by VBF 24/05/2022, 11:42

For an efficient and sustainable corporate bond market

With strong development in the past few years, the corporate bond market has been playing an increasingly important role in the capital market structure, meeting the medium and long-term capital needs of enterprises. However, in the first three months of 2022, the corporate bond market showed signs of cooling down because of several new policies, reducing opportunities for businesses to access capital, thereby hindering their recovery, and slowing down the national program on socio-economic development recovery 2022-2023.

Strong growth and many potential risks

According to Mr. Hoang Quang Phong, Vice President of Vietnam Chamber of Commerce and Industry (VCCI), in the last five years, the Vietnamese corporate bond market has enjoyed an average growth rate of 46%/year. Despite such a growth rate, the size of Vietnam's bond market only accounts for about 15% of GDP, much lower than that of other countries in the region, such as Malaysia (56% of GDP), Singapore (38% of GDP) and Thailand (25% of GDP).

Forum "Efficient and sustainable development of corporate bond market" was held by Business Forum Magazine.

According to the report by the National Assembly's Finance Committee, in 2021, the total value of corporate bonds issued reached VND720 trillion, an increase of 52.5% compared to 2020. This is also the year of applying the latest regulations on corporate bonds, specifically Decree 153/2020/NQ-CP on private placement of corporate bonds in the domestic market and the offering of corporate bonds to international markets (The decree took effect from January 1, 2021). Therefore, 2021 was also a booming year for the privately issued corporate bond market; in which, finance-banking was the leading industry group, accounting for 42% of total issuance value; the real estate industry accounted for 34.8%, up 36.2% compared to 2020.

Dr. Can Van Luc, a finance-banking expert, said that the Vietnamese corporate bond market had great potential. According to the Financial Strategy to 2030, outstanding bond loans should reach 47% of GDP by 2025 (of which, corporate bonds will reach 20% of GDP) and 58% of GDP by 2030 (of which, corporate bonds will reach 25% of GDP). Moreover, Vietnam's macroeconomic prospects are still assessed well, with a growth target of 6.5-7% by 2030 (according to the 13th National Congress).

Vietnam has a great need for infrastructure investment, so it needs medium and long-term capital (in addition to bank credit capital, from now to 2030, Vietnam needs to mobilize VND700 to 1,000 trillion per year in medium and long-term capital), and the corporate bond market is a high potential capital mobilization channel.

However, the reality shows that the "hot" growth of the corporate bond market comes with certain risks and vulnerabilities that may appear in the market.

On April 11, 2022, the Prime Minister issued Official Dispatch 311/CD-TTg on measures to stabilize the stock market and corporate bond market with the requirements of relevant agencies to correct and stabilize the operation of the corporate bond market, ensuring the market's safe, efficient, and transparent operation. In Official Dispatch 304/CD-TTg dated 7/4/2022 on rectification of corporate bond market activities and land use right auction, the issue of controlling the corporate bond market was also drastically directed.

The Ministry of Finance has continuously requested functional agencies in the financial sector to strengthen inspection and supervision, in order to correct and strictly handle violations in the issuance and provision of services on corporate bonds. The 5th draft amending Decree 153 aimed at completing the legal corridor for the corporate bond market.

However, measures, warnings and forecasts about risks and new regulatory possibilities also set new requirements for the corporate bond market, including both the issuer side and the investor side. Investors, businesses, and experts are all worried about policies that may be too tight, leveled, causing difficulties for businesses. If the bond market is not protected and developed, businesses will face disadvantage because of the lack of an important capital mobilization channel. Protecting investors is legitimate, but at the same time, it can cause investors to lose investment opportunities and slow down Vietnam's capital market.

How to make the market healthy?

According to Dr. Can Van Luc, the commercial banking system is overwhelmed in providing long-term loans. Therefore, the channel to raise capital through the bond market is extremely important, the problem is how to regulate the corporate bond market for healthier development.

To make the market healthy, according to Dr. Luc, it is necessary to both develop the market and control the risks. In the immediate future, it is necessary to completely solve the existing difficulties to strengthen investor confidence as well as avoid creating a bad precedent. It is also necessary to soon complete the appropriate legal framework, soon amend Decree 153/2020/ND-CP on private placement of corporate bonds, Decree 156/2020 on sanctioning of administrative violations in the securities sector; Reviewing the Securities Law 2019, in which professional investor standards should be raised. In particular, it is necessary to consider the appropriate level of regulation on collateral, underwriting and distribution of bonds.

In addition, Mr. Luc said that there should be regulations on credit rating to help investors easily determine the quality of the business and the level of risk of the issued bonds. Accordingly, it is necessary to identify the mandatory cases, the cases where the credit rating is encouraged; There should be regulations to ensure that credit rating companies have sufficient professional capacity and ethics, etc.

