Corporate bond market under review

According to the Vietnam Bond Market Association (VBMA), the total value of bond issuances in the first quarter of 2024 was estimated at VND15.71 trillion ($628 million), down 46 per cent year-on-year. This result, however, actually exceeded expectations, as the market had been forecast to be frozen for at least one or two years following shocks that took hold in late 2022 and early 2023.

At a recent conference on Vietnam’s debt capital market, a number of businesses and analysts identified solutions to develop the market in a healthy and sustainable manner.

Credit ratings - A reference for bond pricing

Mr. Do Ngoc Quynh, General Secretary of the VBMA

The efficient operation of enterprises is considered the most important factor in attracting investors to a capital market. Transparency is also key for market participants, as it creates a solid degree of trust.

There are some businesses that publish false stories about their profits and operational efficiency in order to catch the eye of investors. When the truth comes out, however, investors feel confused and are unsure who exactly they can trust. This also affects businesses performing well and posting real profits, adding to their difficulties in mobilizing capital.

I therefore believe there are two important tasks to unlock Vietnam’s capital market.

Firstly, improving the competitiveness of the economy and the operational efficiency of enterprises.

Secondly, creating a culture of transparency, helping consolidate confidence not only among investors but also among other market participants.

From my own observations, a culture of transparency has been gradually taking shape in the market. Together with the operation of a separate corporate bond trading floor via the Hanoi Stock Exchange (HNX), the Ministry of Finance has recently granted operational licenses to three credit rating agencies. These companies must meet certain regulations of State management agencies in terms of professional capacity, capital, and human resources to ensure their own operational efficiency and quality. Most have worked with international credit rating agencies to obtain professional support and ensure their credit rating activities meet international standards.

Apart from monitoring by State agencies and auditing companies, credit rating agencies are considered an important piece of infrastructure in the market, helping boost transparency. Credit ratings are an effective tool to create a yield curve in the corporate bond market, which is an important reference for all parties in the market, not only investors but also issuers, State management agencies, and research organizations.

The VBMA has coordinated with its members to create a system of “market makers” for bonds issued by credit institutions. Market makers operate based on a system of agreed common principles. This has initially helped create a relatively transparent yield curve for bonds issued by credit institutions.

Corporate bonds in the market have yet to form a yield curve because they are issued with different structures and risk levels. Also, most issuers don’t have a credit rating, so it is difficult to make an accurate assessment.

Investors tend not to choose bonds without a yield curve.

There are many different ways to evaluate bonds. However, the use of credit ratings provide a reference for evaluation and have proven popular in countries with a developed financial market. The method has also been certified in the international market.

Three issues in the corporate bond market

Ms. Nguyen Thi Hien, Director General of Techcom Securities (TCBS)

From the perspective of a bond issuance consultancy agency, we recognize that there are three issues that need to be addressed to unlock Vietnam’s corporate bond market.

The first is investors. During the bond issuance process, the market lacks financial institutions as investors. Insurance companies hold potential as investors, but their participation is limited because they are bound by certain regulations and are restricted from investing in corporate bonds. The market also sees limited participation by retirement funds, whose scale in Vietnam is too small and they are subject to insufficiently clear tax policies.

The second issue is trust. Recent incidents have negatively affected the bond market. It is harder to regain confidence in a market than to build confidence in the first place. Vietnam’s capital market lacks institutional investors, while existing investors lack full confidence in the market. Therefore, we are proactively working to boost confidence among investors.

Though not compulsory, we only issue bonds with “financial governance”, strengthening activities relating to the finances of bond-issuing companies, including collecting, managing, monitoring, and controlling financial information, governing all capital flows, and governing projects of issuers.

This is a process during which we accompany customers, helping them gain a clear orientation when issuing bonds, overseeing capital flows and capacity to improve efficiency in financial governance.

Credit guarantee funds also play a very important role in restoring confidence among investors. Many investors with the necessary financial capacity seek bonds with payment guarantees because of the lack of confidence in the market. Some commercial banks in Vietnam offer payment guarantees on bonds to gain access to this group of investors.

