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NA Economic Commision warns of bond market risks

The Saigon Times

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HCMC – The National Assembly’s Economic Commission in a report sent to the legislative body yesterday, May 31, rang a bell of alarm over risks associated with misuse of capital raised from the corporate bond market.

The commision noted that a sizeable amount of funds from the bond market has not been used according to stated purposes or is transferred between enterprises, leading to a high possibility of bond-holders losing both principal and interest, according to the news site VnExpress.net.

According to the report, the bond market size has been expanding steadily. Last year, enterprises mobilized VND637 trillion, or roughly US$27 billion, a steep increase of 36.4% year on year despite the pandemic. In the first quarter this year, enterprises also issued bonds worth VND144 trillion.

The Economic Commission said that the corporate bond market plays a crucial role in supplying capital for businesses, but there remain numerous risks due to the unhealthy structure of bond issues.

Bonds issued via private placement were nearly 18 times higher than the volume publicly issued and up to 70% of bonds were issued by banks, real estate companies, and securities enterprises. Real estate companies alone accounted for 30% to 50% of bonds issued, putting the bond and property markets at risk.

There are cases of capital mobilized from bond issues being transferred on the market instead of being used for purposes stated upon the issuance. The quality of private placement is generally low, which may hinder the issuers’ capacity to refund principal and interest to bond-holders.

The majority of bonds were purchased by securities companies which then retailed them to banks, individual investors and other entities. Data shows credit institutions, securities firms and individual investors held between 34% and 46% of the bonds on the primary and secondary bond markets.

The overheated growth of the bond market, according to the NA Commission, was attributed to high coupons. Many investors are inexperienced without the ability to anticipate risks, but snapped up bonds due to attractive interest rates.

The commission observed that the average tenure of bonds issued in the past two years was only 3.8 years, meaning the amount to be paid to bondholders in the next two years would be tremendous, exerting great pressure on issuers. This year alone, some VND144.5 trillion worth of bonds would fall due, with real estate bonds accounting for more than 43%. Next year will see VND271 trillion worth of bonds become due, and the year after VND329.5 trillion.

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