Several factors have contributed to the significant challenges facing Vietnam’s corporate bond market, including issues regarding issuance quality due to a notable surge in debt restructuring in 2023, unclear risk differentiation, limited availability of investor information, and an insufficiently-developed investor base. Promptly addressing these challenges could potentially take the corporate bond market to approximately 11 per cent of GDP by the end of 2024 and foster sustainable growth in subsequent years.

The country’s corporate bond market experienced a substantial period of adjustment over the course of 2022 and 2023, marked by a decline in the value of new issuances compared to the peak in 2021. The combined value of newly-issued corporate bonds stood at nearly VND800 trillion ($34.4 billion) at that time, before falling to VND300 trillion ($11.77 billion) in 2022 and then exhibiting a modest recovery towards the end of 2023.

Restoration of stability

An emerging trend in late payments has been gradually curtailed, signaling a return to stability in the market. Among Vietnam’s capital mobilization channels, despite receiving significant public interest, the equity channel remains relatively small. The primary capital mobilization channels for enterprises are now bank loans and corporate bonds. While the latter play a more crucial role in providing long-term capital, the former dominate the provision of short-term capital.

“Given the government’s active engagement, particularly evident in its ambition to develop the financial market by 2030, corporate bonds are poised for new advancements,” Mr. Nguyen Dinh Duy, Director and Senior Analyst, Macro and Investment, at VIS Rating, told the “Developing the Corporate Bond Market by 2030: A Perspective from Credit Ratings” seminar held recently by Vietnam Economic Times / VnEconomy / Tap chi Kinh te Viet Nam in collaboration with Moody’s Ratings and VIS Rating. “The period from 2018 to 2023 marked the initial growth cycle of the market, characterized by fluctuations, and there is optimism that, post-2024, corporate bonds will witness more sustainable development.”

As per data from VIS Rating, the gradual fall in the value of late corporate bond payments each month has been notable. As of the end of April, the total value of overdue bonds constituted roughly 15 per cent of the total circulating value. Of these, approximately VND60 trillion ($2.35 billion) matured without the principal being repaid, while another VND120 trillion ($4.7 billion) experienced delayed interest payments before reaching maturity.

“When companies fail to meet both interest and principal payments on schedule, we designate these bonds as overdue,” Mr. Duy said. “This designation is only lifted once the bonds reach maturity and the issuer fully repays both principal and interest.”

Analysts attribute the downwards trend in overdue bond payments to two primary factors. Firstly, the weakest companies have already been exposed, and secondly, there was a notable improvement in overall market confidence towards the end of 2023 and into 2024, as companies found it easier to access capital. Moreover, with the business environment showing signs of improvement, export growth in the first four months of this year resumed, generating fresh orders and allowing companies to restore cash flows to fulfill principal and interest obligations.

“In both 2022 and 2023, the issuance value of corporate bonds fell short compared to their redemption and repurchase values, leading to a contraction in market size,” Mr. Duy told the seminar. “It is anticipated that this disparity will narrow in 2024, contributing to a more stable market scale.”

Indeed, empirical evidence reveals a substantial surge in the repurchase of corporate bonds before maturity in 2022 and 2023, signaling that financially-robust enterprises capitalized on the favorable low-interest rate climate to settle debts associated with previously-issued bonds. Furthermore, some companies opted for issuing new bonds at reduced interest rates, thus curtailing borrowing expenses.

Nevertheless, insights shared during the seminar indicate an anticipated gradual decline in this trend during 2024. Consequently, the corporate bond market may well head towards approximately 11 per cent of GDP by the end of the year, with a progressive uptick anticipated in subsequent years, aligning with the government’s objective of reaching 25 per cent of GDP by 2030. This aspirational goal, which is contingent upon estimated annual GDP growth, necessitates a three-fold increase in the value of corporate bonds if average GDP growth was 6 per cent.

Resolving bottlenecks

Four bottlenecks need to be addressed for the market to thrive. Firstly, there is a pressing need to enhance the quality of corporate bond issuances. This is intimately linked to enterprises’ creditworthiness and the rationale behind the issuance. According to VIS Rating’s data, numerous entities in the market are essentially “shells”, lacking substantial business operations yet still engaging in bond issuances to mobilize funds. These entities exhibit a lack of transparency and possess weak debt repayment capabilities. They also see high rates of delayed bond repayments.

