Clearing Hurdles for Corporate Bond Market Development

10:01:49 AM | 9/19/2022

The corporate bond market enjoyed a boom and steady growth in 2020 and 2021; however, the issuance of new corporate bonds in non-banking fields has become quiet since April 2022. Investment risks and legal risks are exposed in several cases at the back of an overheating development period while regulatory tightening (especially amended Decree 153 on corporate bonds) is attributed to slowing corporate bonds.

Besides, in the money market, tightened credit growth, rising interest rates and weak banking system liquidity at a certain time also disrupted the issuance of corporate bonds.

Hard to raise funds from the corporate bond channel

According to a report by the Vietnam Bond Market Association (VBMA), the corporate bond market had another quiet month of August when there were only 26 privately placed corporate bond issues worth VND13,930 billion and a publicly offered bond issue of VND300 billion. However, most bonds were issued by commercial banks and only two non-bank issues were offered by Fuji Nutri Food Joint Stock Company and Khang Dien Housing Trading and Investment Joint Stock Company with a total value of VND1,800 billion. Thus, in the past four months, new corporate bond offerings were not as "hot" as before.

Meanwhile, the Government repeatedly has directions and projects for strong capital market development, with a focus on the corporate bond market aimed to reach 20% ​​of GDP by 2025. This goal is not simple at all.

Dr. Vu Tien Loc, Chairman of the Vietnam International Arbitration Center and member of the Economic Commission of the National Assembly, said that the Government has introduced many economic and business support policies, including fiscal policies. In addition to relaxing taxes, the Government is also boosting public investment which is also confronting many difficult problems.

Recently, the State Bank of Vietnam (SBV) eased credit room for banks but Vietnam is facing inflationary pressures. Thus, the room is unlikely to be loosened much. Therefore, the credit supply to the economy is also limited while there is a huge capital demand for economic recovery and development. For that reason, the market is hoping for other credit valves for the economy through stock and bond markets.

“In other countries, the fund mainly comes from the capital market while in Vietnam it is mainly from credit. The country’s capital market has developed relatively strongly in the last five years but remained fledging. The fund, sourced through securities and bonds markets, only accounts for 26%. This drawback needs to be solved by Vietnam. It is necessary to bring people's money to business, not to savings accounts at banks,” he added

Many companies are also diversifying capital sources, including through securities and bonds. In fact, there are successful examples but it is still difficult to raise funds on these channels.

It is very important to develop the capital market to create more fundraising channels for businesses, Dr. Loc noted. Then, companies will have more options to seek funds for their business operations, particularly capital-short property developers which may face collapse on lack of funds. Authorities have acted to make the market better but they will also need solutions to unlock the capital market.

Dr. Le Xuan Nghia, Member of the National Financial and Monetary Policy Advisory Council, said, the total outstanding corporate bonds are valued at VND1,400 trillion (US$60 billion) and the total medium and long-term capital in the banking system is VND5,000 trillion (US$213 billion). In recent years, the bond market grew by 30-35% a year. Reportedly, the bond volume doubled every two years, from VND2,800 trillion to VND5,600 trillion two years later and to VND11,200 trillion after six years. This source of capital can shoulder most of the medium and long-term capital that the banking system is seeking.

However, no one cares about that importance but sees it as a "gambling" game of bond issuers, he said. It is very reprehensible to have no specialized supervisory agency caring about developing a medium and long-term capital supply market and mainstreaming the private economy.

A transparent and objective credit rating system needed

Dr. Vu Dinh Anh, an economic specialist, said that the corporate bond market consists of privately placed bonds and publicly offered bonds. Among VND1,400 trillion of issued bonds, 80% are privately issued and the rest is publicly sold. Decree 153 focuses on privately placed bonds but no agency has so far answered whether 20% of publicly sold bonds have any problems or not.

Notably, the COVID-19 pandemic strongly affected bond issuers in 2021, which cannot be ignored.

“It is important who is responsible for the corporate bond market. Decree 153 clearly states the Ministry of Finance, but it is impossible for only the Ministry of Finance to solve existing market problems without the State Bank of Vietnam because it is the biggest buyer of corporate bonds,” he stressed.

It is thought that Vietnam’s corporate bond market currently has no credit rating, no collateral and no underwriting, Mr. Anh noted. However, no collateral is an important feature of the corporate bond market because companies would rather borrow money from banks if they had collateral assets. The most important thing for corporate bonds is that they must be based on credit ratings. Even if they are rated low, companies are still entitled to issue bonds. Therefore, it is important for Vietnam to develop an honest and objective credit rating system.

Mr. Don Lambert, head of the Private Sector Development Unit, Asian Development Bank (ADB) in Vietnam, said, Vietnam has a very fast-growing bond market but the development of credit rating agencies mismatches it.

