No business 'too big to fail': economist

Why is the corporate bond market facing such a difficult situation today?

We need to look deeply into the nature of the financial market and issuance of corporate bonds to determine the cause of today's situation.

In my opinion, there are three main reasons, namely regulators' responsibility; issuer greed and failure in fulfilling their responsibilities after bond issuance; along with inexperienced and small investors.

Many businesses could not refrain from greed, having implemented up to 40-50 projects at once, each worth trillions of Vietnamese dong (VND1 trillion = $42.39 million). So how do they complete these projects, while ignoring market risks?

What are solutions for the corporate bond market in the coming time? Is the freshly issued Decree 08 an antidote?

Recently, two large American banks, Silicon Valley Bank (SVB) and Signature Bank, were forced to shut down because of liquidity loss due to uncontrolled bond issuance and purchase, the U.S. Federal Reserve’s (Fed) interest rate hikes and their failure in predicting the situation. These banks went bankrupt and their assets were used to pay depositors. This is clear proof that no institution is "too big to fail" in a fierce market full of risks.

Over the past time, domestic enterprises have only pursued profits without thinking about the sustainable development of themselves and the market. They will pay a very expensive price if they can't manage risks. However, up to now, no Vietnamese businesses have gone bankrupt although they face more than VND290 trillion ($12.3 billion) in corporate bonds maturing in 2023. This issue needs to be weighed when dealing with the bond market.

Recently, Petrovietnam Securities Incorporated, which manages VND1 trillion ($42.39 million) of real estate developer Novaland’s bonds, has required the issuer to pay the principal and interest, disagreeing with its proposal for debt rescheduling and asset swaps. This can be considered a typical example best reflecting market signals.

The consecutive issuance of Decree 65 and Decree 08 on private placement of corporate bonds within just a few months reflects a "fear" among state management agencies that the corporate bond market may "collapse". However, it seems the new regulations only focus on "investors" but not "issuers” - one of the root causes of market default today. In addition, they do not look into the responsibility of regulators that failed to control market activities.

The delay in the enforcement of Decree 65’s stricter regulations featured in Decree 08 is like giving people high-fever antipyretic drugs without treating the root cause of their disease. It is like avoiding market punishment for some issuers. However, it is also a precious time for bond issuers to mirror themselves.

What is your forecast for the corporate bond market in 2023 and what needs to be done to ensure a sustainable bond market as a reliable medium- and long-term capital raising channel for the economy?

In 2023, the number of newly issued corporate bonds will not increase but the quality will improve. Decree 08 is a temporary remedy for issuers, opening up more opportunities for enterprises to negotiate with bondholders. However, it should be noted that the decree is still a sub-law document. Under the Civil Law, when a new agreement is not reached, the issuer is forced to fulfill its commitment.

When a bondholder buys bonds, he has enforced the economic contract by signing it, and given enough money to the issuer. That means he has fulfilled his responsibility. Therefore, the bondholder has the right to require the issuer to pay principal and interest under the commitment, unless another agreement is reached.

For sustainable market development, businesses must take responsibility for past actions. They need to accept the fact that doing business is not always profitable, accept the rules of the market economy and listen to the market. The most important thing now is that issuers must learn how to control greed, strictly comply with the law, prepare backup plans, and aim for publicity and transparency.

For bondholders, it is necessary to thoroughly understand the issuer to make a final decision. That is their right. They also need to be responsible for their money by studying and re-evaluating the quality of the business, both in terms of projects, finance, and corporate governance. Bondholders can hire a consulting company or a management unit to do this.

Market confidence will return when issuers pay interest and principal in full and on time. Bond issuance activities will increase again when investors see that issuers fulfill their commitments. That is the rule of the market.

About VND700 trillion ($29.7 billion) in corporate bonds is expected to mature in the 2023-2025 period. Particularly, bond maturity pressure on real estate businesses is very large, with more than VND119 trillion ($5.05 billion) in 2024 and nearly VND112 trillion ($4.75 billion) in 2024. In early 2023, a series of businesses, especially real estate developers, reported that they failed to pay principal and interest to bondholders.