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Bond repurchases to help prop up cash flow situation
It is anticipated that financial institutions will be entering the market to purchase corporate bonds in the near future, according to a draft amendment currently under consultation.
According to the Vietnam Bond Market Association, the total volume of corporate bonds maturing in 2023 is around $12 billion. Given the current challenges faced by many issuers, particularly real estate companies, in maintaining adequate cash flow and the significant resale demand from bondholders, financial institutions participating in the repurchase of corporate bonds are expected to be a significant source of support.
“The draft amendment to Circular No.16/2021/TT-NHNN is aligned with the tenets of Decree No.08/2023/ND-CP, which enables credit institutions to procure corporate bonds to supplement their working capital. Furthermore, credit institutions are authorised to repurchase corporate bonds that were previously issued and sold between now and the end of 2023 to alleviate the burden arising from their distribution to investors when the issuer lacks the resources to repurchase them,” according to a BSC market report on March 28.
In tandem with this, the State Bank of Vietnam (SBV) has formulated more stringent criteria encompassing factors such as the debt-to-equity ratio, non-performing loan ratio, monitoring of capital usage purposes, and the absence of bad debt to enhance the safety of corporate bond procurement.
“This change has the potential to alleviate the pressure of maturation in 2023. However, the impact of the SBV’s initiative on this market remains restricted and requires a comprehensive resolution, with the involvement of multiple ministries and agencies in the future,” BSC recommended.
Similarly, as per a report by ACBS, the proposed draft is expected to have a positive impact on the corporate bond market by enhancing the appeal of corporate bonds to banks and consequently improving liquidity within the market.
“It is noteworthy that banks currently represent the most significant bondholders, with their holdings accounting for approximately 34 per cent of the total outstanding corporate bonds,” the report said.
However, ACBS has projected that the draft’s impact on the banking system will likely be marginal, considering that the outstanding corporate bonds represent a mere 2.5 per cent of the total credit outstanding of banks.
In the same vein, industry experts contend that the proposed changes may require more far-reaching revisions. As per the current draft amendment, commercial banks are authorised to procure corporate bonds to supplement their working capital, specifically for short-term periods of less than one year. However, business analysts have noted that issuing bonds with such abbreviated maturities is highly uncommon, with typical durations spanning 5-10 years.
“I see a potential inconsistency in the current scenario. There’s a contradiction in which a bond has already been established, indicating a medium-term maturity of over one year. However, with repurchases intended solely for the purpose of adding to working capital, such an approach lacks coherence,” said Pham Xuan Hoe, former deputy director of the Banking Strategy Institute at the SBV.
Furthermore, while this is highly expected by the market, credit institutions are still not allowed to purchase corporate bonds that have been issued with the objective of restructuring the debts of the issuing enterprises. Experts have evaluated this restriction as potentially limiting the efficacy of debt restructuring activities, contrary to the intent of Decree 8 pertaining to corporate bonds.
“For example, when a bank buys back corporate bonds, and it becomes a bad debt, we have regulations on restructuring bad debt. We don’t need to make a separate provision in terms of buying back bonds,” said Vu Duy Khanh, director of Investment Analysis at SmartInvest Securities.
Meanwhile, representatives from the real estate industry have put forth a proposal suggesting an extension of the effect of corporate bond redemption until the end of 2024, instead of only 2023 as stated in the revised draft. The reason for this proposal is that the issue of bond maturity is not limited to this year alone.
According to Le Hoang Chau, chairman of Ho Chi Minh City Real Estate Association, the total value of real estate bonds due between now and 2024 may amount to VND230 trillion ($9.8 billion).
“Therefore, it is recommended to temporarily suspend implementation until the end of 2024, so that businesses can engage in negotiations with bondholders to resolve mature bonds in compliance with the spirit and provisions of Decree 8,” Chau said.
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