Presently, there are many credit rating agencies in the world and there are also reputable ones in Asia. If Vietnam wants to have successful credit rating agencies, it needs to learn from the experience from global credit rating agencies, he added. They can help provide best practices and standards, especially in terms of experience and governance.

In Vietnam, only a few investors invest in corporate bonds but mainly in government bonds and bonds issued by banks. Meanwhile, the investment demand is still very large, clearly evidenced by insurance market development. Therefore, Mr. Don Lambert suggested that Vietnam urgently need credit rating agencies with mandatory requirements. Besides, businesses are obliged to follow these requirements as market examples because many are quite weak in information disclosure. Subsequently. Credit rating agencies play a great role in information transparency.

“Vietnam can completely give a credit rating because it already has some domestic credit rating agencies. Besides, once a good legal environment has been developed, it will attract investors,” Mr. Don Lambert asserted.

Dr. Nguyen Tu Anh, Director of General Department, Central Economic Commission

The corporate bond market in Vietnam is a slower-growing market than other capital markets. Optimistically, it still grew well in the past. In 2017-2021, the size of the corporate bond market expanded by 24% a year and by 56% in 2021. This shows that the market demand is extremely large, from both buyers and issuers.

However, we must be cautious about new but too-fast growing things. We also witnessed some recent cases regarding corporate bonds but they did not leave much impact on the market.

Trust is crucial in this market. The rule of the game is you must pay for what you did wrongly. Any market must be built on a trust system. Usually, we have two approaches to trust. The classic way is we build strict laws and tight controls to filter out risks. Doing so is truly low-risk, but it destroys the natural attribute of this market, which is a risk.

Therefore, we have a new approach to building trust and developing risk-handling tools. Because each investor has a different “taste” for risk and different needs, we need different tools.

A better tool for developing confidence is hedging risks, whereby we build institutions that guarantee low pay for low risks and high pay for high risks. The market will then operate in a smoother, more sustainable way. Accordingly, the government needs to build a complete and strict legal system to build investor confidence.

Dr. Trinh Quang Anh, Chairman of Vietnam Interbank Market Research Association

From a macro perspective, the size of Vietnam's capital market is about VND11,500 trillion divided by the GDP of VND8,000 trillion, the result is 144%. The bond market is about 40% of GDP. This year’s credit growth is estimated at 14% and most banks are running out of room. This will provide an opportunity for the corporate bond market because, without a chance of borrowing money from banks, companies will issue bonds to raise capital. Some banks also introduce investors to buy corporate bonds issued through banks.

Regulators often point to openness and transparency but some ways of doing this are currently very unclear. We expect the bond market to grow quickly but sustainably, but development requires filters and rejections. So, as usual, negative cases uncovered recently are also necessary to make the market stronger. Only macro risks need to be managed while problems arising from the course of action should be settled by market laws.

Mr. Dang Tran Phuc, Chairman of the Board of Directors of AzFin

Recently, the market has witnessed many negative cases where many investors are unable to get back their assets. These happenings gave rise to regulatory tightening and implicated decent businesses. According to statistics, only VND20-30 trillion of bonds were issued in July-August. This is a big bottleneck. The question is to what extent the responsibility is of regulators and to what extent is it of issuers? Vietnam's corporate bond market is still fledging and undeveloped and many companies see this reality as a "party" to capitalize on the money of investors.

To handle this problem, it is necessary for issuers to be responsible to investors, to themselves, to their employees and to the development of the financial market. They need to use capital more effectively, fulfill their committed obligations, and repay debts on time. They should establish a financial management department, which is responsible for calculating cash flows and capital needs to help them work to plans. In addition, they also need to have an investor relations department to interact with and offer products suitable to investors, contributing to the use of capital in a more transparent and effective way.

Vietnam also needs to have clear regulations on the responsibility of other stakeholders such as issuing agents and collateral assets.

It is necessary for investors to recognize that bonds are also an investment channel and they should allocate their money appropriately. If buying bonds directly, they must find out issuer information by themselves or seek professional advisors or corporate bond investment funds for this.

Dr. Truong Van Phuoc, Member of the National Financial and Monetary Policy Advisory Council

Short-term capital flows should rely on banks and long-term capital must rely on the bond market. What recently happened in the capital market is a warning because we do not have an institution that bears ultimate responsibility.

To develop a healthy and advanced capital market, it is necessary to have an independent institution, a regulatory agency to inspect, supervise and hold responsibility for the movement of the financial market in general and the capital market in particular. It is also necessary to have institutions that rate the health of businesses from which investors can make decisions on their own and bear responsibility for their decisions.

Anh Mai (Vietnam Business Forum)