What is the solvency of real estate bonds?

The total value of corporate bond placement only reached VND 180 trillion (-31.5% YoY) during 1H2022.

>> Wary of corporate bond maturity burden

The State Bank of Vietnam is anticipated to increase the lending limit  s for the banking system towards the end of August or the beginning of September in order to meet the target of 14% credit growth in 2022. The cash flow of real estate enterprises will be influenced by this event in a positive way to some extent. As a result, these businesses will have new opportunities to borrow money to pay their bond obligations.

This choice, however, is only appropriate for businesses with fresh initiatives and high-caliber assets. Additionally, the restoration of credit flows in the last months of the year is anticipated to cause the real estate market to perk up once more. Businesses can sell off their inventory to free up cash for debt repayment.

Raising interest rates is becoming popular due to rising inflation in many nations, and Vietnam is anticipated to do the same in order to relieve pressure on the Vietnamese dong. Rising interest rates will have a direct impact on people's and enterprises' cost of capital in the future, reducing the market's ability to absorb new supply while it remains very high, according to KB Securities.

In the interim, fresh bond issuance will encounter numerous challenges in the future due to new legislation and decreased demand. In terms of policy, the fifth draft amendment to Decree No. 153/2020/ND-CP governing the offering of corporate bonds was announced with changes aimed at tightening the rules for both investors and issuers. These changes include:

First, banning businesses from issuing bonds for the purpose of providing capital, purchasing stock in other businesses, or lending money to others.

Second, the entire outstanding bond sum is no more than three times the total equity. Additionally, there hasn't been any cumulative loss throughout the past year's straight profits.

Third, only bonds issued by publicly traded corporations can be purchased by professional investors who are private persons.

If this decree draft is issued, it will prevent businesses with limit  ed access to bank credits and financial difficulties from issuing bonds.

>> Real estate bonds to be controlled 0

Meanwhile, the demand from individual investors will also decline in the near future because of two factors: (1) a loss of confidence in the bond market following the Tan Hoang Minh Group scandal; and (2) an increase in deposit rates coupled with rising economic risks that cause risk-averse investors to transfer funds to the banking system.

Due to government involvement and the fallout from the Tan Hoang Minh incident, which has a negative impact on the real estate market, the total value of corporate bond placement only reached VND 180 trillion (-31.5% YoY) during 1H2022. In particular, the total amount of bonds placed in the second quarter of 2022 was VND 119 trillion (-45% YoY), with 70% of the total amount going to the banks to raise capital to ensure capital adequacy ratio (CAR). Despite suffering a significant decline as a result of the aforementioned issues, the real estate industry nonetheless placed second in terms of value.

According to KB Securities, the end of 2022 and 2023–2024 would be challenging for real estate enterprises with high maturing bond loads in terms of cash flow. When bank loans are hard to obtain; Capital from bond issuance is constrained; the absorption of the real estate market in 2023–2024 is not high due to the rising interest rates and the risk of an economic recession, small and medium-sized businesses with low asset quality will encounter many difficulties in fundraising.

Given the stronger quality of the projects and the greater ability to borrow finance, KB Securities predicts that the level of difficulty for large real estate firms will be lower. However, these businesses have also had to continuously amass and implement new projects to be able to raise additional debts despite the times when the market developed too quickly since they need to raise fresh money flows to meet the maturity obligations of the bonds issued from past years. In the ensuing years, this will also lead to a cash flow imbalance and a decline in operational effectiveness.