Investors need to be wary of high-yield corporate bonds

24-Sep-2020 Intellasia | VOV | 6:02 AM Print This Post

According to the representative of the Ministry of Finance, if investors of bonds do not analyse and evaluate risks, invest in bonds because of high interest rates, they will risk losing their capital when enterprises cannot fulfill their original payment obligations, interest on bonds.

A lot risks from hot growth market

According to Nguyen Hoang Duong, deputy director of the Finance Department of Banks and Financial Institutions (Ministry of Finance), the corporate bond market (corporate bond) in recent years has become an increasingly important capital mobilisation channel for enterprises. Step by step it shows the shift of capital from the bank credit channel to the bond issuance channel in accordance with the government’s direction of developing a capital market in balance with the bank credit market, reduce the pressure to for bank capital channels.

The corporate bond market has a rapid growth in size, by the end of July 2020, equivalent to 11.2 percent of GDP in 2019. Compared to some countries in the region, although the size of the corporate bond market is still at a low level. However, the rapid development of the corporate bond market over the past time also poses some risks to this market.

The data of information disclosure on corporate bond issuance shows that there are a number of small-scale enterprises that issue bonds separately with a volume many times larger than equity; some real estate businesses have boosted the scale of issuance and in order to attract investors has pushed up issuance interest rates. Typically, there has been a phenomenon of a real estate enterprise issuing bonds with interest rates up to 18 percent or a small equity firm but issuing bonds in large volume…

According to representatives of the Finance Department of banks and financial institutions, if the business and production situation of enterprises are good, the real estate market develops smoothly, the enterprise can fulfill its obligations to the investor when owning bonds. However, for small-scale enterprises, when production and business activities are in trouble, there is a great risk because the limited financial capacity will not be able to cover the large issued debts.

“Investors in bonds, if they do not analyse and evaluate risks, invest in bonds just because of high interest rates, they will risk losing their capital when enterprises cannot fulfill their obligations to pay bond principal and interest”, Nguyen Hoang Duong warned.

Besides, for real estate businesses, besides borrowing bonds, these businesses also borrow from banks.

“If you keep pushing up high interest rates to mobilise bonds in large volumes, when the business is in trouble or the real estate market is in trouble, the risks are great for the enterprises themselves, as well as the organisations. credit and investors of bonds because enterprises cannot fulfill their debt repayment obligations”, stressed by the deputy director of the Finance department of banks and financial institutions.

Increase corporate supervision to issue high-interest bonds

Facing the rapid growth of the corporate bond market, especially, with the phenomenon of a number of real estate companies issuing bonds with large volume and high interest rates, Nguyen Hoang Duong said that the Ministry of Finance provided information for the State Bank of Vietnam to coordinate in management and supervision of the credit extension for the real estate sector. The State Securities Commission and related units of the Ministry of Finance have also strengthened the management of the issuance, investment and provision of services related to the issuance of corporate bonds by securities companies.

“In the coming time, we will continue to set up inter-ministerial inspection teams to check the issuance, service provision, investment and transaction of corporate bonds to ensure compliance with the law”, Duong said.

According to the representative of the Department of Finance of Banks and Financial Institutions, the Securities Law 2019 and the Enterprise Law 2020, effective from January 1, 2021, will be a long-term legal framework for the cooperate bond market. In particular, regulations are unified on issuing private corporate bonds of various types of businesses, distinguishing between channels of private issuance and public offering.

Accordingly, individual corporate bonds are only issued and traded among professional securities investors. For corporate bonds issued to the public, it will be associated with credit rating, credit rating cases and the credit rating roadmap applying under the government’s guidance. At the same time, the process of issuing corporate bonds to the public has also been renewed, creating conditions for businesses to issue bonds to the public to raise capital. Currently, the Ministry of Finance is developing Decrees guiding regulations on issuing corporate bonds to the public and private issuance for implementation from January 1, 2021.


Category: Finance, Vietnam

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