In this, the Ministry of Finance and the State Bank of Vietnam (SBV) are only playing a small role in creating legal frameworks for the bond market at macro and micro levels.
JOURNALIST: - Is there any serious problem in the corporate bond market?
Prof. Dr. TRAN NGOC THO: - Decree No.163/2018/ND-CP stipulates very fairly an open regulatory requirement for issuing individual bonds, for example, conditions and dossiers for bond issuance which are well streamlined. Accordingly, enterprises are allowed to issue bonds many times, taking into account the progress of investment projects without necessarily meeting the criteria for profits for the consecutive years ahead of the issuance year.
The regulations also aim at creating more flexible options for bond-issuing businesses. If there are favorable conditions, businesses are allowed to buy back bonds before regulated time. Recently three companies, namely, Norah Furniture Company, Sunny World Company and Quang Thuan Investment Company simultaneously bought bonds valued at VND 4,200 bn issued on December 2018.
In addition to large real estate businesses, banks and listed companies, and small and medium-sized enterprises also issue bonds. At the end of November 2019, a number of bonds worth about VND 237,000 bn, were issued, an increase of 5.8% compared to 2018, of which, real estate businesses accounted for 34.5% and banks accounted for 45.5%, as per data provided by SSI Securities Corporation.
All enterprises must timely disclose their information to investors who will make a decision to buy bonds, and also publish facts or details about such enterprises, including displaying information ahead of bond issuance, results of bond issuance, and periodic and extraordinary information on website of Hanoi Stock Exchange (HNX). Although the regulations stipulate this clearly, most businesses seem to ignore this. According to HNX statistics released in the third quarter of 2019, only few businesses out of 151 bond-issuing businesses published their full financial statements.
For debenture bonds that have no pledged collaterals, bond investors must show self-responsibility for risk assessment. For collateral bonds, several specific features are a focus of attention. Firstly, bonds are secured by land use rights in the future. Usually, bond-issuing businesses clearly state the land use rights in contracts and are not subject to any current provision of the Land Law, Housing Law, Real Estate Business Law, Investment Law, or Construction Law.
Secondly, shares of other businesses are mortgaged. For example, Hong Hoang Investment Trading Joint Stock Company has just issued bonds worth more than VND 1,402 bn, with pledged collateral of shares from ACB Bank with interest rate upto 20% per year, along with buyers that are foreign investors. Thirdly, shares of issuing businesses are also mortgaged.
Corporate bonds are an effective tool in the market to take advantage of gaps resulting from incompatibility among current regulations… a way of circumventing the laws to maximize benefits for investors. Many doubts arise that lots of banks are now having cross-ownership of bonds among them in order to increase mobilization and the proportion of medium and long-term capital.
This goal is to deal with the State Bank of Vietnam’s requirements of reducing the proportion of short-term capital for medium and long-term loans. On the other hand, there are also some doubts about using corporate bonds to avoid income tax.
Current regulations do not enforce businesses issuing individual bonds to be rated. In case enterprises are strictly required to rank their quality, how Saigon Phat Thinh Credit Rating, that is licensed in Vietnam, can rate enterprises is under consideration. The Ministry of Finance stated that they were working with the world's leading credit rating agencies to discuss the possibility of providing services in the Vietnamese market.
- What should be done to further develop the corporate bond market?
- The current rules lean heavily on protecting bond issuers. However, this is an obvious case of issuance of individual bonds. In addition to a separate issuance channel and public issuance channel, third one is between separate issuance and public issuance. This intermediary is aimed at protecting bond investors, and simultaneously reduce issuance costs as well.
Specifically, enterprise credibility is not necessarily rated when such an enterprise publicly issues bonds. However, such enterprises still have to comply strictly with regulations on information disclosure and listing in secondary markets, such as India, Malaysia, Thailand, Israel and the US.
It is noticeable that this issuance is only applied to targeted investors with loose regulatory rules. This doesn’t mean the responsibilities for information disclosure are totally neglected. In the context that Vietnam has only one enterprise that is licensed to give credibility ratings, the quality of rating is firmly considered a serious issue.
The regulatory rules applied in the corporate bond market must aim at protecting investors, ensure the safety of the banking system, and simultaneously develop the bond market. The State Bank of Vietnam must be responsible for tightly monitoring the capital in the banking system that is flowing into the bond market.
The Ministry of Finance and the State Securities Commission of Vietnam should have strict regulations on information disclosure, severely punish any form of false information published, and look at several cases of sudden absence of bond-issuing businesses on HNX.
For example, is it possible that bond interest rates increase by 20%? It is said that investing in corporate bonds creates high risks but makes high profits as well. However, the question of which case is abnormal or normal has never been answered satisfactorily.
Everything goes well if activities of enterprises still comply with legal regulations no matter how high or low the interest rates are, not taking into account some tricks related to “money laundering” that affect the stability of the financial system. Issuing individual bonds is a field for only professional and organized investors. Therefore, let them be responsible for their own investments.
The majority of corporate bonds are a place for poor liquidity assets. Those who invest in corporate bonds never aim at profits from disparity between buying price and selling price, like stocks. They often want phenomenally high profits in return, which only comes about after a long period of patient waiting, or from analytical skills in the bond business. It is a market for individual trading sessions among trusted partners.
Surprisingly, even though the United States is known as the most developed and transparent bonds market, trading sessions there are still done via phones. A recent study on ‘The Economist’ showed that upto 80% of US corporate bonds are still being traded via phones, of which 90% of bonds are exchanged less than a few times a year. So obviously, the young bonds market in Vietnam has poor liquidity. Accordingly, the fact that investors receive high profits of 20-30% per year, is considered normal.
It seems that State Agencies haven’t carefully studied the complex and diverse characteristics of the corporate bond market compared to the stock market. The fact the Ministry of Finance and the State Bank of Vietnam have issued continuous warnings on the recent explosion of corporate bond issuances is actually to protect small inexperienced investors.
These two agencies are only playing a small role in creating legal frameworks for the bonds market at macro and micro level. Passive reaction from such regulators may slow or even kill the growth of the corporate bond market as it has just opened up.