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Tuesday, December 6, 2022

Depositors turn bondholders

By Dung Nguyen

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In the past, depositors who put money in their bank accounts could choose to become corporate bondholders or real estate investors. The market needs to be transparent and depositors need to beware because “the bond game” is not for non-professional investors.

Higher interest rate, yet risk-free

Since the outbreak of Covid-19, deposit interest rates have decreased significantly. Consequently, instead of sitting idle in the bank, the cash flow is accumulated by investments that yield higher returns, such as real estate or stocks. However, for those who were not risk-takers, their savings could be turned into bonds with the support and consultancy of bank tellers.

For example, A – an office worker based in District 1, decided to invest her money in bonds late last year after consulting a teller. The bonds she bought had a term of five years with an annual coupon of 11%. The effective interest rate is calculated by adding the gross interest margin (starting from 3.5-5% per annum) with the reference interest rate of the interest period (interest rate for 12-month deposits at Vietcombank).

In fact, A stated that the teller ensured that she could resell the bonds at any time. Then, A signed the contract with the securities company and got her bond certificates. “I decided to buy bonds because they earn higher interest than savings accounts and can be resold. It is also because I trust the bank,” A justified.

In bond transactions, banks and securities companies are merely intermediaries. Accordingly, under all circumstances, bond issuers are responsible for paying the principal and interest to bondholders and must accept liability for their source of payment.

This was confirmed in the recent case of Tan Hoang Minh when both the banks and securities companies immediately asserted their roles as “intermediaries”. In fact, A was lucky enough to have her “Bond Certificates”, while other Tan Hoang Minh bond purchasers were only given an “Equity Investment Agreement”.

According to Lawyer Tran Minh Hai, CEO of Basico Law Firm, Tan Hoang Minh was not the only case. Apart from the loopholes in the legal process of corporate bond issuance, the underlying cause is “the credit risk entailed when purchasing bonds”.

Previously, when an enterprise looked for bond purchasers, the bank was the only place to go. However, the bank’s procedures of equity investment are as lengthy and complicated as the loan appraisal process.

Consequently, banks and securities companies helped sell the bonds to individual investors in the last five or six years instead of investing in the bonds themselves. Those intermediaries aimed for profit without risk in the bond transactions, Hai analyzed.

Transparency and caution

In fact, issuing corporate bonds is an effective way for enterprises, especially the economy, to raise capital. Despite the high-growth firms and relatively large number of new issues, the corporate debt-to-GDP ratio is still considerably lower than that of some countries in the region, such as Thailand, Singapore and Malaysia. Until the fourth quarter of 2021, the overall size of Vietnam’s bond market accounted for 41.11% of GDP, in which the corporate bond market accounted for 16.58% of GDP. Real estate companies covered a large proportion of corporate bond issuers due to the rising demand for raising capital and increasing low credit accessibility.

The number of real estate companies issuing bonds rose from 141 in 2020 to 193 in 2021.

The higher the interest rate, the higher the risk. The value of real estate bonds which are not guaranteed by collateral or (partially or wholly) by shares, was VND172,500 billion, accounting for 54.2% of the bonds issued in 2021. The actual value was probably higher since there was an amount of VND33,000 billion (accounting for 10%) of real estate unsecured bonds, according to a report by SSI.

In fact, investing in bonds is a game played by institutional investors who have numerous resources to evaluate the bond issuers’ financial strength. However, recently, there has been a lack of business transparency in the market. Typically, several subsidiaries were established to carry out projects or act as a shell for raising capital.

According to FiinRating, a credit rating agency, it is crucial to clarify the procedure to guarantee benefits to investors by ensuring that the issuers and the bond guarantors willingly fulfill their commitment toward payment.

According to the law, private placement is opened only to professional investors, including institutional investors such as banks, securities companies, insurance companies or investment funds. Individual investors who wish to join the offering must prove their financial ability and professional performance. However, there are consultancy services for forging professional investors’ documents to buy bonds illegally.

Currently, the Ministry of Finance is revising the law and regulations regarding the issuance of securities. The regulations should be adjusted in accordance with market-moving information. Basically, the corporate bonds market is still an effective channel to raise medium-term and long-term capital, especially for issuers with strong fundamentals and transparent information about the profit and risks.

While the market needs more transparency, the “depositors” need to beware because “the bond game” is not for non-professional investors. When asked about the issuer’s purpose for raising capital, A, in the story mentioned above, shook her head.

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