(Tiểu luận) topic discussion about the vietnamese corporate bond market

Stringent bond market regulations - Require strictly regulatory approvals for corporate bonds- Stringent transparency and disclosures requirements for both public and private-placed issu

Topic: Discussion about the

Vietnamese corporate bond market

FOREIGN TRADE UNIVERSITY

report

HANOI, DECEMBER 2022

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TABLE OF CONTENTS

INTRODUCTION 2

CHAPTER 1: ATTRIBUTES OF A THRIVING CORPORATE BOND MARKET 3

1 Corporate bond market liquidity 3

2 The ratio of the size of the local corporate bond market to GDP 3

3 Stringent bond market regulations 3

CHAPTER 2: ANALYZING VIETNAMESE BOND MARKET 4

1 Overview of the Vietnamese bond market 4

2 Analyzing existing regulatory framework loopholes in Vietnam’s corporate bond market 6

3 Credit ratings and rating agencies in the Vietnamese market 8

3.1 Credit rating of bonds in Vietnam 8

3.2 Reasons why bonds needed credit rating 9

CHAPTER 3: CASE STUDIES OF SUCCESSFUL BOND MARKETS 11

1 Malaysia 11

1.1 History of the Malaysia bond market 11

1.2 Factors leading to Malaysia bond market success 11

1.3 Lessons learned 13

2 South Korea 14

2.1 Background history: The turning point of the bond market 14

2.2 Major policies 16

3 Singapore 17

3.1 Structure and historical background of corporate bond market in Singapore 17

3.2 Market situation 18

3.3 Major policies 18

CONCLUSION 20

REFERENCES 21

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INTRODUCTION The financial market is made up of three main capital mobilization channels: the stock market, the money market, and the bond market Because of the rapid development of Viet Nam‘s economy, the commercial banking system is overwhelmed in providing long-term loans

To reduce the dependence on commercial banks, developing an emerging bond market and in particular, a corporate bond market is crucial However, the question is how to regulate the corporate bond market for healthier development

1 Objective of the research

A sound legal and regulatory framework governing corporate bond markets is an important pillar which supports the development of a deeper, broader and more efficient bond market in EMs (IOSCO, 2011) This paper will act as a reference for Vietnam policy makers

on legal and regulatory framework to develop their corporate bond market

2 Scope of the research

First, we discuss the attributes of a thriving corporate bond market Second, we show an overview of the Vietnamese corporate bond market, as well as how some companies utilized the regulatory framework loopholes,leading to an ever-rising default incidents in the last 2 years We also analyze credit ratings and rating agencies in the Vietnamese market Finally, we will compile the lessons learned from successful bond markets (Malaysia, Korea, Singapore) and apply those lessons to give policy implications to the Vietnam bond market

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CHAPTER 1: ATTRIBUTES OF A THRIVING CORPORATE BOND MARKET

1 Corporate bond market liquidity

A ‘thin’ or illiquid market can also become volatile With fewer orders to absorb market fluctuations, buyers and sellers find it easier to push prices up and down (Bennett, How are market liquidity and volatility related? 2019)

2 The ratio of the size of the local corporate bond market to GDP

The level of economic development, proxied by per capita GDP, is a determinant of bond markets development as more developed economies require larger financing for larger fixed capital, education, technology and inter-generational investments (Eichengreen et al., 2004)

3 Stringent bond market regulations

- Require strictly regulatory approvals for corporate bonds

- Stringent transparency and disclosures requirements for both public and private-placed issues

- Continuous monitoring and updating of credit ratings of bonds by the rating agencies

To develop the corporate bond market, credit rating activities play an important role Credit rating agencies contribute to increasing operational efficiency in terms of investment supply and demand in the market, helping investors to better perceive the financial capacity and debt solvency of the enterprise, as well as related risks to have investment orientation

For investors, the credit rating given by a reputable organization will give investors more information to assess risks, thereby making reasonable investment decisions

For bond issuers, bonds with a high credit rating also increase the credibility of the business in the eyes of investors, making it easier for the business to raise capital

