The capital market is described as a tripod featuring credit, bonds, and stocks, of which, the bond market is its indispensable third leg.
Decree 08/2023/ND-CP, issued by the Vietnamese Government on March 5 to amend and supplement Decree 65 on private placements, has created a legal corridor for companies that fail to pay due bond principals to swap assets or extend payment deadlines for up to 2 years with the consent of bondholders. According to the Hanoi Stock Exchange (HNX), 54 issuers reported late repayments of bond principals and interest from September 16, 2022 to January 31, 2023, as compared to almost zero before.
This February, only two companies issued bonds via private placement with a total value of VND2 trillion ($85.16 million). The Vietnam Bond Market Association said that in 2023, VND285.178 trillion ($12.14 billion) worth of bonds will mature, equivalent to 2.4% of the total current credit balance. This is a serious imbalance in the capital market.
In the context of tight monetary policy, a frozen real estate market and struggling economy, where will companies find the money to pay these bond debts?
Listed companies in panic
It is necessary to recognize the importance of the current bond market. Not all bonds are overdue and not all are junk bonds. HNX statistics showed that 776 companies have issued bonds via private placement. In January 2023 alone, up to VND8-9 trillion ($383.22 million) of bonds were bought back before maturity. Meanwhile, last year’s figure was VND118 trillion ($5.02 billion).
Even listed companies that have disclosed information fully and transparently have had to actively buy back bonds before maturity. They include a number of real estate enterprises such as Phat Dat Real Estate Development Corp. (code: PDR), DIC Corp. (DIG) and Dat Xanh Group (DXG).
The bond whirlwind has forced companies to find ways to redeem bonds in order to avoid affecting their stock prices. For example, Phat Dat had to quickly sell a plot of land on Dien Bien Phu street in Ho Chi Minh City at a price much lower than the market rate just to buy back VND1.232 trillion ($52.46 million) of undue bonds, or approximately 40% of total issued bonds. In addition to debt reduction, this move aimed to stabilize shareholder sentiment when the stock price plunged over the company’s bond issuance.
Losing confidence, individual investors now see bonds as an "epidemic". Any company with bonds is being considered an "epidemic-causing virus" despite their stable financial situations.
Money needed to recover confidence
With a strict credit rating system, banks hold the most information and knowledge about corporate health. They also have better information than other investors in the market, and they themselves are the biggest players in the bond market today.
However, the strict regulations in the State Bank's Circular 16 dated November 10, 2021 on corporate bond trading of credit institutions and branches of foreign banks are creating barriers hindering banks from buying issued bonds for the purposes of restructuring, capital contributions and share purchases.
This is also a bottleneck for the real estate market because buyers who fail to mobilize capital cannot acquire and develop projects from property developers that are in need of restructuring. If this spiral continues, the number of suspended projects will increase and a bad debt boom for banks will become visible.
Since the end of 2022, many businesses have been unable to transfer their projects to quickly restructure and reduce debt like the case of Phat Dat, partly because of legal problems and severely disrupted capital sources from credit and bonds.
This situation has almost frozen the bond market and reduced its status to a junk market. It is similar to the time when Covid-19 broke out. Bad debts among banks were at risk of skyrocketing and the State Bank had to issue Circular 01 dated March 13, 2020 on debt rescheduling, exemption or reduction of interest and fees, and retention of debt category to assist borrowers affected by the pandemic. Therefore, the loosening of Circular 16 is necessary when the value of privately placed bonds maturing this year reaches up to VND285.178 trillion ($12.14 billion) while the primary market has no individual investors currently.
This will help banks to actively participate in the bond market, thus accelerating the restructuring of the real estate market, while regaining the confidence of individual investors.
Decree 08 helps just companies with delayed bond repayments, not being able to unleash this important capital market. Therefore, new specific policies are needed to help the current bond market warm up without any rescue or money injection plan. Without urgent action, the disruption would probably soon spread to the credit market after striking the stock market.