Corporate bonds

Corporate bonds still attractive

Up to 9.3% per year is the yield on 365-day corporate bonds issued by AD Group, which bank employees now offer to their customers.

Compared to savings in this bank for the same duration, the bond coupon rate is higher by two percentage points. However, unlike savings, with a low demand deposit rate set for early withdrawals, corporate bonds, if held for at least 183 days, earn their holders an unchanged yield or rate of return. discount not significantly lower.

Six months of refinancing

Corporate bonds generally have a long duration, at least 12 months. Normally, companies issue bonds with a duration of 1 to 3 years to ensure compliance with legal regulations. However, in reality, most corporate bonds come with a clause allowing the buyer to sell them back to the issuer after 180 days. In some cases, depending on the time of issue, the issuer makes 185 days exactly equal to six full months.

The six-month holding period is the essence of corporate bonds. Bank savers opt for a term of six months to benefit from an interest rate higher than the current ceiling rate of 4% per annum (the ceiling interest rate on short-term deposits of less than six months is now 4% per annum as prescribed by the bank). About 75% of deposits in banks are currently less than 12 months old. To attract bond buyers, issuing companies are offering a six-month holding condition to compete with banks.

The flexible six-month holding period paves the way for circumventing regulations, but at the same time it is a source of pressure for the issuer to prepare enough resources to refinance its corporate bonds every six months. For this reason, corporate bond issuers need a stable source of capital from production, business or commercial departments.

Alternatively, they must launch new bond issues to raise sufficient funds to redeem their bonds every six months.

In the general structure of corporate bonds, those issued by banks (to bolster their Tier 2 capital) in 2021 accounted for around a third, while the rest were sold by real estate, construction and travel companies. Meanwhile, according to data recently released by the Ministry of Finance, privately placed corporate bonds in the first quarter of 2022 totaled VND 136.5 trillion, of which 70% was offered by real estate companies. Those issued by banks fell to 4.85%, a very modest proportion.

Real estate developers always need long-term capital, because the time it takes to complete a housing project, from land clearance and compensation to product launch, is on average five years. Consequently, the refinancing of corporate bonds takes place continuously. In addition, a number of companies have recently issued bonds to achieve mergers and acquisitions (M&A) or land acquisition, which requires longer duration and larger scale for corporate bonds. Some companies have participated in auctions of land use rights organized by local governments with money from corporate bond issues.

Who bought corporate bonds prematurely?

According to the Ministry of Finance, the value of corporate bonds issued in April and the first two weeks of May were VND 30 trillion and VND 10.5 trillion, respectively, a sharp drop from the same period l last year.

Demand for bond issues remains strong, but the fact that buyers are no longer “particularly interested” is the main reason for such a drop.

In the first four months of the year, VND24.7 trillion of corporate bonds were redeemed before maturity, the finance ministry said.

Who bought corporate bonds prematurely? First of all, there are the credit institutions. Many banks have already reached their credit growth limits just after the first quarter, but the State Bank of Vietnam (SBV) has not revised their limits upwards for this year. Unable to lend more, in a context of rising deposits (some banks have raised the interest rate on their savings not only to accelerate capital raising but also to maintain their market share and retain their customers), many lenders had no choice but to redeem their bonds prematurely. The Bank for Investment and Development of Vietnam (BIDV), for example, revealed plans to buy back over VND5 trillion of corporate bonds before their May-July maturity.

Second, some trading, construction, service and real estate companies also pre-purchased their corporate bonds.

These companies have just sold their bonds, and either have not yet had time to use the sums obtained, or have only used part of them, but the violent fluctuations of the financial market have prompted them to return l money to buyers.

Real stock of corporate bonds

Outstanding corporate bonds held by banks currently stand at VND326.5 trillion, up 19% from the end of last year, the SBV said in a report sent to the Standing Committee. of the National Assembly at the last meeting. Specifically, the figure includes VND 124.8 trillion for real estate trading and VND 101.5 trillion for increasing the size of issuer capital. It should be emphasized that these corporate bonds in which the banks have invested are not bonds issued by the banks to reinforce their Tier 2 capital.

The Ministry of Finance meanwhile said that VND637 trillion in corporate bonds were issued last year, of which VND605.9 trillion came from private placements. If the volume of corporate bonds placed by the private sector in mid-May is included, the total amount comes to VND 782.9 trillion.

So what is the actual number of outstanding corporate bonds issued before 2021 that are still valid and added up so far? It is around 1.55 trillion VND at the end of the first quarter of this year, according to the corporate bond report released by Techcom Securities Joint Stock Company (TCBS).

The size of the corporate bond market at the end of last year was equivalent to 15% of GDP, according to the Ministry of Finance. Given that the 2021 GDP estimated by the ministry is VND 8,398,600 billion, the corporate bond market is expected to be worth VND 1,259,790 billion. If we also count the number of corporate bonds sold in the first four and a half months of this year, the market size will be VND 1,436,790 billion.

Several bank executives also estimated that the actual figure of outstanding corporate bonds should be around VND 1.4-1.5 trillion, on par with that calculated according to the Ministry of Finance.

Corporate bonds issued by credit institutions, as noted by some banks, represent a third of the outstanding amount. The proportion of those sold by banks has declined and is likely to continue to decline as demand for issues nears zero and the trend of early redemption of bonds persists. Meanwhile, the proportion of corporate bonds provided by real estate companies continues to grow.

Maturity pressure

Some VND 540 trillion of corporate bonds will mature in 2022 and 2023, or 36% of the total amount outstanding, pushing the need for additional issuance to ensure capital rotation between companies to higher levels. new highs, noted SSI Research.

Meanwhile, the research department of Maritime Bank (MSB Research), in a report, noted that the volume of corporate bonds coming due this year is around VND 231.24 trillion, focused on the fourth quarter and real estate and construction companies. From June until the end of the year, the value of real estate corporate bonds reaching maturity will gradually increase from nearly VND 5.5 trillion in June to over VND 21.23 trillion in December. . This is the amount of real estate corporate bonds maturing on time, obliging the issuer to pay the buyer principal and interest under all circumstances.

In 2020-2021, dong interest rates were stable at the lowest level in two decades, making savings unattractive as an investment channel for those with idle money. Meanwhile, the corporate bond market, with higher interest rates and flexible terms, has really “boomed”.

Outstanding corporate bonds are equivalent to about 13.7% of the total VND 11 trillion that the banking system offers to the economy on credit, which is almost equal to the one-year credit growth of all banks.

There wouldn’t be much if corporate bonds helped production and business. Instead, they are mostly versed in real estate. Properties are never an internal force for the economy. Moreover, it pushes the dream of most Vietnamese to have their own house further, considering the current price of real estate and what people actually earn. Where are the agencies responsible for issuing, inspecting and mining corporate bonds during the volatile cycle of this powerful financial instrument?

Source: SGT