Make healthy cash flow to buy corporate bonds

Nearly 60% of corporate bonds issued are held by banks and securities companies.

"Tightening" banks to buy bonds

By the end of November 2021, the State Bank of Vietnam (SBV) issued Circular 16/2021/TT-NHNN stipulating the purchase and sale of corporate bonds by credit institutions and foreign bank branches (Circular 16). This Circular takes effect from January 15, 2022.

A notable point in this Circular is that a credit institution can only buy corporate bonds when that credit institution has a bad debt ratio of less than 3% in the latest classification period according to the regulations of the State Bank on classification of assets, deduction level, method of making provision for risks and use of provisions to deal with risks in operations for credit institutions before the time to buy corporate bonds.

In addition, credit institutions are not allowed to buy corporate bonds in three cases. Firstly, corporate bonds are issued with the purpose to restructure the debts of the issuing enterprises. Secondly, corporate bonds are issued for the purpose of contributing capital or buying shares in other enterprises. Thirdly, corporate bonds are issued which have the purpose to increase the size of working capital.

At the same time, credit institutions may only buy corporate bonds when the enterprise meets many conditions such as: the purpose of using the proceeds from the bond issuance of the enterprise is lawful and consistent with the bond issuance plan and/or capital use plan; the issuer commits to redeem bonds before maturity when it changes the purpose of using proceeds from the bond issuance or violates the law on corporate bond issuance, violates the capital use plan; issuing enterprises must not have bad debts within the last 12 months and must have financial capacity to ensure full payment of bond principal and interest on time.

In addition, a credit institution may only purchase corporate bonds that the issuing enterprise has changed the purpose of using proceeds from the bond issuance in accordance with the law before the credit institution buys the bonds when the bond issuer is rated at the highest level according to the credit institution's internal credit rating regulations at the latest time.

Along with that, Circular 16 also stipulates responsibilities of credit institutions when buying corporate bonds. For example, during the holding period of corporate bonds, at least once every six months, credit institutions shall assess the production and business situation of the issuing enterprise, assess the financial situation, solvency payment of principal and interest of bonds of the issuing enterprise.

No chance to "shake hands" to avoid credit

Commenting on Circular 16, experts from Vietcombank Securities Company (VCBS) said that Circular 16 orients the system to safety, strengthens strict control in corporate bond transactions, and manages operations and credit activities in general. The main point that Circular 16 sets is to ensure the bad debt ratio at a safe level and credit quality. Next, corporate bond products also have strict regulations on selection criteria and trading principles. When the strict regulations in Circular 16 come into effect from January 15, 2022, VCBS estimates that it will affect about 20% of the newly issued bonds in the market.

“The Circular will orient credit institutions to trade quality corporate bonds, ensure cash flow in the form of bond purchases or loans, and at the same time manage credit risks arising in the future. These will be necessary elements for long-term buying and holding activities for credit institutions' corporate bond portfolios," VCBS stated.

Currently, the scale of corporate bonds only accounts for about 12% of bank credit outstanding and about 15% of Vietnam's GDP. According to a report by SSI Securities Company, nearly 60% of corporate bonds issued are held by banks and securities companies, of which banks account for 27.3% of total issuance.

Therefore, economic expert Assoc. Prof. Dr. Dinh Trong Thinh warned that corporate bonds can be a way for banks to both circumvent the law on lending to real estate businesses and securities companies, while avoiding the order to tighten loans in risky areas, without having to make provisions for risks, "cleaning" the balance sheet.

Therefore, commenting on the issuance of Circular 16 by the State Bank and the issuance of Circular 57/2021/TT-BTC by the Ministry of Finance stipulating the roadmap to rearrange the market of securities, including corporate bonds, Assoc. Prof. Dr. Dinh Trong Thinh said that the lesson of the financial crisis in 2008-2009 required the Ministry of Finance and the State Bank to have a "brake" at the right time, so that credit financing does not harm inflation as well as the macro balance.

Therefore, the Government needs to have strict management and supervision. Circular 16 stipulates three cases where credit institutions are not allowed to buy corporate bonds, which will avoid the “handshake” between enterprises and credit institutions, or a credit institution that lends money to a "backyard" business to the wrong audience.

According to experts, the need to invest in corporate bonds of credit institutions still exists, when this is an asset channel that brings attractive profits compared to many other channels, especially when compared to Government bonds, which have relatively low yields. It is forecast that trading activities of corporate bonds from credit institutions will likely accelerate in the transition period, before Circular 16 comes into effect.