The third issue is transparency and infrastructure for the market. The separate bond transaction system at HNX is a major step forward in ensuring market transparency, together with the appearance of credit rating agencies. Restoring confidence among investors must start with transparency. This is best done by having a prestigious third party evaluate and verify the operational efficiency of the bond-issuing company.

Problematic market

Mr. Nguyen Hoang Long, Deputy Director General of the Gelex Group

After the bond market was seriously hit by negative events in late 2022 and early 2023 and investor confidence deteriorated, Gelex had to re-purchase most issued bonds before maturity. Only those guaranteed by the Credit Guarantee and Investment Facility (CGIF) of the Asian Development Bank (ADB) and insurance companies were not affected.

The Gelex Group needs to mobilize capital for future major projects. The domestic capital market remains gloomy and global interest rate are still high, making it difficult for businesses like us to mobilize international capital. We recognize that the market now has higher requirements, so sought credit ratings early on, despite this not being compulsory. We also embraced environment, social, governance (ESG) practices.

We discovered complex bond structures when working with the CGIF, and learned a great deal about preparing for such structures. This is estimated to take a year. We are coordinating with major organizations to seek bond structures that are appropriate.

Difficulties for insurers in bond investment

Mr. Ngo The Trieu, CEO and Head of Investment at the Eastspring Investment Fund Management Company

Many insurance companies would like to increase their investment value by investing in corporate bonds, because interest rates on government bonds in Vietnam are quite low while insurers must make payouts to long-term policyholders. Investment in corporate bonds is therefore considered a sound way to increase investment profits.

Vietnam is estimated to need capital of $25-27 billion a year to 2035. Of this, the majority will be used on energy transition, climate change adaptation, and other issues. This is a significant sum, equivalent to 5-6 per cent of total outstanding credit in the entire economy.

However, while these are mid and long-term investments, the main source of capital mobilized from commercial banks is short-term lending. The State Bank of Vietnam set a limit on the use of short-term capital for long-term loans at 30 per cent, from the beginning of 2023, making it difficult for banks to increase long-term capital sources.

Meanwhile, insurance funds have capital available but cannot make long-term investments and are not permitted to invest in restructured corporate bonds, which are considered “bad” bonds. Businesses also find it difficult to mobilize capital when investing in projects lasting up to 20 years, while banks only provide five-year loans. Therefore, businesses need to constantly restructure their loans. However, who will restructure such loans? More effort is required to deal with this issue.

Regarding information transparency, many investments that Eastspring conducts face problems with information provision, even though it is compulsory to publish information every quarter. Asking businesses to provide more information after they have received our investment can be problematic. Credit ratings therefore play an important role in helping investors obtain more information.

We also need to understand capital restructuring in a comprehensive manner. There may be greater risks if insurance companies make bond investments, but from the perspective of the entire economy, this trade-off may well be acceptable. It is clear that insurance companies are professional investors.

Retirement funds are also capable of making mid and long-term investments, but tax incentives are needed for them to do so. Taking all problems into consideration, the government and relevant agencies need to take action and redesign capital sources and capital attraction channels to create the conditions for insurance companies to invest in corporate bonds.

Risk transparency helps boost confidence

Mr. Paul Coughlin, former Global Director of S&P Global Ratings

What happened in Vietnam’s corporate bond market at the end of 2022 was not unique. Similar incidents occurred in Thailand, Indonesia, and South Korea in the 1990s. The current context in Vietnam is different, but we can still learn from the experience of others in the region. We should not be overly pessimistic about the market’s prospects.

Vietnam needs to continue consolidating infrastructure in the corporate bond market, including completing market institutions and architecture such as investors, credit ratings, and yield curves.

Many enterprises are still sensitive about analyses revealing risks in their business activities. However, investors need to clearly understand such risks to feel secure when investing in corporate bonds.

The lack of information transparency has become a challenge for both investors and management agencies. It is therefore necessary to bridge the information imbalance between participants in the capital market and provide in-depth analyses on the credit quality of issuers and available debt tools in the market.

Vietnam should allow insurance companies to more easily participate in its corporate bond market and also attract investment funds to expand the investor base.

If these issues were to be addressed, Vietnam would have many opportunities to attract mid and long-term capital for sectors of potential like renewable energy and infrastructure.