Following a remarkable period from 2018 to 2021, when average annual growth stood at some 45 per cent, Vietnam’s bond market then encountered a crisis in confidence after a series of setbacks in 2022. New corporate bond issuances stalled during the course of the year, and this persisted into the first half of 2023.

Due to government support measures, however, the country’s bond market experienced something of a recovery in the latter months of 2023, though previous levels are still to be restored.

Corporate bonds continue to entail risks in terms of quality, and an anticipated significant change in the total value of public issuances is yet to materialize. To foster the advancement of a high-caliber bond market to serve as a long-term capital mobilization channel for businesses and an enticing investment option for investors, credit ratings have emerged as a key solution in the eyes of many stakeholders.

 

Timely action needed

Professor Hoang Van Cuong, Member of the National Assembly’s Finance and Budget Committee and Deputy Chairman of the Vietnam Economic Association

Bond debt stood at around 16 per cent of GDP following the boom in Vietnam’s corporate bond market from 2018 to 2021, triggering high hopes for the establishment of a broader financial market beyond the traditionally credit-dependent capital market. However, the crisis experienced in 2022 led to a market contraction, reducing bond debt to some 11 per cent of GDP, and the market has been stagnant since. Further growth remains uncertain, and the corporate bond market is still relatively small compared to total mobilized capital.

Bond capital constitutes approximately 8 per cent of total credit, as businesses are not fully accessing the capital market and are still focusing on raising short-term funds through banks. This indicates that significant potential exists for the development of the corporate bond market. Regardless, there remain numerous quality issues that need to be addressed.

Firstly, the corporate bond market is still small, with a focus on the banking and real estate sectors, making it more speculative than investment-driven.

Secondly, the quality of bonds do not align with the objective of supporting the overall recovery of business production in the economy.

Thirdly, the proportion of bonds issued by rated companies remains low, at less than 10 per cent, whereas in Asia it is over 50 per cent and 80-90 per cent in developed countries around the world. There is a lack of independent evaluation agencies, and the quality of listed bonds is not reliable.

The target of corporate bond debt reaching 20 per cent of GDP by 2025 is challenging, and reaching 25 per cent by 2030 will be even more difficult. Corporate bonds are expected to play a vital role in Vietnam’s future as a channel for long-term capital mobilization by businesses. This is especially important as companies concentrate on recovering and seek capital to expand their production and business operations, yet face difficulties accessing bank loans despite claims of low credit costs.

Businesses with the potential to recover and secure new orders must have access to capital. With bank loans difficult to obtain, they will rely on bonds. For a successful bond issuance, companies need to establish trust so that investors feel secure. This requires timely action in the near future to promote corporate bond issuances.

Legal regulations are quite comprehensive in regard to information transparency, with issuing companies having to meet a series of information requirements. A thorough understanding of this information provides a solid basis for making informed investment decisions. However, for companies issuing bonds to the public, information control must be regular and facilitated through the stock exchange, which will effectively act on behalf of bondholders to control and access information.

For privately-issued corporate bonds, access is intended for professional individual investors under legal regulations. However, only a small fraction of individual investors regularly review these bonds, with reports available at least twice a year. These reports may not always provide sufficient information to thoroughly analyze and evaluate the company’s operations. High profit figures do not necessarily signify a stable and sustainable business, as they are influenced by numerous factors. Even companies with independent audit reports need ongoing scrutiny.

 

Three essential conditions to achieve 2030 goals

Mr. Tran Le Minh, Managing Director of VIS Rating

There are three key conditions necessary to realize the 2030 vision for Vietnam’s bond market.

Firstly, we must prioritize market transparency, which is the bedrock of market growth. Without it, progress will be stymied.

Secondly, we need straightforward and widely-accepted benchmarks. Investors seek clear indicators to understand bond prices, commonly referred to as the corporate bond yield curve.

Lastly, we must address the investor structure. Individual investors currently hold a significant share of corporate bonds in Vietnam. As of the end of last year, this cohort represented 33 per cent of the total value of corporate bonds in circulation. Conversely, institutional investors typically dominate bond holdings in international markets.

