reason for issuing corporate bonds, in addition to interest rates (coupons), it is also necessary to consider issuance costs. These costs will fluctuate greatly depending on the form of issuance and consulting costs. Therefore, it is difficult to base on interest rates alone and come to a conclusion that it is "expensive" or "cheap" compared to borrowing from a bank. Enterprises will choose the form of capital mobilization that best suits the interests of that enterprise at a certain time instead of simply relying on interest rates. In addition, compared to the form of capital mobilization by issuing shares, issuing shares is not always feasible and is also subject to market fluctuations and risks. In addition, capital mobilized from this form sometimes cannot generate profits immediately, putting pressure on earnings per share (EPS). Finally, the financial leverage ratio, enterprises will try to achieve the most optimal ratio possible, and this will directly affect the decision of which form the enterprise wants to mobilize capital.
3. Limitations when raising capital through issuing corporate bonds
The corporate bond market still has many limitations. Currently, corporate bonds in Vietnam are mainly issued in private form, offered to a limited number of investors, with low transparency. In addition, most corporate bonds are held by investors until maturity, so there are almost no transactions in the secondary market. The number of bonds listed and traded on both exchanges is still low, and transactions are mainly conducted through hand-to-hand transactions. General information about the market is also lacking, causing difficulties for investors.
In addition, bond issuance is still not easy in general, because if you look closely, you will see that only large companies with state capital, or joint stock companies with large charter capital, or newly equitized banks issue corporate bonds. This shows that investors are only careful to consider buying shares of businesses they trust, and many companies issue bonds privately to strategic shareholders, not to the public, so it is difficult to confirm that businesses can easily find capital through this channel. In addition, the corporate bond market does not have centralized transactions, so it is very difficult for investors to transfer when needed. Another issue is the issue of corporate information. Many listed companies on the Vietnamese stock market have not yet fully disclosed information, so in a secondary market like bonds, it is not easy for bondholders to get accurate information from the companies. Another risk is interest rates. Normally, after the first year, the bond interest rate is usually a floating interest rate, which means taking the mobilization interest rate of the same term of the four major banks, plus 2-4 percentage points. If the economic situation is difficult, the base interest rate decreases, leading to a decrease in the mobilization interest rate of the bank, then the investor will suffer.
Another problem is that if a business issues bonds and the bank buys them back, then the business uses this money to pay off the bank's debt to help the bank clear bad debt, this is also a worrying issue. In this case, the bank is only a lender through bonds and does not hold the assets like a normal credit loan, so if the business encounters risks, the bank will also be affected. These are also the reasons why corporate bonds are less attractive.
4. Orientation and solutions for developing the corporate bond market
To implement market development solutions in accordance with the roadmap for developing the Vietnamese bond market until 2020 in Decision No. 261/QD-BTC dated February 1, 2013 of the Minister of Finance, it is necessary to focus on synchronously implementing the following group of solutions:
First, about the group of solutions to perfect the legal framework
Evaluate the implementation of Decree No. 90/2011/ND-CP on corporate bond issuance. On that basis, the Ministry of Finance will submit to the Government a Decree replacing Decree No. 90/2011/ND-CP with amendments and supplements to ensure consistency with the development of the corporate bond market. In addition, continue to implement Decree No. 88/2014/ND-CP on credit rating services, to promote the development of the corporate bond market.
Second, about the market solution group
One is to develop a plan for developing the corporate bond market. The goal is to increase transparency as well as promote liquidity for the market, increase capital mobilization for the concentrated market. In addition, the goal of perfecting the corporate bond market is associated with the restructuring process of the stock market to have solutions suitable to the characteristics of the Vietnamese market; reform issuance, develop the market platform system, especially the information system. Legal issues, policy mechanisms, pricing, credit ratings must have a roadmap for application, refer to the bond market platform that ASEAN countries are aiming for...
Second, there needs to be the early establishment and development of credit rating companies for all corporate bond issuances.
This system will help investors better understand the issuing enterprise and is the basis for credit institutions to evaluate loan expansion. Currently, there are many prestigious and experienced international credit rating organizations such as Moody's, Standard & Poor's, Duff & Phelps, Fitch's, CBRS ... However, Vietnamese enterprises are currently mainly small and medium-sized, hiring large foreign companies will be very expensive. Therefore, Vietnam needs to plan its own roadmap to develop credit rating regulations according to Vietnamese standards, but still ensure compliance with international standards.
Third, strict management is needed to limit organizations issuing low-quality corporate bonds.
The Vietnamese corporate bond market is still too small, with very few corporate bonds traded and listed on the market. Therefore, we need a strict management mechanism to limit organizations from issuing bonds of poor quality and weak issuers. These are key factors that cause the loss of confidence of public investors. Securities companies and consulting organizations should have more investment reports, bond market analysis, as well as evaluate and rank the quality of bond issuers.
