Corporate bonds pose a risk of bad debt

Commercial banks, in addition to being substantial bond issuers, are significant investors in the Vietnam corporate bond market.

>> Expectations to boost the corporate bond market

Nonetheless, the impact of the aforementioned fact is limit ed because corporate bonds represent for a tiny fraction of overall assets held by Vietnam's commercial banks.

Existing risks

Commercial banks, in addition to being substantial bond issuers, are significant investors in the Vietnam corporate bond market. According to FiinRatings, 17 commercial banks reported holdings of corporate bonds available for sale as of December 31, 2022, totaling VND 188 trillion.

Investment in corporate bonds is now included in bank outstanding loans, according to current legislation. As a result, when the issuer becomes partially or entirely bankrupt, these investments are also at risk of becoming NPLs. No matter how corporate bonds are turned into bad debt, the issuer's other debts will likewise become bad debt.

The risk is exacerbated by the significant demand for matured corporate bonds this year and next, with the entire value of privately-placed corporate bonds maturing in 2023 estimated to be VND 235 trillion. Although some companies missed bond interest and principal payments.

The Hanoi Stock Exchange (HNX) announced a list of 54 firms that have failed to satisfy their bond payment commitments on February 21, 2023. Although some of these firms paid later, our data showed that as of March 8, 2023, the number of issuers behind on bond payments had climbed to 67, with 63 of these companies failing to pay their bond payments and four of them having their obligations restructured by extending the maturity date. To compensate investors, the majority of these firms provided higher interest rates, mirroring a rise in market interest rates overall.

>> Corporate bond issuance surges in March after prolonged inactivity

According to FiinRatings, late corporate bond payments were VND 89.3 trillion, accounting for roughly 55% of all outstanding bonds issued by these entities. The ability of these organizations to make their bond payment commitments will be determined by the maturity of their debt, their ability to mobilize alternative sources of finance, and their expected cash flow from business activities.

Restructuring bond debt

Several financial experts believe that determining the risk level of corporate bonds for banks is dependent on a variety of criteria. Not every bank that owns or invests in a big number of corporate bonds faces a high level of risk. The risk is heavily influenced by the quality of corporate bonds held by banks. That is, it is dependent on the issuers' ability and creditworthiness.

The bad debt percentage from outstanding corporate bonds is only 11.3%, according to FiinRatings. The bad debt percentage is greater, at 18.7%, for issuers that are real estate enterprises in particular. Yet, the total value of bonds owned by banks amounts for just 2.3% of the total earning assets of the banking system as a whole. As a result, the risk of bad debt calculated for the entire financial system is not very high.

Decree 08/2023/ND-CP, in particular, has removed significant pressure on the corporate bond market. Furthermore, the government is reducing obstacles to the real estate market as soon as possible.

Mr. Le Hong Khang, Manager, Credit Risk Analytics, FiinRatings, stated that the impact of corporate bonds on commercial banks, if any, would be mitigated if bond debt restructuring was carried out more aggressively in accordance with Decree 08/2023, and the Government's solutions to support the corporate bond market were effectively implemented.