In my opinion, if we can fulfill the first two conditions, the third will naturally follow. I think that, at this juncture, we are laying a strong foundation and taking initial steps to effectively address the first and second conditions. If this is accomplished, the bond market will witness advancements in both quality and quantity, surpassing previous stages.

From our perspective, the corporate bond market is embarking on a new phase of development, which holds special significance. The pivotal moment lies in the non-extension of Decree No. 08 and the enforcement of Decree No. 65 since January 2024, significantly enhancing transparency compared to the past.

In my experience directly overseeing bonds, there were occasions when not only individuals but also institutional investors felt uncertain due to information opacity. However, that phase has now passed. With Decree No. 65 in full force and particularly with the establishment of a bond trading platform, mandatory information disclosure has become a reality.

I also greatly appreciate the provisions of Decree No. 65 requiring audits of how bond-issuing companies use the capital raised. Ensuring that all information on capital utilization is transparently disclosed is extremely beneficial for the market, elevating transparency to a new level where individual investors can also access detailed information about corporate bonds on the Hanoi Stock Exchange (HNX).

As representatives of bondholders, this is both the frontline and the last line of defense for protecting their rights. Under existing regulations, there are many parties involved in bond issuances, in regard to valuations, ratings, and auditing, but the representation of bondholders is crucial. In practice, when bonds default, bondholder representatives are the first to negotiate with the issuing organization before resorting to legal action.

There is a customary practice when a default occurs, with neither party rushing to litigation but instead negotiating for two weeks. If issues cannot be resolved by the end of this period, legal action is the taken. From every angle, bondholder representation is extremely important to ensure the rights of investors.

Another aspect to consider is the necessity of more credit ratings agencies. The global credit ratings market is predominantly the domain of three major entities: Standard & Poor’s (S&P), Moody’s, and Fitch Group. These hold sway over the industry. However, it is essential to prioritize quality over quantity when it comes to credit ratings agencies. For these to function effectively and provide meaningful insights, they must employ rating methodologies that have stood the test of time. Therefore, ensuring the market’s efficiency can be achieved by focusing on proficient agencies capable of delivering reliable services.

In Vietnam, we have fielded enquiries from the Ministry of Finance regarding the competency of local ratings agencies in assessing the market. Vietnam now boasts approximately 700 bond-issuing enterprises, but demand for ratings services is relatively modest. The number of companies seeking ratings now stands at less than 100, and with four licensed ratings agencies their needs can be fully met.

There is little disparity in quality between credit ratings agencies. They must uphold certain standards across different markets, and all share three commonalities.

Firstly, strict adherence to regulatory guidelines is essential, especially given the rigorous oversight in the industry. Most markets require credit ratings agencies have separate corporate governance structures.

Secondly, successful agencies must employ rating methodologies that have stood the test of time and gained acceptance in the market.

Thirdly, integrity is a core principle for all reputable rating agencies. The standard for service quality remains consistent across markets. However, there is also segmentation, with larger clients often choosing specific agencies, while smaller ones opt for smaller ratings entities.

 

Credit ratings offer numerous avenues for capital raising

Mr. Nguyen Manh Ha, Deputy Head of the Research and Policy Coordination Department, National Financial Supervision  Supervisory Commission (Please visit https://nfsc.gov.vn/vi/trung-tam-giam-sat-tai-chinh/)

When discussing the significance of credit ratings, I hold the view that they represent impartial insights provided by independent entities that are crucial for investors when deliberating on corporate bond investments. Furthermore, there is a plethora of stakeholders reliant on information pertaining to credit ratings.

For individual investors, credit ratings serve as a standardized metric facilitating instrument comparison, aiding in investment decision-making. In the ongoing surveillance of bond products, regularly updated credit ratings also play a pivotal role in enabling customers to prudently manage risks.

For issuing firms, credit ratings carry significant weight. A favorable rating grants the advantage of capital mobilization at reduced cost, thereby presenting opportunities to attract more economical capital sources. Credit ratings also serve as a benchmark for enterprises to determine the pricing of their financial instruments.

