The world witnessed 2022 with a series of crises that are the most concerning in decades, including COVID-19, regional conflicts and the risk of world wars, inflation and global economic recession. However, Viet Nam’s economy whose global integration has been raised significantly may be affected by the dual impact of inflation and recession in 2023 and subsequent years.

Investors participating in the corporate bond market need to be cautious, learn the legal regulations, the business’s capacity and efficiency of the corporate issuer, and understand the risks before making an investment decision. (Illustrative imaged sourced from the internet)

In fact, last year saw economic and social problems with a series of economic incidents involving companies and economic groups like FLC, Tan Hoang Minh, AIC and Van Thinh Phat, along with dozens of large-scale corruption cases revealed, and most recently, SCB (Sai Gon Joint Stock Commercial Bank) facing growing demands for early withdrawal of savings from its customers and especially the payment of corporate bonds. Such incidents created a wave of insecurity among the people, causing public distrust in the banking and the bond system.

Meanwhile, Viet Nam’s stock market, as reported since the first quarter of 2022 to now, has fallen deeply by more than 33%. Domestic investors, due to the loss of most of their invested capital, have only stood outside.

Corporate bond, which is an important part of the capital market, joins with the money market to form the country's financial market. The capital market plays a particularly important role in the stability, development and economic growth of a country with a market-oriented economy.

This is a channel to mobilise idle capital from people and businesses to create the most effective medium and long-term investment capital for the economy. This is also the most important, if not the main channel for government borrowing for spending and financing the economic recovery.

The Vietnamese capital market was formed in 2000, in which the new stock and bond markets are only 22 and 16 years old, respectively. As of the end of 2021, the capital market, including outstanding bonds and stocks had provided about 25% of capital for the economy (47% credit capital, 15% FDI, 13.5 % public investment).

In recent years, Viet Nam's bond market has achieved a rapid growth rate of 46% per year, although the size of the bond market, including corporate bonds, was only 20% of GDP but it is forecast to increase rapidly in the next few years.

This rate is still very low as compared to most of the developed countries in ASEAN, East Asian countries with the size of the local currency bond market, mostly reaching over 50% of GDP.

In Viet Nam, since 2017, the private-issued corporate bond market has grown very rapidly, accounting for 92% of the total volume of bonds issued. Privately- issued corporate bonds are offered for sale and traded between the issuer and professional securities investors who are knowledgeable and experienced investors to invest in a riskier product than bonds issued to the public.

The basic principle of the private method is that the bond issuer is self-borrowing, self-paying, self-responsible for the efficiency of capital use. The enterprise must be responsible for paying in full and on time the interest and principal amount of the bond and fulfilling its commitments to investors.

Currently, the issuance of individual corporate bonds has become an important capital mobilisation channel for production, business and investment of enterprises, helping them gradually reduce their dependence on credit loans from banks.

2. In the bond market report of VNDirect Securities Company in 2021 and 2022, banks and securities companies are the largest issuers of corporate bonds, accounting for 42% of the released total bond value, followed by construction businesses - real estate with 35%.

It is highly concerning that banks participate in the corporate bond market with both roles: both as an issuer and as an investor (buying up to 50% of the total issuance of corporate bonds by real estate enterprises).

The tendency to buy back bonds before maturity is becoming more and more popular. According to the Viet Nam Bond Market Association (VBMA), in the first nine months of this year, the total value of bonds called by businesses has reached more than VND 142,000 billion, up 67% over the same period last year. Among businesses that called the most bonds, banks were the leading group, followed by real estate businesses.

According to the assessment of the management agencies, up to now, the issue of corporate bonds has revealed inadequacies.

3. More than ever, in the current context, the strict handling of offending businesses is necessary, but it is also necessary not to disrupt the market and make sudden policy changes like the past. Mr. Zafer Mustafaeglu, representing the World Bank (WB) in Viet Nam, commented: “Viet Nam's capital market is still relatively young, so mistakes are possible. More important is how we learn from our mistakes, there should be no overreaction that limits growth in the long term.”

Regarding the general policy of the State, when the illiquidity of corporate bond issuers is spreading rapidly, the management agencies need to recommend effective remedial measures to issuers whose corporate bonds’ terms are coming to maturity.

For example, before making a decision to blockade and deal with it by law, the management agencies need to create conditions for bond issuers and bondholders to negotiate debt extension and agree on a payment schedule to minimise losses. Enterprises can handle bond debt due by issuing more, selling assets, first of all as security assets to fulfill bond debt repayment obligations.

The aforementioned way will limit the impact of default chains that can lead to panic, causing financial market collapse. Management agencies need to refer to the experience of more issuance to successfully reverse debt when dealing with the government bond market in the 2011 - 2015 period. At that time, the government bond market had very high interest rates and short maturities: interest rates were up to 12 - 13%/year and 1- 3 year loan terms accounted for 77% of total issuance in 2013. The additional issuance to repay debt indeed helped the government bond market return to a safe state with interest rates of 3 - 4%/year and maturities even up to 20-30 years.

It is necessary to add the mandatory provisions of the law to bond credit ratings, both for corporate bonds issued to the public and corporate bonds issued privately. Currently, in the country, corporate bonds issued to the public are not required to have a credit rating. This is clearly a loophole worth mentioning, enabling weak businesses to issue subprime bonds to the market.

A bond rating, which is a grade given to bonds that indicates their credit quality, typically includes an assessment of the bond's terms, collateral, and solvency factors (such as third-party guarantees) in the case of the business’s payment inability. Accordingly, investors can refer to the credit rating of the bond before deciding investments and should not take risks if the bond does not have a credit rating.

Reporting by VO DUY KHUONG - Translating by A. THU