The Vietnamese government’s Decree 81, which comes into effect on September 1, will help raise the corporate bond market standards and remove low-quality issuers to better protect investors.

Local companies raised nearly 160 trillion dong ($6.9 billion) from selling bonds in the first six months of this year with average annual yield of 6.72 per cent and average maturity of 4.7 years, data from Ho Chi Minh City-based SSI Research show.

The value of the corporate bond market increased sharply from 9.01 per cent of the country’s total gross domestic product (GDP) in 2018 to 11.3 per cent last year.

But risks are persistent as some companies have issued bonds with total values beating their equity capital by 10-20 times.

Total issuance of real estate firms accounted for 38 per cent of the corporate bond market with outstanding debt highly exceeding their equity capital, thus creating potential risks for the market if the property market is volatile.

Since the beginning of the year, the Ministry of Finance has warned investors and companies twice about potential risks on the market.

The State Securities Commission (SSC) chairman Tran Van Dung said corporate capital often comes from bank loans and share issuances.

Share sales put companies under pressure of paying dividends while the banking sector’s credit has kept declining in the last two-three years, creating the opportunity for the corporate bond market to develop, he said.

“The development of the corporate bond market should be healthy and inevitable. But the Ministry of Finance and the State Securities Commission have found some deals are highly risky for investors.

“Some companies are small in market capitalisation, some don’t have transparent financial reports, or some don’t have good-quality, well-valued collateral,” Dung said.

VNDirect Securities Corp bond market research director Vuong Hoang Son said Decree 81 will raise the standards on corporate bond issuance, limit private issuance to minimise the risks for individual investors, and the responsibility of underwriters (financial-banking institutions) will be higher when evaluating the financial capacity of the issuers.

The decree will help remove low-quality issuers as they want to take advantage of the bond market to raise capital, he said.

“That will cut the number of companies issuing bonds and the market value in the last four months of the year,” Son said.

Under the new decree, the total bond issuance of a company cannot exceed its equity capital by five times and the gap between two bond issuances must be at least six months.

The bond issuer also has to declare its purpose and business plan so investors can monitor the use of the capital.

The rules will constrain corporate bond market growth in the remaining months of the year, Son said, adding that private issuance will switch to public issuance as companies will become more transparent.

Luu Minh Sang, financial-banking law lecturer at the University of Economics and Law, Vietnam National University in Ho Chi Minh City, said the lack of transparent information disclosure and independent credit rating among bond-issuing companies are good conditions for risks.

The lack of independent credit rating on firms’ financial capacity and assets allows them to compete by interest rates, he said.

It could be difficult for companies with good financial reports to raise capital from bond selling because others with unclear reports will offer lower rates, he added.

Even the consultancy firms cannot dig deep into the issuers’ financial reports to foresee the risks and most of the consultants are underwriters of the bond issuance deals so their opinions are often biased, he said.

VIET NAM NEWS/ASIA NEWS NETWORK