For regulatory bodies, credit ratings are an indispensable informational resource, guiding the development of effective monitoring and oversight strategies throughout the lifespan of debt instruments.

 

Advancements seen in information disclosure

Ms. Le Thi Thu Ha, Deputy Director of the Securities Public Offering Management Department, State Securities Commission (Please visit https://ssc.gov.vn/webcenter/portal/ssc/pages_r/m/introduction/organizationstructure)

The State Securities Commission consistently stands by both businesses and investors in the market. Acting as a conduit for securing medium to long-term funding, the engagement of businesses in the stock market seeking capital mobilization to fuel their operations represents a positive catalyst for attracting enterprises and investors alike.

In recent times, in order to facilitate capital raising through public bond offerings, apart from adhering to the standardized prerequisites outlined by securities legislation, businesses must also furnish investors with minimal yet comprehensive and transparent data.

Beyond its routine undertakings, the State Securities Commission has been actively aiding enterprises in navigating and resolving legal compliance concerns. Furthermore, we have recently convened training symposiums to elevate transparency levels during enterprises’ offering endeavors.

This arises from the observation that upon receiving registration filings for public securities offerings, particularly corporate bond issuances, information provided by issuing entities and advisory bodies through disclosures often falls short of meeting basic requirements. Even when applying the standard of comprehensive information tailored to investor needs, there remains a notable disparity.

In relation to regulations on credit ratings in capital-raising activities within the securities market, during the formulation of the Law on Securities and Government Decree No. 155/2020/ND-CP detailing the execution of specific provisions of the Law, only one ratings agency was licensed in the market. Considering the service landscape at that time, we introduced provisions in Decree No. 155 stipulating that securities offerings exceeding VND500 billion ($19.6 million) in scale and comprising over 50 per cent of the owner’s equity, or offerings resulting in bond debts exceeding VND1 trillion ($39.2 million) at the time of registration, must undergo evaluation by a credit ratings agency.

At present, it is apparent that almost no public bond issuances registered with the State Securities Commission have met the required credit rating threshold. Nevertheless, some issuing entities have voluntarily opted for credit rating evaluations during their offerings. This suggests an initial recognition of the need to improve the quality of information disclosure in bond offerings.

We now have four licensed credit ratings agencies in the existing landscape. Looking ahead, given the prevailing circumstances, there are intentions to revise certain legal provisions concerning credit rating criteria. The objective is to enhance transparency through assessments conducted by credit ratings agencies in corporate bond offerings. While this is a mandatory regulation, the awareness and commitment to transparency should ideally stem from the companies themselves, underscoring its paramount importance. Furthermore, conducting seminars to disseminate market insights on the role of credit ratings agencies remains pivotal.

 

Ensuring accuracy and reliability

Ms. Thai Thi Quynh Nhu, Senior Researcher, Vietnam Institute of Real Estate Market Research (VIRES)

In the realm of real estate, criteria for bond issuances encompass two categories: unsecured corporate bonds and secured corporate bonds. Secured assets comprise securities, constituting 38 per cent, real estate assets 30 per cent, and future projects 32 per cent. Hence, real estate assumes a pivotal role as collateral. Investors in corporate bonds need to contemplate the methods of capital retrieval in risk scenarios. Absent collateral, recuperating capital becomes an arduous process, particularly given the substantial reliance on individual investors for corporate bond financing. For the general populace, the decision to invest savings entails evaluating the significance of collateral.

In cases where assets are backed by real estate, certain firms have encountered or neared insolvency, lacking the capability to reimburse in times of risk. Companies teetering on the brink often extend remarkably high bond interest rates, surpassing 12 per cent, which are never seen in profitable ventures.

Assets intended for collateral must undergo careful scrutiny. For instance, condominiums earmarked for sale should commence construction from the fifth floor upwards, while land must possess legal documentation. In instances where there is a risk of incomplete capital recovery, investors still anticipate partial restitution.

Hence, if the goal is to restore investor confidence, the paramount concern is achieving transparency alongside accurate and dependable information. Transparency lacking legal assurance presents challenges. I propose that regulatory bodies oversee the legal validity of collateral assets before capital mobilization, particularly those secured by real estate.