Furthermore, the purpose of an issuance is intricately linked to the quality of the corporate bond. In 2023, issuances for debt restructuring witnessed a substantial increase, resulting in quality falling below expectations. However, this phenomenon can be attributed partly to heightened regulatory oversight by governing bodies regarding information disclosure and the genuine utilization of capital by enterprises during bond issuances.

The second bottleneck significantly affects both the public and investors, as the market lacks clear differentiation between the risk profiles of corporate bonds. “There is a common perception that corporate bonds backed by assets pose lower risks compared to those without collateral,” Mr. Duy explained. “However, in reality, many types of collateral lack liquidity and cannot be readily converted into cash. Typically, banks require real estate as collateral, but for bonds, enterprises can be more flexible, using securities or stocks as collateral.” Therefore, while asset-backed bonds have a higher recovery rate compared to unsecured bonds, the extent of this higher rate is not clearly defined and can still result in losses for bondholders.

Additionally, according to credit rating experts at the seminar, there has been a recent trend of businesses opting for third-party guarantees to bolster bond quality. However, it is crucial to note that these guarantees don’t always ensure the same level of credit quality as those asserted by the issuing companies. Hence, investors must scrutinize the terms and conditions of such guarantees along with the third party’s repayment capabilities.

In practice, many bond issuances with third-party guarantees often involve individuals or other businesses providing the assurance, typically the parent company. But when the system encounters challenges, these assurances often prove worthless, as demonstrated by the case of the Van Thinh Phat Group. Thus, when investing in bonds with third-party payment assurances, independent assessment remains imperative. Factors like credit ratings should be considered to evaluate the risk associated with each bond type, taking into account the terms and conditions stipulated by the guarantor. It is worth noting that many scenarios involve third parties consenting to payment guarantees but with several conditions attached.

The third bottleneck pertains to issues surrounding bond valuation. The market previously lacked differentiation in risk level, resulting in inconsistencies in how bonds were priced. “We refined our analysis by isolating bond issuances with identical terms and conditions, ensuring they were subject to the same benchmarks and issuance timelines,” Mr. Duy said. “This allowed us to observe that despite similar interest rate environments, some enterprises failed to meet their obligations, causing losses for investors.”

He added that, logically, bond prices should be adjusted based on the level of associated risk. Ideally, businesses and bonds with higher risk profiles should command higher interest rates and vice-versa. Evaluating the risk posed by both the issuing entity and the bonds themselves would enable creditworthy businesses to secure capital at lower interest rates, while also minimizing risks for investors.

Conversely, bonds facing delayed payments, signaling considerable risk, are trading on the secondary market at levels similar to bonds issued by entities with average or below-average credit quality. This underscores the notable divergence in creditworthiness and debt repayment capability among issuers, highlighting the need for benchmarking. Mr. Duy called for the involvement of credit ratings agencies in the market, to assist investors in discerning the risks associated with corporate bonds and allowing for better informed investment decisions.

The final bottleneck lies in the investor composition within the Vietnamese market, as the ease of trading and transactions hinges on the participation of buyers and sellers. The major players in the country are still mostly commercial banks, which are actively involved in both bond issuances and investment but tend to prioritize short-term durations.

The establishment of a dedicated bond trading platform on the Hanoi Stock Exchange (HSX) has led to a surge in bond trading activity on the secondary market. Analysts project that this secondary trading venue will persist in bolstering market liquidity throughout 2024. Nevertheless, the primary objective of corporate bonds remains the attraction of long-term investors who adopt a buy-and-hold strategy. Secondary transactions play a marginal role in driving up the values of new issuances and facilitating capital mobilization for businesses within the bond market.

Hence, there is demand in the market for additional investors seeking long-term investment opportunities and possessing diverse risk appetites. However, professional, long-term investors with potential in the Vietnamese market, such as insurance companies and retirement funds, encounter numerous legal obstacles when considering investments in corporate bonds. Nonetheless, viewed optimistically, this presents a significant opportunity for professional institutional investors to enter the market, thereby stimulating demand for corporate bonds.