Significant increase in corporate bond yield

Previously, corporate bond issuance activities had faced many difficulties because of tough requirements under Decree 90/2011 of the Ministry of Finance. Since the issuance of Decree 163/2018, which was issued to replace Decree 90, the corporate bond market has grown rapidly.

Many real estate enterprises have pushed the bond interest rate to a high level in order to attract capital, despite risks. (Illustrative photo)

Many real estate enterprises have pushed the bond interest rate to a high level in order to attract capital, despite risks. (Illustrative photo)

However, it seems that the risk for corporate bond market has also increased simultaneously as many companies are competing very fiercely with each other to attract investors, which has led to a big jump in corporate bond yield.

Boom in corporate bond issuance

Companies’ capital demand has become huge recently. There are three ways for companies to raise capital, by bank borrowing, bond issuance and share issuance.

Previously, most companies increased their capital by borrowing from banks or issuing more shares. However, recently the corporate bond market has grown rapidly in terms of number of issuing companies and issuing volume.

There has been fierce competition between companies to attract more investors and capital. Some companies have issued bonds at very high interest rates which are double of the deposit rates of banks. Although these bonds are considered high risk, the high-interest-rate bonds are still attractive in the eyes of investors.

According to the State Securities Commission, the bond issuing volume of 2018 was VND 224,000bn vs the registered amount of VND 427,000bn, an increase of 94.5% YoY. In the first half of 2019, the total issuing amount reached VND 116,085bn, an increase of 7.4% YoY, in which issuing amount of banks was VND 36,700bn (constituting 36%), and issuing amount of real estate companies was VND 22,122bn (constituting 19%). The bond issuing volumes of brokerage companies and other companies constituted 3.5% and 58.5%, respectively.

According to VBMA, 22 out of 23 registered bond deals were issuing successfully in July 2019, in which one deal was issued to the public while the remaining deals were issued to private investors.

In August 2019, F88 was successful in raising VND 100bn by issuing 2-year bond in two weeks. Agribank also announced that the bank has got approval to issue VND 5,000 of 7-year bonds.

Surge in corporate bond interest rate

Volume increasing is usually a positive sign. However, the corporate bond market has still lacked an independent credit rating institution. Most bond issuing companies have not been evaluated by a credit rating institution. Hence, to attract more investors, companies have to increase the interest rate of bonds.

Looking back at 2018, many banks pushed up the bond issuance activities to increase the tier 2 capital and the long term fund. The issued interest rate of banks was around 7.5%/year while the corporate bond yields of other companies fluctuated between 8-10.5%/year for the same period.

In 2019, most banks plan to issue bonds with term of 5-7 years and floating interest rate. The yield of these bank bonds may reach 8-9%/year. The bond yield of some recent successful deals of other companies were popular at 10-12%/year. This level was even higher than the lending interest rate of banks (9-11%).

Corporate bonds are not only attractive in the eyes of institutional investors, but also individual investors. Some individual investors have spent billions of dongs to buy high-interest bonds of some companies.
Notably, the high bond yield is mainly found in real estate companies like Khang Dien House and Van Phu Invest. Furthermore, 10-12% yield was just the average level. The bond yield even reached 14.5%/year, such as bond yield of Phat Dat Real Estate. Since beginning of 2019, Phat Dat Real Estate had six issuances, with bond yield each time being 14.45%, 12%, 10.5%, 14%, 13.5% and 9.5%, respectively.

According to 2018 data, brokerage companies constituted 40.85% primary bond market, while banks and other companies constituted 35.5% and 23.65%, respectively. In 2019, the main clients in corporate bonds market are still brokerage firms, investment funds and banks.

Some notable companies which were successful in issuing corporate bond in 2019 include Phu Quoc Tourism (issued 3 times of VND 1,400bn to Techcombank Securities), Phat Dat Real Estate (issued VND 200bn at 14.45% to Thanh Thanh Cong Securities, Bao Long Insurance and Sai Gon Trading JSC and Vietnam Debt Fund SPC).

The bond purchasing activities have also been very hot in banks. MB-Sai Gon Branch and OCB-Ben Thanh Branch bought 100% of two issuances of Phat Dat Real Estate with amount of VND 550bn and VND 225bn at 10.5% and 9.5%, respectively. These bond yields were lower than the bond yields that Phat Dat Real Estate issued to other investors.

Corporate bonds are not only attractive in the eyes of institutional investors, but also individual investors. Several individual investors have spent billions of dongs to buy high-interest bonds of some companies.

Risk Increase

In a discussion with Sai Gon Investment, an expert said that the range of 10-12% of corporate bond yield is acceptable as at this rate, corporates can raise funds for longer term, 5 years, rather than 3 years from bank loan. Furthermore, not all companies are able to get a good lending interest rate from banks. Normal companies are usually offered at 9-11% while big companies, which have billions of dong at demand deposit account, are mostly loaned at 6-7%. The reason that banks loan to these companies at lower interest rate is because banks can use the demand deposit of these company for free. For example, banks can lend them out.

However, if companies continue attracting investors by pushing bond yield higher, they will create risk for bond market and for themselves. For a long time, real estate companies have mostly operated based on the capital funded from clients, secondary investors and banks.

The Real Estate Business Law strictly controlled the capital raising from people. The project is only allowed to raise funds from people when it completes the legal procedure, tax responsibilities and receives the certificate to allow fund raising activities from the Construction Office. Furthermore, the State Bank encourages banks to balance their lending structure, and reduce lending proportion in real estate market. These two factors have created pressure for real estate companies. They have to borrow money by issuing bonds at high interest rate.

Deputy Prime Minister Vuong Dinh Hue has asked the Ministry of Finance, State Securities Commission, and the State Bank to review the regulations on bond issuance through private placement and report to the government on the corporate bond market, given the high bond interest rate recently.  If there are any abnormal signs, the authorities need to adjust immediately.
Hence, investors who buy bonds have to be careful as they have to carry all the risk. The risk of corporate bonds only reduces when market has an independent institution to do the credit rating for issuing companies. The credit rating will help investors know whether the bond yield has reflected the risk of the bond and make more suitable decisions.

One more thing to note is that some companies have issued new bonds to pay for old bonds or pay for loans at banks. Furthermore, some banks have used bond purchasing as a way to loan to companies. This is an issue that authorities need to control to avoid risk in the future.

The risk of high corporate bond interest rate has been noticed by the government. Vuong Dinh Hue, Deputy Prime Minister, has said that if the authorities are not able to manage the bond issuing activities, risk will arise, and impact the credit market and macro issues. The Deputy Prime Minister also asked authorities to build a legal document which only allows professional investors, who have ability to do financial analysis and risk evaluation, to buy bonds through private placement.

The Deputy Prime Minister has asked the Ministry of Finance, State Securities Commission, and the State Bank to review the regulations on bond issuance through private placement and report to the government on the corporate bond market given the high bond interest rate recently.  If there are any abnormal signs, the authorities need to adjust immediately.

Yen Lam

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