Finance ministry warns of risks in high bond yield rates

Investors should make careful decisions when purchasing corporate bonds, especially coming with high yield rates, to avoid risks, the Ministry of Finance (MoF) has said.

The MoF has issued the warning, saying investors should not be lured by high bond yield rates.

According to the ministry, risks that investors may face include the firm’s failure to fulfill the terms and conditions of its bond issuance, failure to make full payments when the debt is due, or the issuer may not fulfill its commitment to investors on the redemption of bonds before the maturity date.

Whether the issuer can repay depends on its financial capacity and business performance, the MoF said.

High rates

Bond issuance is becoming a popular channel for firms to raise capital due to its efficiency and convenience. To attract investors, some companies have raised bond yield rates higher.

In late October, HCM City-based Hong Hoang Trading Investment JSC issued more than VND1.4 trillion (US$60.5 million) worth of five-year bonds with a surprisingly high yield rate of 20 per cent per annum.

This is the highest level of bond yield a bond issuer has offered so far in Viet Nam. With the rate, Hong Hoang has to pay investors VND280 billion in interest annually. The company was established in late 2016 with charter capital of only VND5 billion.

Also in October, Sai Gon Vina Real Estate JSC (Land Saigon) issued VND1.85 trillion worth of three-year bonds with a fixed yield rate of 11 per cent per annum.

Land Saigon reported no revenue from sales and only reported revenue from financial activities, both in the third quarter as well as in the first nine months of this year.

In Q3 alone, revenue from financial activities reached VND24.4 billion but financial expenses amounted to VND40 billion. This, together with high management expenses, caused Land Saigon to suffer a loss of VND14.2 billion.

When issuing bonds, the issuers must ensure their total assets are greater than the value of bonds they wish to raise. Otherwise, their operation will face imbalance and potential risk of bankruptcy, said Truong Hien Phuong, senior director of KIS Viet Nam Securities Corporation.

“Bond issuing organisations must have a specific plan for the use of the capital flow. Investors will face more risks if they invest in firms who do not have a detailed plan or can not be frank about their use of the raised capital,” Phuong said.

According to a recent report by Saigon Securities Incorporation, total corporate bond issuance in the first 10 months of 2019 reached VND178.7 trillion.

Commercial banks were the biggest issuers with total issuance value of more than VND79.4 trillion, 44.4 per cent of total value. Real estate businesses accounted for 34.3 per cent with VND61.3 trillion. The rest were infrastructure development companies, securities companies and other businesses.

If investors plan to purchase corporate bonds, they should seek information of bond issuers, issuance purposes, collateral, issuers' commitment, maturity date and payment methods. They should also check the issuers' financial health and how they use proceeds from bond sales, said Le Hoang Chau, chairman of HCM City Real Estate Association.

Credit ratings

At an investment conference held in HCM City early this month, Stephanie Betant, head of Corporate Financial Services, HSBC Viet Nam, forecast the corporate bond market in Vet Nam will thrive and attract investors.

Some large enterprises in Viet Nam had connected to the international financial market by issuing bonds, she said.

However, Vietnamese firms still need to simplify procedures, enhance information disclosure and transparency of corporate bond issuance. They also need to attain credit ratings before issuing bonds to the public to gain investors' confidence, especially less experienced individuals.

Only when businesses attain credit ratings, can investors feel secure when buying their bonds. Enterprises can also determine the offered yield rates based on their ratings because if they get a high level of credit ratings, they still can issue bonds without offering too high yield rates.

According to the Ministry of Finance, bonds issued in a private placement are more appropriate for institutional or professional investors than for individual investors who lack analytical or risk assessment skills.

Retail investors, also known as individual investors, who do not have adequate financial capacity or investment experience should invest through professional funds, the MoF said.

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