Companies are looking to raise debts from bond issuance before the amended Law on Securities takes effect next January.

A view of Vinhomes Smart City, a project developed by the residential
real estate firm Vinhomes JSC. (Photo vinhomes.vn)

The amended securities law, which was approved by the National Assembly in November 2019, will take effect on January 1, 2021.

The amended law will restrain local companies from selling their bonds to investors, especially individuals, to diminish the risks for the equity market.

According to Bao Viet Securities Co (BVSC), corporate bond issuance in June was estimated at VND31 trillion (US$1.34 billion).

In May, the value was VND27 trillion, which was down slightly from the previous month as the economy suffered from the social distancing and the spread of the coronavirus.

Real estate firms and banks were the biggest issuers as they sold VND8.5 trillion and VND11 trillion worth of bonds in June, respectively.

But banks’ issuance value was down slightly compared to May while real estate firms hiked their issuance to VND11 trillion in June from VND4.75 trillion in May.

That indicated real estate developers were still hungry for capital as they had difficulties getting access to bank loans, said BVSC analyst Nguyen Duc Hoang.

Recent issuers include residential developer Vinhomes, which outsold VND12 trillion worth of bonds in private deals.

The corporate bond market would be more dynamic in the last six months of the year and both issuance volume and value would jump, Hoang said.

“Banks and real estate firms will remain the biggest issuers,” he said. “Banks will need more borrowing to lower their capital expenses and maintain their capital adequacy ratios.”

 “As property developers will be restricted from loans from banks and financial institutions, their demand for debt will increase, especially when bond issuance will be tightened next year under the amended Law on Securities.”

 Under the new law, companies will have to meet higher standards of bond issuance while unprofessional (or uncertified) investors are no longer eligible to purchase corporate bonds.

 According to business insiders, unprofessional investors are often individual ones, who are not qualified for financial investment by any companies and market regulators.

 Individual investors are lured into the corporate bond market because companies offer annual yield rates (average 10-11%) that are higher than banks’ saving rates (average 7-8%).

 In addition, they don’t have to wait until the maturity dates of the bonds to sell the assets like they do when depositing in banks, as they can negotiate with the company that is the distributor of the bonds.

 Especially, individual investors don’t pay close attention to the financial health and operation of the bond issuer.

 “Restraining unprofessional investors from buying corporate bonds is common in the international markets,” Vuong Hoang Son, director of bond market at VNDirect Securities Corporation, said.

 “This type of product is more suitable for institutional investors, who are able to analyse and evaluate the issuers while companies also have to meet strict issuance requirements,” he said.

 “Companies should be encouraged to sell bonds in public deals and the procedures should be simplified to make it more convenient for them to do so,” Son said.

 Limiting individual purchases for corporate bonds may not affect the market because major buyers are institutional ones with strong financial capacity and experience, Hoang said.

 Unprofessional investors must study the bond issuers first regarding their purposes, guarantees and financial capacities when issuing bonds, he suggested.

 “Investors must be careful with high-interest bond issuers because high risks will come along,” he said. “They should ask for the consultancy of institutional investors before making decisions.”

 As the corporate bond market is showing signs of significant growth, the Ministry of Finance has asked the issuers to make sure they are financially healthy to pay back the debts. Companies must also be committed to the deals signed with investors, especially individual ones.

 In addition, the ministry has recommended investors get access to the evaluation reports by financial firms before buying corporate bonds to understand the target and financial status of the bond issuer as well as the chance and risk of the bond deal.

 Underwriters and distributors are asked not to sell corporate bonds at all costs. They are asked to be responsible for providing accurate, transparent information of the bond issuer and the issuance and make sure the benefits of investors are secure.