What factors hinder banks' corporate bond repurchase?

>> Banks underwriting bonds should buy back bonds: central bank

Current regulations provide that when a commercial bank operates as an issuance agency, commits to and enters contracts with investors for the buyback of issued bonds, it is also responsible for redeeming corporate bonds. Nguyen Thi Hong, the governor of the State Bank of Vietnam, made this statement in response to a suggestion from voters in Ho Chi Minh City that commercial banks be given the duty of purchasing back bonds that have been offered for sale to investors through intermediaries.

According to the State Bank of Vietnam, the bond issuer is obligated to make all required principal and interest payments to investors on schedule and in full. If the issuers for bonds offered for sale on the domestic market is unable to pay the bond principal and interest due in full and on time in accordance with the issuance plan disclosed to investors, they may negotiate with bondholders to pay the bond principal and interest due with other assets.

Also, voters in Ho Chi Minh City suggested that the State Bank of Vietnam increase its oversight of the state of affairs and the actions related to the purchase of corporate bonds by financial institutions. An unplanned inspection of corporate bond investment activity at 11 credit institutions has been started by the State Bank of Vietnam. Many decisions on administrative breaches have been made for credit institutions that violate the law based on the findings of the inspection.

There is no necessity for commercial banks to take part in the repurchase of corporate bonds that the bank has previously introduced to bondholders, according to legislation and comments from the State Bank of Vietnam (SBV) - note that this refers to "introduction" and not commitment. Many bondholders are worried about this issue, but they are unable to submit a formal redemption request because bondholders' purchasing activities are conducted through an intermediary organization (specifically, on the market with the participation of both commercial banks and securities companies), and the contract contains no information indicating that the introducing parties engage in issuance agency activities. Also, there is no agreement between the introducing parties and the investor regarding the transaction. The responsibility of the parties that "introduce" bonds with large volume and high risks to investors is therefore a controversial issue.

Blocking point from Circular 16/2021/NHNN

However, according to the SBV's Circular 16/2021, credit institutions are not permitted to purchase corporate bonds in some circumstances, such as when the bonds are issued with the intention of reorganizing the issuer's own debt, providing money, or purchasing stock in other businesses. These are regarded as hot topics since they have been the two most common ways for enterprises to raise funds in Vietnam's capital market in recent years.

>> Corporate bonds pose a risk of bad debt

According to the State Bank of Vietnam's regulations on the classification of valuable assets, level of deduction, method of setting up risk provisions, and use of provisions to handle risks in operations for credit institutions before the time of buying corporate bonds, one of the principles for buying and selling corporate bonds is that a credit institution can only buy corporate bonds when it has a bad debt ratio of less than 3% according to the most recent classification period.

Therefore, the current rules governing the trading activities of corporate bonds by credit institutions apply to both the kinds of corporate bonds issued for purposes that credit institutions are "not allowed to buy" in accordance with Circular 16 as well as banks' participation in bond repurchases (in the event that there is a commitment with investors on the repurchase of bonds). It can be difficult to tell whether a corporate bond fits this description. Furthermore, if the requirements are not completed, banks find it challenging to take part in purchasing or investing corporate bonds in fresh issues from other banks.

Circular 16 is still considered one of the "blocking points" that prevent commercial banks from participating widely in the corporate bond market. Therefore, there have been suggestions that the SBV should consider amending Circular 16.

Lessons from the Collapse of SVB

Another factor to consider is that the collapses and woes of international banks may make it less likely for the banking industry to support the corporate bond market. This is because banks like Silicon Valley Bank (SVB) of the US or the Swiss giant Credit Suisse have experienced problems with bonds and assets, which make up a large proportion of their total assets.

The collapse or instability of banks, particularly SVB, was caused by investing in bonds when interest rates were low. As interest rates increased, the price of bonds in the market decreased, and banks needed money to pay bondholders or to support credit activities. Banks had to sell bonds at a loss, which would result in their inability to pay if they did not sell.

Therefore, risk management for investment portfolios and bond holdings requires rigor and compliance with general financial risk management rules. This should be emphasized throughout the banking system, especially in the current period of global financial risk.