Broad Space for Bond Coupons

11:24:47 AM | 28/3/2019

Issuing bonds to mobilize capital is a common approach adopted by Vietnamese companies, in addition to mobilizing loans through commercial banks.

Volatile unconvertible bond coupons

In recent days, many investors have been invited to corporate bonds issued by Saigon Securities Inc. (SSI). The stock broker plans to issue VND500 billion worth of 2-year bonds, carrying par value of VND100 million, in March and April 2019. The coupon rate is expected at 8% per annum for the first year and added 1.5% to the reference rate in the second year.

In early March 2019, Viet Dragon Securities Joint Stock Company (VDS) disclosed a board resolution on issuance of VND500 billion worth of unsecured unconvertible bonds which carry one-year maturity term, a par value of VND100 million and a coupon rate of no more than 9.5% per annum. Thus, if compared with SSI bonds, VDS’s bond coupon is about 1.5 percentage points higher.

Securities companies are quite active in issuing bonds, with many well-known names like Tan Viet Securities Incorporation (TVSI), Tri Viet Securities Company, Viet Capital Securities Joint Stock Company, Thien Viet Securities Joint Stock Company, Vietcombank Securities Joint Stock Company, Saigon - Hanoi Securities Joint Stock Company (SHS), and VNDirect Securities Joint Stock Company. These brokerage houses have flexible products for customers as buyers not only hold the right to request premature buyback, but are also allowed to use these bonds to secure buying power for their securities trading accounts.

Coupon rates among these brokers also vary. While SSI offered an 8% rate for the first year, Viet Capital Securities Joint Stock Company followed its approved bond offering plan with a coupon rate that may be higher than that of SSI.

Specifically, in mid-January 2019, Viet Capital Securities Joint Stock Company announced a board resolution to sell 2-year bonds worth of VND500 billion. The coupon is equal to medium-term deposit rate plus 4.5% applied by BIDV and Vietinbank. Given the current deposit rate of 6.9% at these lenders, the coupon rate of Viet Capital Securities bonds is up to 11.4% per annum.

Besides, property firms also keenly issue bonds, either being convertible or non-convertible bonds.

In late 2018, Vingroup announced a successful bond offering of VND1 trillion. With the par value of VND100,000, the 2-year bonds carry a 10% coupon for the first year and a reference rate plus 4% for the second year. The reference rate is based on the 12-month deposit rate of BIDV, Vietcombank, Vietinbank and Techcombank. The current rate is nearly 11% per annum.

Vingroup's issuance report showed that the property group mainly sold its bonds to domestic institutional investors. After the issuance (December 24, 2018), its bond-based debt was VND13,503 billion, accounting for nearly 17% of its total debt. Currently, Vingroup is offering VND1 trillion of bonds with the same terms as that bond issuance.

Popular coupon rates of non-convertible bonds range from 8% to 12% per annum. In fact, this is the net rate for bondholders but the amount paid by issuers may be higher if its bond issuance or liquidity is underwritten. For this case, issuing companies may have to pay up to 13% per annum for bond coupons.

Are convertible bond coupons flatter?

While non-convertible bond coupon rates move in a quite large range, rates of convertible bonds are divided into two different groups.

Most recently, Hoang Huy Investment Financial Services Joint Stock Company (TCH) announced the successful offering of VND1,200 billion of convertible bonds (par value of VND1 million), carrying a coupon rate of 7% per annum. The converted price has not been made clear to the public.

Relative to other property developers, this rate is quite soft for TCH. But, this is not the cheapest cost of convertible bond issuance.

In early 2018, Cuu Long Pharmaceutical Joint Stock Company (DCL) successfully issued US$20 million of 5-year convertible bonds, born a coupon rate of 1% per annum (in USD). The bonds will be converted into shares at a price of VND25,000 per share. The conversion starts one year after the issuance date, depending on the bondholders' request.

Why is there such a big difference?

Refrigeration Electrical Engineering Corporation (REE) issued non-convertible bonds, using its interests in two member companies as collaterals. The firm offered 10-year bonds to foreign investors for VND2,318 billion. The bond par value is VND1 billion.

More remarkably, in the information disclosure, REE said that the bond coupon rates are equal to the government bond yield plus a margin, but the upper limit is 7.3% per annum. The issuance was underwritten by the Credit Guarantee and Investment Facility (CGIF), a trust fund of the Asian Development Bank (ADB), rated AA by S&P Credit Ratings.

Why is there this difference? In theory, the difference in yields mainly lies in bond types, creditability and position of issuers at the time of issuance.

As usual, financially strong companies which have high ratings and do not depend much on loans will have to pay less for bond-based debts. This however does not mean that issues that accept high coupon rates are less strong, but this is simply a perspective of corporate finance and common theories.

Recently, many companies issued bonds, especially real estate developers. Many analysts noted that property firms issue a lot of bonds possibly because they have limited available property fund or anticipated or simply they anticipate funding hardship in the time to come.

According to some experts, bonds underwritten for liquidity by banks is a good choice. However, investors should carefully read the underwriting terms before signing and pay attention to issuer credibility to ensure the safety and flexibility of their bond investment.