Many risks involved
A report by the Vietnam Institute for Economic and Policy Research (VERP) on the macro-economic situation in the first six months of 2020 says that businesses have raised almost VND 160,000 bn through corporate bonds at an average annual interest rate of 6.72%. In the last few years the corporate bond market has grown substantially and showing an even stronger growth each year, from 9.01% of GDP in 2018, to 11.3% of GDP in 2019.
However, along with rapid and strong growth there are many risks involved that threaten the stable development of the corporate bonds market and the capital market in general. It is apparent that corporate bonds of high value are being continually issued, almost ten to twenty times that of equity. Data reveals that real estate companies with newly issued corporate bonds took up 38% of the value of the entire market in 2019, with the total balance several times higher than equity, causing potential high risk of insolvency if the real estate market is faced with adverse fluctuation. Additionally, lack of transparency, shortfall of information in the market, and independent credit evaluation has created more risks for enterprises, especially for individual investors.
Decree 81/2020 stipulates that businesses must fulfill three additional requirements. First, balance of corporate bonds at the time of issuance must not be more than five times the equity. Second, a period of 90 days for issuance of corporate bonds and next issuance period to be only after six months. Third, issuance companies of corporate bonds must sign contract with an issuance consultant organization to award legal documents. Additionally, the financial statements in documents that offer corporate bonds must be approved by auditors.
Decree 81/2020 also calls for regulations on better management and supervision with due responsibility to the Ministry of Finance and the City Stock Exchange Department with regards to release of relevant information and procedures for reports and statistics. Competent agencies expect these regulations will contribute to improving the quality of corporate bonds issued in the market, and prevent issuance of too many bonds that may be far too high for a company’s financial capacity.
Risks still loom
Decree 81/2020 only controls private offerings while public offerings must await the Securities Law 2019 to take effect on 1 January 2021, along with some other written guidelines. Furthermore, the Securities Law 2019 will have several regulations on management of corporate bonds private offerings of public corporations. One of the most notable details is that participants in private offerings are only professional securities investors. Therefore, just in a few more months, the legal frame on issuance of corporate bonds will change, causing some disorder in the market.
Actually Decree 81/2020 has not established a mechanism that is able to protect the interests of investors, especially individual investors. Individual investors are always vulnerable entities in the market because they do not have sufficient means to analyse, access information or have know-how about the market. However, there is no mechanism for independent credit evaluation regarding the capacity and prospect as well as risks of bond issuance. The investors do not have an independent and objective information channel on which they can rely on for making their investment decisions.
Lack of credit rating results causes competition between corporate bond issuance companies, that depend mainly on interest rates. This makes it more difficult for financially companies in need of capital to get access to the market. The interest rates in the market which do not reflect the actual risks put investors in a maze and they tend to be attracted by interest rates without paying enough attention to the risks involved.
Although Decree 81/2020 adds responsibilities for issuance consultant organizations for evaluation by laying issuance conditions for companies, this additional regulation does not seem to create much positive effect, because consultant services can go as far as evaluation of the issuance documents and not go farther into important matters such as financial capacity or risk levels.
Moreover, an issuance consultant organization is usually an issuance agent or an issuance guarantor, so the issuance consultant organization's evaluation is just not objective enough. Also, the problem of adequate information and lack of transparency has not been dealt with. Decree 81/2020 does not include a new regulation on the release of information as guided by the Ministry of Finance.
In fact, the quality of the information released by the companies has not covered sufficient requirements and it only satisfies formalities but lacks significant information. Some companies even maintain two separate books, and timely information is not forthcoming. The website of the Hanoi Stock Exchange (HNX) also fails in its purpose to keep investors up-to-date on all necessary information.