Fixing loopholes to improve health of the corporate bond market

Assoc Prof and PhD Đinh Trọng Thịnh.

The corporate bond market is expected to become a major source of capital for businesses in the long term, alleviating the pressure on the banking system in supplying capital to the economy. However, recent scandals involving bonds issued by property developers as well as uneven quality of corporate bonds have weakened investor confidence in the market.

Assoc Prof and PhD Đinh Trọng Thịnh, a senior economist from the Academy of Finance, spoke to Vietnam News Agency Television about the loopholes in this market and solutions to make the market healthier and grow well.

How do you evaluate the current state of the corporate bond market after a number of controversies related to corporate bonds?

After some scandals involving corporate bond issuance, the corporate bond market has slowed down. Previously, the market grew about 46 per cent on average in the 2017-21 period and in 2021, the growth rate was 56 per cent. It still kept growing very fast in the first three months of this year before taking a toll in April (when scandals broke out). Especially in the real estate sector, almost no new bonds were issued in April.

However, this slowdown is only temporary. Disturbances in the market will make both issuers and investors take time to review and check the situation and conditions for a more sustainable development in the future. In addition, the State management agencies have also taken actions to rein in the market, from which they can eliminate unqualified issuers and select the trained investors who are professional and committed to long-term development of the market.

What are the loopholes that need fixing for a healthier market?

The loopholes in the market are seen in legal and management mechanisms. Regarding the legal mechanism, existing regulations including Decree 153 (issued on December 31, 2020) on private placement of corporate bonds have had some changes but are still not suitable to the development conditions of the Vietnamese economy and behaviours in the Vietnamese corporate bond market, showing many problems in both supervision and management for the authority.

For the Vietnamese stock market in general and the corporate bond market in particular, there are many new investors entering the markets, so their knowledge and understanding of stocks and bonds is inadequate while there are some businesses and groups of investors (stock driving teams) seeking to dodge the law, lead the market or encourage non-professional investors to trade like professional investors, driving the market to grow significantly but at the same time exposing many risks.

In the past, we have seen many problems with the corporate bond market, so I think that it is necessary to fix the law, both in terms of mechanism and supervision, making it a medium and long-term capital source for the economy.

Recently, the concept of 3-0 (no credibility, no underwriting, no collateral) is often mentioned in corporate bond issuance. What are the risks and reasons behind this issue?

Compared to regulations in the international bond market, regulations of Decree 153 are similar to those of many developed economies. However, in the Vietnamese market – a fledgling market with many amateur investors – the current regulations are a bit loose and can be abused by issuers and market driving teams, so changes are necessary.

In the international Over-the-Counter (OTC) bond market, it’s normal for businesses to issue and sell bonds, even without going through the stock exchange, so they do not need to publish their business results and financial situation nor need a credit rating. Buyers in this market are also professional investors and they know the risks. As for Việt Nam, investors have insufficient understanding about the market, so it is necessary to have a third party to help them analyse the financial situation of the issuers, the risk and return, and a credit rating agency does this best. This agency is different from the auditing company as the latter only checks the company’s financial health for a certain period of time while the former follows the business for a long time, thus their recommendations will be relatively reliable.

Currently, there are only two credit rating agencies in Việt Nam – FiinRatings and Sài Gòn Phát Thịnh Credit Rating Group – so it’s difficult for them to meet the rating demand of the market.

In addition, the lack of collateral is also a problem. The regulation on the bond ratio (the ratio of the bond issued by a firm as a percentage of its total equity) should be set at a rational level.

The Government is planning to amend Decree 153. What is your view on the role of this?

Regulation in the bond market for listed companies is almost fully-built and issuers need to comply. However, there are many problems for unlisted companies so we need to amend Decree 153 to put the private bond issuance into order. First of all, we need to recognise that the corporate bond market is an important capital mobilisation channel for businesses so building an appropriate legal framework is essential.

After five amendments, Decree 153 still has many problems. For example, the parent company is not allowed to issue bonds to finance the operation of subsidiaries. I think this regulation is not reasonable and needs to be reviewed because many subsidiaries are newly established, their financial capability is weak and the credibility in the market is low, so the parent company issuing bonds and transferring capital to its subsidiaries makes sense. Thus, the law should be loosened so that large corporations can do this.

In addition, regulations involving credit rating and purpose of the issuance should also be studied to have a practical mechanism.

What are your recommendations for the market to develop sustainably?

We need to amend Decree 153 and related regulations towards ensuring the full and synchronous development of the market but also safeguarding the interests of investors and the enforcement ability of businesses.

The second thing is that we have to consider the purpose of issuance, but not make it difficult for businesses in issuance.

Third, we must contemplate the application of credit rating to issuers. We must have appropriate management mechanisms by establishing investment committees or bondholders’ associations to monitor the usage of proceedings of the issuance. We should also review the role of the auditing firms to ensure the publicity and transparency of the business.

Moreover, we also need to raise the awareness of bondholders about the corporate bond market. — VNS