Corporate bond market needs transparency

(ĐTTCO) - Statistics from the stock exchanges show that the total amount of corporate bonds issued from the beginning of this year to now is estimated at VND159 trillion, up 50 percent over the same period last year.

An individual investor opens a stock trading account at a securities company. (Photo: SGGP)

An individual investor opens a stock trading account at a securities company. (Photo: SGGP)

The proportion of individual investors investing in corporate bonds increased to nearly 30 percent in the first months of this year, compared to 9 percent in 2019. To minimize risks, the authorities are taking steps to make transparent the corporate bond market.

High income lures investors

Along with the declining momentum of savings interest rates, corporate bonds with attractive yields are strongly attracting idle cash from individual investors. It is recorded that the interest rate of corporate bonds ranges from 10.5 percent to 12.5 percent per annum, or even up to 15-17 percent per annum. According to SSI Securities Company statistics, the number of corporate bonds held by non-credit organizations and individuals has increased by about 153 percent in 2019 and increased by around 25 percent in the first six months of this year. This shows that corporate bonds have been drawing a considerable amount of money from other investment channels, of which the most direct is the savings deposit channel, due to the same nature of investments with fixed income. 

‘The income of corporate bonds is 1.8-4 percent per annum higher than the interest of time deposits of large commercial banks,’ said Ms. Nguyen Thi Thanh Tu, senior analyst at SSI Research.

Real estate and construction enterprises account for a large number of units that have been increasing capital mobilization through bond issuance channels. Even financial, securities companies, and commercial banks have also promoted issuing corporate bonds to raise capital. At many commercial banks, the listed deposit interest rates are extremely low as required by the State Bank of Vietnam, but their private investment advisory offices bustle because their main job is to invite and consult depositors to shift to the corporate bond channel. The race to raise capital for corporate bonds is so intense that there was the situation of “bonus” interest, besides the income on the contract; employees of securities companies of banks solicited customers and vied each other to achieve the sales target. They even provided inadequate counseling or explained incorrectly about the corporate bond model. Currently, corporate bonds are not only offered for sale directly at the counter, but investors can also place orders on 
the electronic banking application of banks or trading software of securities companies. According to securities companies, the proportion of individual investors investing in corporate bonds has increased to nearly 30 percent in the first months of this year, compared to the level of 9 percent in 2019.

The main reason that urged individual investors to participate in the corporate bond market is attractive income. However, profits often come with risks, owning bonds means that investors become creditors of issuers and will face the risks of insolvency of the issuers. 

‘Therefore, investors need to understand thoroughly the capacity of the intermediary distribution organization in fulfilling its commitments to repurchase corporate bonds before maturity and the fees charged. In many cases, the fee for reselling bonds before maturity may erode the difference with the deposit interest rates,” Ms. Tu said.

Small individual investors need to be blocked

In the face of this tendency, the Ministry of Finance has repeatedly warned that intermediary distribution organizations should not offer bonds at all costs to investors. At the same time, it has recommended that investors, especially individual investors, need to access information fully, analyze, and carefully assess the risks they might encounter when investing in corporate bonds, and they should not buy corporate bonds because of high-interest rates. Because, investors might not be able to recover the amount of bond investment, including principal and interest if the issuers encounter difficulties.

The Securities Law 2019 stipulates that professional securities investors are investors with financial capacity or expertise in securities, including both institutional and individual investors. Of which, individual investors are considered as professional securities investors when they meet the following conditions: individuals granted a securities practice certificate, individuals holding listed securities or securities registered for transactions amounting to at least VND2 billion, and individuals who have a taxable income of at least VND1 billion in the preceding year.
In 2019, individual investors traded on both the primary and secondary markets with a total value of about VND66 trillion, equivalent to about 1.4 percent of the total residential deposit in the banking system. In the first six months of this year, individual investors purchased nearly VND22.7 trillion worth of corporate bonds in the primary market, equivalent to nearly 15 percent of the total bond issuance, higher than the average of 10 percent in 2019. As the number of individual investors participating in corporate bonds is increasing year by year, the Ministry of Finance acknowledges that there was a phenomenon that enterprises have split into many issuances and many bond codes to meet the number of small investors. Especially, at present, many enterprises tend to promote approaching individual investors to make private placements with high-interest rates.

From the market perspective, investing in corporate bonds is like investing in stocks. However, if the market is not transparent, the issuers face difficulties in production and business, leading to inadequate fulfillment or failure to fulfill commitments to investors, such as redemption before maturity, and repayment of principal and interest, the affected scope will be great, causing uncertainties to the financial market and the society.

Due to this fact, the Enterprise Law that has just been approved by the National Assembly and the Securities Law 2019, which will take effect from January 1 next year, will restrict individual investors to purchase corporate bonds through private placement. Specifically, the Enterprise Law stipulates that the buyers of privately-placed bonds in the issuances of joint-stock companies that are not public companies include strategic investors for individual convertible bonds and bonds with detachable warrants; professional securities investors for individual convertible bonds, bonds with detachable warrants and other types of privately-placed bonds. Thus, shortly, many individual investors who are not professional securities investors will have to stop their games on the privately-placed corporate bond market.

Many people said that making transparent the bond market, as well as strengthening supervision and limitations on the issuance of corporate bonds, is necessary. However, banning unprofessional individual investors will make it more difficult for enterprises to raise capital. Regarding this matter, the Standing Committee of the National Assembly stated that it is necessary to stipulate that the subjects entitled to buy and transfer privately-placed bonds must only be professional securities investors, under the Securities Law and common practice. On the other hand, non-professional securities investors may entrust private-placed bond investments through professional securities investors, thereby developing institutional investors. Thus, it will diversify the structure of investors and increase professionalism for the market.

By Nhung Nguyen – Translated by Thuy Doan

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