Corporate Bond Issuance: Near, Far Worries

In 2011 when Vinashin announced in a statement that it would pay what it owed, a former knowledgeable insider wrote that "A bankrupt company is never capable of restructuring its own finance but it must rely on external support. When it has a right and accurate external financial backing, the financial task of Vinashin is only procedural."

 

In the end, the last day of the giant standing on his clay feet came: "Vinashin has completely settled its debts." Of course, the State-run shipbuilder could not do it without special support. But, it had to pay VND56 billion in interest for its debts each day since then, let alone overdue fines imposed by its creditors. For example, its US$600 million debt has now ballooned to US$626 million. Certainly, its creditors do not expect to regain what they have given, said the source.

 

As for its US$750 million debt, the Government will have to arrange its payment because it borrowed it for Vinashin. The US$600 million debt (principal, yields not counted) is now restructured with government-guaranteed bonds bearing a coupon rate of 1 percent per annum. Creditors will receive both principals and yields in 2025. Although the yield is significant, it is better have than have-not. Foreign creditors providing in retail loans (totalling US$200 million) have to accept a resale at a price 30 percent lower than original value. Domestic banks will be also applied a similar policy but they are paid by bonds of the Vietnam Debt and Asset Trading Company (DATC). But, it remains unclear how to deal with debts of Vinashin's affiliates to suppliers, contractors and subcontractors.

 

A special mechanism has been deployed and the visible loss is now US$4 billion, plus the "legacy" for an industry "which does not have sufficient technical facilities, expertise, managerial skills and financial resources to perform contracts concluded with customers" as concluded by the Government Inspectorate of Vietnam. In this legacy, there is a "bitter fruit" born by Government-guaranteed corporate bond issue.

 

The capital market is now sparking a new wave: Corporate bonds. Companies are estimated to raise VND34 trillion from bond issues in 2013, twice as much as in 2012. The Vietnam National Coal, Mineral Industries Holding Corporation Limited (Vinacomin) is regarded as the most successful bond issuer this year. Vinacomin successfully issued VND5 trillion worth of bonds, 1.7 times initial expectations of VND3 trillion when it performed the market survey. The Bank for Investment and Development of Vietnam (BIDV) successfully issued 10-year bonds worth VND3 trillion. Reportedly, the Electricity of Vietnam (EVN) has revealed a much more ambitious plan, raising VND10 trillion from a corporate bond issue.

 

In general, this new wave is more positive than negative, but it still raises certain concerns.

 

According to observers, corporate bonds are divided into three categories. One type is "absolute assurance" but this accounts for only 10-20 percent of total issuance. Another type is bonds issued to draw cash flows for debt settlement (orange level) and the final type is bonds issued for restructuring debts (red level, the money can be used for another cycle of bad debts, but better concealed). Notably, companies still are legally allowed to issue bonds for debt restructuring.

 

Remarking on this matter, Nguyen Huu Quang, Member of the Finance and Budgetary Committee of the National Assembly, said: "When a company issues bonds, the buyers are commercial banks, which are also businesses. This is theoretically safe. The company must consider effective business plans in order to repay debts, while the buyers of corporate bonds must be sure of their recovery before they purchase. But, that's in theory only. If banks buy bonds without careful due diligence, the issue fails to pay debts on time, they will have bad debts."

 

Dr Tran Du Lich noted, "Corporate bond is a form of direct funding and it does not pass any intermediary credit institution. This is good because it helps reduce credit costs. However, corporate bonds will not promote its roles if they are illiquid. Or in other words, they should be transferable on the market as other valuable papers."

He added that the liquidity of corporate bonds is not high. Currently, there are two kinds of corporate bonds: One is secured by assets of the issuer and other is credit loan, which depends on the creditability of the issuer. These bonds have different degree of risks and their coupon rates are also different. The second type of bond essentially needs credit rating of banks.

 

Dr Lich said, as most bond issuers are not listed on the stock market, the supervisory role of the State Bank of Vietnam is very important to ensure transparency and eliminate underground agreements between commercial banks and enterprises.