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Saturday, December 4, 2021

Banks’ rush for corporate bonds faces scrutiny

The Saigon Times

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HCMC – As many banks are rushing to buy corporate bonds, the State Bank of Vietnam (SBV) has issued Circular 16 tightening control over corporate debt purchases by banking institutions to prevent any potential impact on the system.

Some 60% of corporate bonds are being held by commercial banks and securities firms, according to a recent report publicized by securities firm SSI.

Purchases of corporate bonds could be aimed at refinancing and restructuring debt for businesses, said Dr Nguyen Tri Hieu, an economic expert, adding that this is a method that firms and banks often resort to for refinancing purposes.

Corporate bonds might be taken advantage of by banks to offer loans to property firms since the central bank is restricting lending to some risky sectors, including real estate, while corporate bonds can help firms pay debt on the nail, which will not affect their credit ranks.

An expert from securities firm SSI said that all corporate bonds issued in Vietnam have yet to have credit ratings, with many covering no collateral and payment guarantees.

In addition, some firms announced mobilizing capital with high interest rates, but worked out no practical business plans. As such, they will find it hard to pay principal and interest on time.

Default risks are not high in the short run as bonds will fall due in 2023 and 2024. However, the financial hardship induced by the Covid pandemic could increase the default risk.

Many experts said that the corporate bond market poses a potential risk for firms, mainly those in the property sector, which issue corporate bonds with high coupons. If real estate firms get into trouble, banks and individual investors holding their bonds would be affected.

Under the circular, banking institutions must not buy corporate bonds if their bad debt stands at below 3%.

Also, credit institutions must not purchase corporate bonds that firms issue to restructure debts, contribute funds and acquire shares or raise working capital.

In line with the circular, banks cannot sell corporate bonds to their subsidiaries, the local media reported.

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