Wary of corporate bond maturity burden

Vietnam's corporate bond market now only accounts for 18.3% of GDP as of 2Q2022.

>> Banks should tighten assessment controls of their corporate bonds investments: experts

Vietnam's corporate bond market is positioned to replace the banking sector as the medium- and long-term funding channel for enterprises under the Government strategy, with an average annual growth rate of 30% throughout the period of 2005–2021.

The government set a goal for the corporate bond market scale, saying that it should equal 20% of GDP by 2025 and 30% of GDP by 2030. Meanwhile, Vietnam's corporate bond market now only accounts for 18.3% of GDP as of 2Q2022.

Commercial banks are among the biggest bond issuers because corporate bonds have the following advantages: (1) they mobilize medium-to-long-term capital, which makes it simpler to balance sources for lending to businesses and retail customers; and (2) they increase tier 2 capital, which promotes financial capacity growth, improves capital adequacy ratio, and increases the economy's medium-to-long-term credit capacity.

Additionally, commercial banks take part in the market as investors, actively enhancing liquidity and fostering the growth of the corporate bond market. Another significant aspect is that the corporate bonds are recorded as ready-to-sell securities (with the ability to sell before maturity). Therefore, there is a chance that companies could employ corporate bonds for short-term refinancing.

Due to the difficulty in obtaining bank loans and the State Bank of Vietnam's explicit declaration of stringent monitoring of real estate credit through the adoption of new rules, real estate firms also aggressively issued corporate bonds in the period between 2018 and 2021. As of January 1, 2017, regulations on the risk factor of accounts receivable for real estate enterprises increased to 200% from the 150% mentioned in Circular No. 06/2016/TT-NHNN. The banks were also required by Circular No. 08/2020/TTNHNN to lower the percentage of short-term funds used for medium- and long-term loans. As a result, from over 26% in 2018 to roughly 12% in 2021, the real estate credit growth rate significantly dropped.

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In addition, many real estate businesses that did not meet the conditions to borrow capital from banks have switched to issuing corporate bonds with higher interest rates. Some bonds did not include collateral assets and were not subject to the same settlement activities as a bank loan.

Vietnam bussinesses’ corporate bond maturity value in 2022-2032 (Estimated basing on current outstanding bonds)

According to KB Securities, enterprises promoted bond issuance in the period of 2019–2021, which increased the pressure of bond maturity in 2022–2026. In 2023 and 2024, the total bond maturity value reaches VND 374.3 trillion and VND 381.2 trillion, respectively. The real estate group accounted for the second largest proportion, reaching VND 120.4 trillion (32.1%) in 2023 and VND 121.1 trillion (32.0%) in 2024.

"We will focus on data analysis of listed real estate companies, which is easier to collect data on and more transparent. For the unlisted group, the transparency and data availability are quite limit  ed", said analysts at KB Securities.

KB Securities’s statistics show that in the 2020 – 2021 period, real estate enterprises with total equity lower than VND 20,000 billion had an unimpressive positive cash flow from operating activities (CFO) while enterprises with equity of VND 1,000–5,000 billion had negative CFO in 2021 and 1Q2022. This group boosted investment activities, buying new high-value projects funded by cash flow from debt and issuing shares. Meanwhile, enterprises with total equity of over VND 20,000 billion had much more impressive business results with a high positive CFO in the 2019-2021 period, although this group also maintained high new project investment.

In KB Securities’ view, in the period of market instability, the risk is higher in small and medium-sized enterprises due to the high leverage and lower quality of projects, along with poor sales performance.