Urgent need to monitor corporate bond market

SGI

The Ministry of Finance is seeking amendments to Decree 163/2018/NĐ-CP on corporate bond issuance as an urgent solution to managing and monitoring the current very high growth of the corporate bond market.

Illustrative photo.

Illustrative photo.

Potential risks

According to the Finance Ministry, from 2017 to now, the corporate bond market has developed strongly, which has subsequently helped businesses mobilize capital to develop production and gradually reduce dependency on credit. The scale of the corporate bond market in 2017 reached 6.29% of GDP, by the end of 2018 it had reached 9.01% of GDP, and in November 2019 it was at 10.93% of GDP. In particular, the scale of the individual corporate bond market had reached 10.37% of GDP, a six time increase compared to 2011.

Ever since Decree 163 took effect at the end of November 2019, there have been around 650 issuances of corporate bonds of value VND 196,000 bn. The outstanding balance of individual corporate bonds issued by the end of November 2016 were equivalent to 10.37% of GDP, an increase of 34% compared to 2018 when it was at 8.57% of GDP, showing that the corporate bond market has had a very strong growth. Currently, the credit institution is the largest issuer with 35.7% of the bond volume, while Real Estate enterprises have 22.5%, securities companies have 2.8%, and construction businesses, services, manufacturing and other businesses have 39%.

However, Decree 163 shows a number of limitations, including regulations on individual bond issuance and trading. Under the current Securities Law, private placement is issued to less than one hundred investors, excluding professional investors, and it does not use mass media or the internet. At the same time, there is no regulation on the scope of individual securities transactions. While Decree 163 has a higher opening to meet the growth and rapid development of the corporate bond market, the trend of individual investors to buy corporate bonds is increasing. Many of them are small-scale investors with limited financial capacity and no experience.

The increase of individual and small-scale investors not having access to sufficient information on issuance, finance and ability to repay debts has implied risks when businesses face difficulties and do not meet with commitments to buy bonds as agreed, causing instability in the financial market and shaking the confidence of investors.

Previously, the Ministry of Finance had repeatedly issued warnings about the issuance of individual corporate bonds. According to Mr. Nguyen Hoang Duong, Deputy Director of the Department of Finance of Banks and Financial Institutions in the Ministry of Finance, the risk is when bond issuing businesses and investors participate in raising capital.

This is unprofessional and does not fully comply with the provisions of the law on information disclosure and issuance process, and also lacks basic experience and ability to analyze and assess risks. While on the other hand, enterprises and entities issuing and participating in the market use professional measures to control cash flow, avoid safety limits in accordance with specialized laws or serve the beneficial goals of enterprises.

In order to protect individuals and small-scale investors who buy corporate bonds, the Ministry of Finance proposed immediate amendments in issuance and transactions of individual corporate bonds to be within one hundred investors, excluding professional securities investors throughout life of the bond, instead of the current regulations in Decree 163 for one year from date of issue.

This regulation aims to separate issuing to the public, which is issuing and trading without limit to number of investors, and issuing separately, which is only issuing and trading within the number of one hundred investors. To limit businesses to split the issuance of bonds into many batches with many codes for individual investors, "breaks" regulations on the private placement for less than one hundred investors, as well as restricts transactions within a one-year period. The revised draft decree adds that the next issuance of bonds must be at least six months from the previous issuance and the bonds issued follow same terms and conditions.

Issuance of three times equity

According to the Hanoi Stock Exchange, in eleven months of 2019, there were twenty eight out of 177 enterprises with volume of bonds issued in excess of three times the equity, accounting for 27.8% of the total issuance volume, of which eleven enterprises with the issuance volume exceeded fifty times the equity, and six enterprises with issuing volume exceeding hundred times the equity. Among businesses issuing bonds in large quantities, some did not clarify the purpose of capital use and the arrangement of source for payment of bond principal and interest.

Currently there is no reputable company in the market that provides credit rating services for corporate bond pricing on standard products. Therefore, it is difficult to make corporate bonds transparent because the infrastructure is still not ready, and lacks the necessary regulations to ensure market stability.
In the latest quarterly financial statement the draft restricts small-scale enterprises from issuing bonds in large volumes that potentially risk both issuers and investors, and added conditions on limiting the issuing of bonds to ensure that the outstanding balance of corporate bonds issued by individuals does not exceed three times equity. In case of excess, the preferred channel of public release will be one with higher standards, better conditions and more transparency.

For issuance interest rates, the Civil Code 2015 in Article 468, stipulates that the agreed interest rate cannot exceed 20%  per year. The tax law also provides for a reasonable level of interest expenses when determining income, subject to corporate income tax. The Ministry of Finance proposes to supplement regulations on the issuance interest rate of smart bonds for an enterprise when determining the taxable income in accordance with the tax law.

Translated by Francis

Hà Linh

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