Regulatory agencies such as the State Securities Commission need to play an important role in supervising and enhancing the transparency of issuers and protecting the interests of investors. Issuance advisory organizations also need to work closely with issuers in standardizing bond documents, gradually approaching international standards with more transparent information - like a securities instrument - to avoid unnecessary risks. Only by doing so can we encourage deeper participation of investors to develop the corporate bond market.
1. Development situation of corporate bond market in 2015-early 2016
Currently, the need for capital mobilization of enterprises in the form of bonds is urgent. In countries with more developed economies, the demand for corporate bond transactions is stronger. Investors always want to find stable investment channels with low risks to diversify their investment portfolio. Vietnam's corporate bonds have only reached a scale of 2.5% of GDP, compared to the average of ASEAN+3 region of 21.7% of GDP, so there is still a lot of potential. When the corporate bond market develops, it will help avoid maturity risks, reduce capital costs, help the capital market balance with the currency market, reduce transaction costs... and increase the competitiveness of Vietnamese enterprises.
In 2015, VND42,769 billion of corporate bonds were issued, according to statistics from the Ministry of Finance. Although the issuance volume of the entire bond market (government bonds, government bonds, government bonds, and corporate bonds) increased by 7% in 2015, the amount of corporate bonds issued decreased by 11%. The issuance of corporate bonds during the year was mainly for restructuring purposes. From the perspective of investors, mainly banks, the selection of issuers was quite careful, partly due to the pressure to lower the bad debt ratio. Therefore, these credit institutions mainly only invest in enterprises with good financial foundations. In 2016, the economy will continue the restructuring process. The stability of the domestic economy will face challenges from the world economy, especially China. In addition, the interest rate level will be under pressure from the exchange rate and the FED's plan to raise the operating interest rate. These factors will negatively affect the capital demand of the domestic market. Therefore, the volume of corporate bonds issued in 2016 is forecasted to be difficult to make a breakthrough compared to 2015. Investors, mainly banks, will still be cautious in choosing businesses with stable financial foundations and limited risks.
In the first months of 2016, the corporate bond market was more active with many large-value bond issuance deals such as Thanh Thanh Cong Tay Ninh Sugarcane Joint Stock Company (TTCS) issuing 1,000 billion VND in bonds purchased by TPBank and VIB for 600 billion VND and 400 billion VND respectively. Rong Viet Securities Company plans to mobilize 300 billion VND in regular bonds; Thong Nhat Investment and Production Joint Stock Company plans to issue 800 billion VND in convertible bonds... However, economic experts say that the number of corporate bonds issued is still quite modest.
2. Advantages of raising capital through issuing corporate bonds
Compared to bank loans, capital mobilization through bonds has some advantages such as not requiring collateral and being able to actively use the mobilized amount without bank supervision. Enterprises only have to pay interest for a term of 6 months or 1 year and only pay the principal at the end of the term. Enterprises will receive immediate and full disbursement instead of disbursement with a roadmap, in installments like when borrowing capital from banks, helping them to be more proactive in using capital. In some cases, especially when interest rates are low, enterprises can issue long-term bonds with fixed interest rates to take advantage of capital sources at low costs. Meanwhile, for the form of conventional bank loans, medium and long-term lending interest rates are often floating and will be reviewed and changed periodically. Regarding the reason for issuing corporate bonds, in addition to interest rates (coupons), it is also necessary to consider issuance costs. These costs will fluctuate greatly depending on the form of issuance and consulting costs. Therefore, it is difficult to base on interest rates alone and come to a conclusion that it is "expensive" or "cheap" compared to borrowing from a bank. Enterprises will choose the form of capital mobilization that best suits the interests of that enterprise at a certain time instead of simply relying on interest rates. In addition, compared to the form of capital mobilization by issuing shares, issuing shares is not always feasible and is also subject to market fluctuations and risks. In addition, capital mobilized from this form sometimes cannot generate profits immediately, putting pressure on earnings per share (EPS). Finally, the financial leverage ratio, enterprises will try to achieve the most optimal ratio possible, and this will directly affect the decision of which form the enterprise wants to mobilize capital.
3. Limitations when raising capital through issuing corporate bonds
The corporate bond market still has many limitations. Currently, corporate bonds in Vietnam are mainly issued in private form, offered to a limited number of investors, with low transparency. In addition, most corporate bonds are held by investors until maturity, so there are almost no transactions in the secondary market. The number of bonds listed and traded on both exchanges is still low, and transactions are mainly conducted through hand-to-hand transactions. General information about the market is also lacking, causing difficulties for investors.
