State bank prepares to regulate growing corporate bond market
State bank prepares to regulate growing corporate bond market
The corporate bond market has performed well in the seven months since its new legal framework was implemented, meeting the needs of enterprises. This capital raising channel is forecast to continue developing strongly.
Stricter regulations will create a foundation for more stable and sustainable development of the corporate bond market
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Rapid growth
According to the Ministry of Finance, outstanding corporate bonds expanded rapidly, from 6.29 percent of the country’s gross domestic product (GDP) in 2017 to 9.01 percent in 2018, 10.38 percent in 2019 and 15.75 percent in 2020.
According to the Vietnam Bond Market Association, 376 domestic corporate bond issuances took place in the first seven months of 2021, with total value of VND235.094 trillion, including 363 issuances under private placement and 13 under public offering, as well as three issuances on the international market with total value of US$1 billion.
Commercial banks led the corporate bond market with total issuance value of VND95 trillion in the first seven months of the year. Of these, 79 percent of bonds were issued for 2-4 year terms at low interest of 3-4.2 percent. A group of real estate companies ranked second with total issuance value of VND75.8 trillion. Of these, about 15 percent of bonds were issued without collateral assets or secured by stock.
Bonds are a popular channel for firms to raise capital. According to the assessment of the Fixed Income Securities Research of Fiin Ratings, capital raising through corporate bonds will continue to thrive and the size of the corporate bond market will soon approach that of the stock market. Public offerings will play a more significant role in the overall corporate bond market.
Sustainable market development
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The State Bank of Vietnam is collecting feedback for a draft circular regulating the purchase and sale of corporate bonds by credit institutions and foreign bank branches. Credit institutions are only allowed to buy corporate bonds when their bad debt ratio is below three percent according to the latest audited financial statement, except for the purchase of corporate bonds under a restructuring plan approved by competent authorities. Credit institutions are not allowed to borrow capital from others to buy corporate bonds.
Financial-banking expert Nguyen Tri Hieu said the draft circular has stricter regulations in order to avoid overheating of the corporate bond market and create a foundation for more stable and sustainable development.
Regarding the implementation of the Law on Securities and the Law on Enterprises, the Ministry of Finance submitted decrees regulating the offering and trading of corporate bonds to the government for promulgation, including Decree 153/2020/ND-CP dated December 31, 2020 on private placement of corporate bonds and trading of privately placed corporate bonds in the domestic market and offering of corporate bonds in the international market; Decree 155/2020/ND-CP dated December 31, 2020 detailing and guiding the implementation of a number of articles of the Law on Securities, including provisions on public offerings of corporate bonds.
The Ministry of Finance recommended that investors carefully consider risks when investing in privately-placed corporate bonds and study the conditions and terms of bonds as well as the financial condition of the issuers. Bond investors should also note that service providers are just the distributors of bonds and do not guarantee the safety of investment in corporate bonds. They enjoy service fees from the issuers without being responsible for their repayment capacity.