In addition, there should be solutions to increase the quality of corporate bonds. It is necessary to consider more specific regulations on the size, frequency and conditions of issuance; support and facilitate public issuance activities (simplifying the process, and shortening the time to process documents); improve the infrastructure of the corporate bond market, such as establishing a centralized secondary market for corporate bonds, and stipulating the application of international accounting standards; and upgrade information technology infrastructure, database. We should also continue to develop the Government bond market as a rating standard for corporate bonds.

According to Mr. Luc, it is necessary to develop a diversified and professional stock investor base; encourage the development of investment funds, open-ended funds, and pension funds; encourage investment entrustment; improve the transparency of information for investors, and offer products suitable for individual investors. In particular, it is necessary to improve the mechanism and the quality of management and supervision of the corporate bond market, and strengthen inspection and supervision.

The standard of bond issuers is not high

Mr. Dau Anh Tuan, Deputy Secretary General, Director of Legal Department of VCCI

Regarding the individual bond market, the total private issuance volume in 2021was VND605 trillion, up 38.8% compared to 2020. In the first quarter of 2022, the volume of credit bonds issued by private sectors continued to increase to VND105.5 trillion. Over VND5 trillion of corporate bonds were sold to the public. Credit institutions were the largest issuers, accounting for 36.2%, and real estate businesses accounted for 33.26% of the total issuance volume.

However, while the corporate bond market grows rapidly, it incurs many risks; the standards of issuers are not high; and the financial situation of some issuers is still limit ed. Many bond investors are only interested in interest rates rather than getting to know the capacity of the insurer.

There has been a situation where the issuer uses capital inconsistently with its announced information. Professional investors (insurance companies, investment funds, pension funds) have not played a dominant role in the individual bond market.

Using capital by issuing bonds is not necessarily rigid

Mr. Le Hoang Chau, Chairman of HCM City Real Estate Association

Implementing a corporate credit rating organization is very important and it is necessary to have a roadmap to enforce credit rating for corporate bonds. By doing so, not only can we control information provision of issuers and market transparency, but also reduce risks for investors, and promote the participation of resources from corporate bond issuance.

Besides, the use of capital from bond issuance is not necessarily rigid, for the specific purpose of the project given when issuing the bond. Because the implementation progress of a project can last from 3-5 years, it is necessary to thoroughly understand the issue of using capital after issuing corporate bonds. When an enterprise meets the standards of Vietnamese and international enterprises, investors and public agencies only need to base on the enterprise's accounting statement to understand the capital use mechanism from corporate bond issuance.

It is recommended that agencies continue to consider amending and supplementing Decree 153/2020/ND-CP in the direction of increasing transparency to reduce risks for investors, increase the responsibility of issuers and increase the supervisory role of management agencies and corporate credit rating units.

It is necessary to improve power for management agencies

Dr. Nguyen Tri Hieu, banking and finance expert

The corporate bond market in Vietnam is going through a difficult period, and investor confidence has fluctuated because of recent incidents. Although the market has not yet fallen into a crisis, the incidents have proved that the market needs a strong correction and reform.

The private market will grow stronger than the public issue market, but it is a riskier market because the regulations on issuance are not as strict as that of the public issue market. Therefore, Vietnam needs to improve the control capacity and power of the market management agencies and state audits in performing the obligations of market management and control.

Many people are concerned that the tightening of the market by regulatory agencies will hamper market development. In my opinion, effective market control will be the premise for sustainable development in the future. Of course, it will create difficulties for the market, but it will restore confidence in the market.

In addition, it is necessary to establish a separate office under the Ministry of Finance on credit rating to supervise the credit rating companies, to control compliance with regulations on credit rating, and the conflict-of-interest cases between members of the rating company and the rated bonds.

It is necessary to analyze according to the characteristics of each industry

Mr. Pham Xuan Hoe, Former Deputy Director of the Institute of Strategy, State Bank of Vietnam

After the recent "controversial" cases in the financial market, the views on the corporate bond market are shifting from the extremes of openness to strict management. That is not reasonable with market principles and if it continues like this, it will be difficult for Vietnam to have a healthy bond market, or reach the target of 20% of GDP. Therefore, the overall approach of the market must be very open, following the principles of the market economy, in order to balance capital between the long-term and short-term markets, and balance risk and market development.

Notably, the Draft amending and supplementing Decree 153 mentions that the enterprise's debt limit should not exceed three times the equity, but that approach is not appropriate. Previously, the International Monetary Fund or the World Bank recommended the overall level of debt to businesses, including bonds, stocks, and loans from other organizations, that each type of enterprises will have a different debt ratio. For example, the commercial sector is financed by 70% capital and 30% is equity, while the industrial sector 50-50%. Thus, we must analyze according to the specific industry to limit the debt ratio.

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