High-yield corporate bonds rated risky despite boom

High-yield corporate bonds rated risky despite boom

Despite their attractiveness to high-yield investors, corporate bonds have also drawn scrutiny for their vulnerabilities, exposing investors to many types of risks.

Corporate bonds are mostly seen as an effective tool for raising capital without issuing equity, Photo: Le Toan

The Ministry of Finance (MoF) has once again cautioned investors over the high risks associated with high-yield corporate bonds.

Corporate bonds are generally viewed as an effective way of raising capital without issuing equity, which can cost a degree of control over the company, or accepting the constraints imposed by banks.

Data from the Hanoi Stock Exchange unveiled that corporate bond issuance in this year’s first five months witnessed an increase of 15 per cent compared to the same period of last year, to reach VND91.6 trillion ($4 billion).

Bond issuance in Vietnam is booming as enterprises tap into the channel rather than automatically going for the more complex means of borrowing funds from banks.

“Falling and low deposit interest rates are the main factors making corporate bonds a fertile land for buyers looking for good yields who favour corporate bonds which often offer more attractive interest rates,” Pham Tien Dung, Deputy head of research at Bao Viet Securities (BVSC) told VIR.

The demand for high yield is the biggest driver of investor behaviour as they downplay high valuations for this type of risky asset. Specifically, there are some companies issuing bonds worth 50 to 100 times their equity. However, the MoF emphasised that investors should keep an eye out for abnormally high yields, as the issuers can fail to pay coupons in a timely manner. In the worst scenarios, a company running into financial difficulties could go bankrupt and leave its debts unpaid.

Dung estimated that the average interest rate of corporate bonds is approximately 10 per cent, but some businesses might provide higher rates of over 12 per cent like Nam La Hydropower JSC, or Centre of International Relation & Investment JSC. The first half of 2020 witnessed the flood of corporate bonds with total estimation of more than VND100 trillion ($4.34 billion), with property firms leading the way.

Previously, the State Bank of Vietnam also questioned the reliability of bond investment activities and warned of potential disorderly price moves and losses for investors.

Analysts at MB Securities said that real estate companies were increasing bond issuances to raise funds as banks tightened lending to limit bad debts, a phenomenon also seen in retail and food and beverage, among others.

Market watchdogs warned that companies issuing bonds with attractive yield could experience financial struggles behind the curtains and troubles in paying back loans – that is why they are racing to provide high yields to draw in investors.

For example, Hong Hoang Commercial Investment Trading JSC issued bonds with an annual yield of 20 per cent – which is seen as an abnormally high rate.

In some countries, high-yield corporate bonds are also called “junk bonds” as there is a good chance they will default. Hence, investors are urged to adjust the spread with an estimated annual loss rate to arrive at the junk bond risk premium.

On the other hand, credit ratings agencies are a very important factor guiding investors’ decision-making by indicating the likelihood of defaults. However, Dung of BVSC noted that the lack of independent credit ratings agencies means no transparency in the local corporate bonds activities. “The flood of corporate bonds is slated to quench the thirst for funding, but many issuers have failed to publish their information. Therefore, investors might find it difficult to assess companies’ financial health accurately,” he said.

VIR