While real estate firms are still grappling with woes, including cash flow problems that have rendered them helpless to take back their bonds that are due, commercial banks have performed well. They have paid their bondholders on time and have actively bought back their bonds that have yet to fall due.
While real estate firms are still grappling with woes, including cash flow problems that have rendered them helpless to take back their bonds that are due, commercial banks have performed well. They have paid their bondholders on time and have actively bought back their bonds that have yet to fall due.
Increasing bond buybacks
Recent data from the Vietnam Bond Market Association (VBMA) showed banks bought back more than VND17 trillion (US$744 million) worth of bonds in May, accounting for 66% of the total value of bonds bought back, at nearly VND25.6 trillion (US$1.1 billion).
Since early this year, the total value of corporate bonds repurchased prior to maturity by issuers has surged by 70.6% compared to the same period last year at VND76.5 trillion (nearly US$3.3 billion).
Buying back bonds before maturity has become more active since late 2022. Many of the bond issues previously offered for sale neither met issuance requirements nor adhered to the capital use purpose stated in the original debt sale plan. Those bond buybacks have helped issuers avoid legal risks associated with new regulations.
Banks increase bond buybacks
Surprisingly, banks have boosted bond buybacks since early this year. A corporate bond market report for April 2023, published by Fiin Group, said that banks were responsible for 61% of the total value of bonds bought back in April. This represents a 5.64-fold increase compared to March and a 2.42-fold increase compared to the same period last year. Most of the bonds repurchased by banks come with a three-year term and fall due in 2024 or 2025.
By June 2, the value of bonds that reach maturity in the rest of this year had amounted to VND195.09 trillion (US$8.5 billion). Real estate companies account for nearly VND101.18 trillion (US$4.4 billion), 52% of this amount, while banks will handle VND31.66 trillion (US$1.4 billion), according to statistics.
Excess money as a motive?
With credit growing by a modest 3.17% in the end of May, banks have found themselves sitting on mountains of cash. In an attempt to reduce capital redundancy and optimize capital efficiency, banks have had little choice but to buy back bonds. As the demand for loans in the economy has remained woefully low, banks have used their excess money to step up bond buybacks.
Banks are seeking to launch more share issues to increase their charter capital this year to raise their capital adequacy ratio and improve the capital structure for long-term business operations. In doing so, banks can reduce their reliance on the bond market. Therefore, buybacks of bonds that have yet to fall due are seen as a suitable strategy under the current circumstances.
Regulations and other purposes
In April, the State Bank of Vietnam (SBV) issued Circular 03/2023/TT-NHNN, suspending the implementation of Clause 11, Article 4, Circular 16/2021/TT-NHNN. This regulation pertains to the purchase and sale of corporate bonds by local banks and foreign bank branches.
During the circular’s validity (April 24 to December 31), credit institutions can buy back the unlisted corporate bonds they previously sold, subject to specific conditions outlined in the circular. They can also repurchase their own bonds if all conditions are met and agreement with bondholders is reached, or there is a provision for buyback in earlier regulations.
Moreover, the current regulations dictate that a company’s tier 2 capital (largely derived from the sale of bonds with a term of over five years) cannot exceed its tier 1 capital (consisting of charter capital, reserves and undistributed earnings). Consequently, for long-term bonds issued in previous years, with over five years remaining until maturity and no longer guaranteed, a deduction of 20% of the total par value is made from the value of bonds included in tier 2 capital.
Banks are buying back such bonds in advance to make room for new bond issues with terms exceeding five years in the future. This strategy will help increase the value included in their tier 2 capital. Essentially, buying back bonds that are not yet mature allows banks to restructure bond terms to maintain a high capital adequacy ratio and ensure other indicators, such as the ratio of short-term capital used for making medium and long-term loans.
Despite the difficulties faced by the corporate bond market, certain banks still plan to raise capital through this market. As banks have continued to exhibit consistent performance, investors are confident in purchasing their bonds, which offer higher interest than savings accounts. For example, Vietcombank (VCB) recently approved plans to issue bonds to the public in two batches with a total value of VND9 trillion (US$393 million).
In May, the central Government issued Resolution 88/NQ-CP during its regular online meeting with local governments. The resolution requires the Ministry of Finance to closely monitor the corporate bond market, particularly companies with large volumes of debt issued that have had difficulty fulfilling their principal and interest payment obligations in 2023. The Ministry of Finance must submit a report on the corporate bond market in 2022-2023, along with practical, feasible, and effective solutions to address existing problems, to the Prime Minister before June 15.