In addition, bond issuance is still not easy in general, because if you look closely, you will see that only large companies with state capital, or joint stock companies with large charter capital, or newly equitized banks issue corporate bonds. This shows that investors are only careful to consider buying shares of businesses they trust, and many companies issue bonds privately to strategic shareholders, not to the public, so it is difficult to confirm that businesses can easily find capital through this channel. In addition, the corporate bond market does not have centralized transactions, so it is very difficult for investors to transfer when needed. Another issue is the issue of corporate information. Many listed companies on the Vietnamese stock market have not yet fully disclosed information, so in a secondary market like bonds, it is not easy for bondholders to get accurate information from the companies. Another risk is interest rates. Normally, after the first year, the bond interest rate is usually a floating interest rate, which means taking the mobilization interest rate of the same term of the four major banks, plus 2-4 percentage points. If the economic situation is difficult, the base interest rate decreases, leading to a decrease in the mobilization interest rate of the bank, then the investor will suffer.
Another problem is that if a business issues bonds and the bank buys them back, then the business uses this money to pay off the bank's debt to help the bank clear bad debt, this is also a worrying issue. In this case, the bank is only a lender through bonds and does not hold the assets like a normal credit loan, so if the business encounters risks, the bank will also be affected. These are also the reasons why corporate bonds are less attractive.
4. Orientation and solutions for developing the corporate bond market
To implement market development solutions in accordance with the roadmap for developing the Vietnamese bond market until 2020 in Decision No. 261/QD-BTC dated February 1, 2013 of the Minister of Finance, it is necessary to focus on synchronously implementing the following group of solutions:
First, about the group of solutions to perfect the legal framework
Evaluate the implementation of Decree No. 90/2011/ND-CP on corporate bond issuance. On that basis, the Ministry of Finance will submit to the Government a Decree replacing Decree No. 90/2011/ND-CP with amendments and supplements to ensure consistency with the development of the corporate bond market. In addition, continue to implement Decree No. 88/2014/ND-CP on credit rating services, to promote the development of the corporate bond market.
Second, about the market solution group
One is to develop a plan for developing the corporate bond market. The goal is to increase transparency as well as promote liquidity for the market, increase capital mobilization for the concentrated market. In addition, the goal of perfecting the corporate bond market is associated with the restructuring process of the stock market to have solutions suitable to the characteristics of the Vietnamese market; reform issuance, develop the market platform system, especially the information system. Legal issues, policy mechanisms, pricing, credit ratings must have a roadmap for application, refer to the bond market platform that ASEAN countries are aiming for...
Second, there needs to be the early establishment and development of credit rating companies for all corporate bond issuances.
This system will help investors better understand the issuing enterprise and is the basis for credit institutions to evaluate loan expansion. Currently, there are many prestigious and experienced international credit rating organizations such as Moody's, Standard & Poor's, Duff & Phelps, Fitch's, CBRS ... However, Vietnamese enterprises are currently mainly small and medium-sized, hiring large foreign companies will be very expensive. Therefore, Vietnam needs to plan its own roadmap to develop credit rating regulations according to Vietnamese standards, but still ensure compliance with international standards.
Third, strict management is needed to limit organizations issuing low-quality corporate bonds.
The Vietnamese corporate bond market is still too small, with very few corporate bonds traded and listed on the market. Therefore, we need a strict management mechanism to limit organizations from issuing bonds of poor quality and weak issuers. These are key factors that cause the loss of confidence of public investors. Securities companies and consulting organizations should have more investment reports, bond market analysis, as well as evaluate and rank the quality of bond issuers.
Regulatory agencies such as the State Securities Commission need to play an important role in supervising and enhancing the transparency of issuers and protecting the interests of investors. Issuance advisory organizations also need to work closely with issuers in standardizing bond documents, gradually approaching international standards with more transparent information - like a securities instrument - to avoid unnecessary risks. Only by doing so can we encourage deeper participation of investors to develop the corporate bond market.
Although there are still many difficulties to be resolved, it is hoped that in the coming time, the issuance of corporate bonds will have many improvements when currently, the Vietnamese economy is highly appreciated for its speed and growth potential. This belief is increasing as Vietnam increasingly integrates deeply and widely with the world economy through AEC, TPP...
LIST OF REFERENCES
1. Tapchitaichinh.vn
2. Corporate bond report 2015-VCBS
3. http://www.bvsc.com.vn/
4. http://www.mof.gov.vn/
LIST OF REFERENCES
1. Tapchitaichinh.vn
2. Corporate bond report 2015-VCBS
3. http://www.bvsc.com.vn/
4. http://www.mof.gov.vn/
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