One of the most decisive inclusions in Decree 81/2020 is of Clause 8 in Article 6 on bond transactions, whereby corporate bonds issued domestically are restricted from trading with more than one hundred investors within one year from date of issuance, except cases under court jurisdiction, under legal inheritance, or held by professional securities investors.
At the end of one year, corporate bonds can trade without restriction among other investors, unless the issuing company decides otherwise. The issuance of corporate bonds in the international market will need to comply with regulations on transactions in the issuance market, with the outstanding debt not exceeding five times the equity. According to the latest quarterly financial statement, the issuance must be after a gap of six months.
Decree 81/2020 is believed to be an effective tool to limit some enterprises from selling bonds at high interest rates and pushing the corporate bond market into hot growth. Therefore, before Decree 81/2020 takes effect from 1 September, many businesses are rushing to sell more corporate bonds. This strong push in the corporate bond market has led to an interest rate competition, uncertainty in corporate bonds, with investors at risk of buying without the ability to assess or evaluate their purchase.
In the immediate future and due to the current unpredictability in the market caused by the Covid-19 pandemic, the pressure on debt repayment of municipal bonds will also be pushed up leading to risk of default. Now, real estate businesses are increasing capital mobilization through municipal bonds. Securities companies and commercial banks are also promoting corporate bonds to individual investors and supporting the trend to buy more corporate bonds. This could possibly cause the corporate bond market to face risk of collapse.
Lure of high interest rates
According to Dr. Nguyen Tri Hieu, an expert in finance and banking, theoretically, corporate bonds are a good way to resolve capital constraints for businesses. However, when many individual investors only look at interest rates before buying bonds without understanding the actual status of the issuing business, then it is easy to fall into a trap.
Dr. Hieu believes that many people do not have the ability to analyse financial statements correctly, with many people mistakenly believing that bonds are supported or guaranteed by banks. He also said that many of the businesses issuing bonds at high interest rates are in real estate businesses, because when capital is low then interest rates are the best bait to lure investors, a trend that has been on the increase this year.
Asso. Prof. Dr. Nguyen Khac Quoc Bao, a lecturer at the Ho Chi Minh City University of Economics, said that investors are too gullible to understand the risks of corporate bonds and his concerns are currently directed towards real estate businesses that are offering investors such very high interest rates. He feels that investors must not fall into this trap and be lured into believing that investing in land is more secure than investing in gold. On the other hand, he believes that adverse warnings could also negatively affect the corporate bond market, which would not be good for the economy. He feels the dependence on bank capital must be balanced by development of corporate bonds as well.
Dr. Nguyen Khac Quoc Bao also firmly believes that in order for the corporate bond market to become more professional, besides the corrective moves being made by the Ministry of Finance, the Government also needs to develop a secondary market so that corporate bonds have higher liquidity. At this time, profits from bond investment will not only come from the current interest rate, but also from the difference in buying and selling price in the secondary market. As a result, investors in corporate bonds will be forced to compare quality of bonds. A bond market that lacks in an independent ranking organization indicates that the market is not transparent in sharing information.
According to Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, the amended Decree 81/2020 will regulate the issuance of corporate bonds in a much stricter way, but the Securities Law also needs to be in sync as well because at present these two laws are clashing with each other.