- Well-established regulatory framework on taxation

- Incorporating hedging instruments

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CHAPTER 2: ANALYZING VIETNAMESE BOND MARKET

1 Overview of the Vietnamese bond market

Overall, the corporate bond market of Vietnam has been blooming especially the past 2 years with a robust growth in the corporate bond issuance Issued corporate bond in 2021 reached 658,009 billion VND, a 42% increase compared to 2020’s 462,575 billion VND In which, the public offering rate was 4.58%, much lower than in 2020 (7.10%)

Regarding the bond issuing market structure divided by type of enterprise, in 2020, the total issuing value of real estate firms rose to the top, reaching VND 3,689 billion, accounting for 32% of the total value of bond issued In 2021, real estate bonds accounted for 35% of total issuance volume, continuing to increase strongly in total size during the year as the real estate market continued to grow over the year

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Total corporate bonds were 61,374 billion VND, which went down by 68% compared to quarter

3 of 2021 (VBMA, 2022) In which, construction and real estate were the two sectors with the highest fall in issuing value, a decrease of 98.7% and 93.4% respectively (VBMA, 2022)

(source: VBMA, 2022)

This is due to the liquidity of these bonds being low due to COVID-19 causing slow project implementation Slow project implementation due to COVID-19 social distancing and project legal procedures is shown by a sharp decrease in the Contracted Sales/Inventory index Sale rate dropped sharply at 30% - compared to the highest record in the market recovery and stabilization phase (only in Hanoi and HCMC - which accounted for about 60% of the national scale) Real estate credit was in difficulty because of the bank credit with the State Bank’s Circular 16 and recent developments in the corporate bond channel (Draft Decree Amending Decree No 153); policy changes after the Thu Thiem land auction

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Regarding the Vietnamese corporate bond market size, it was much lower than that of other regional countries, evidently in 2020 For example, Malaysia’s corporate bond market accounted for 56% of its GDP, Singapore’s accounted for 38%, and Thailand accounted for 25% While Vietnam only accounted for roughly 14.75% of its GDP

2 Analyzing existing regulatory framework loopholes in Vietnam’s corporate bond market

(Publicly-offered bonds are regulated by the Law on Securities whereas privately-placed bonds are by Decree 153)

First, the requirements and processes for approval of the corporate bonds are currently governed by very loose legal restrictions As a result, many enterprises lacking financing take advantage of this by offering high interest rates without having a sound business plan Under current regulations, enterprises may mobilize funds through private placements of bonds without having to seek permission from state authorities and are just required to take responsibility for repaying their debts According to the MOF, there are still small-sized enterprises that mobilize large amounts of capital at high interest rates without collateral or with poor-quality collateral The value of unsecured bonds issued in 2021 alone mounted to VND 83 trillion, accounting for

18 percent of the total bond value There are risks in case these enterprises issue bonds, because

if their production and business activities struggle, they cannot repay the principal and interest to investors (Fixing legal loopholes to develop a sound corporate bond market)

In the case of Tan Hoang Minh, small investors still consider themselves to be holding bonds issued by Tan Hoang Minh without meeting the 5 conditions to be recognised as professional securities investors as stated in Article 11 of the 2019 Securities Law The reason for this is that Tan Hoang Minh’s subsidiaries issue bonds for the purpose of using them to cross-invest in other member companies in the Tan Hoang Minh ecosystem, instead of raising capital

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bondholder, is Tan Hoang Minh Group From that, following the form of a ghost contract called

“Investment cooperation with Tan Hoang Minh Hotel Trading Service Co., Ltd.”, Tan Hoang Minh has raised nearly VND 10 trillion from private investors In fact, individual investors are essentially not holders of Tan Hoang Minh bonds, through many of them think they are bondholders, and many others mistakenly believe that the bonds of Tan Hoang Minh Corporation have been licensed by the State Securities Commission of Vietnam However, according to the current securities law, the State Securities Commission of Vietnam only licenses and strictly manages corporate bonds issued by public companies As for private corporate bonds, businesses follow the principles of self-borrowing loans, self-paying debts and taking self-responsibility for capital use efficiency and debt payment ability, without having to obtain approval from any authority Moreover, investors will have to give self-assessments, be responsible for their own investment decisions and bear all risks arising in investing and trading in bonds of these corporations The State does not guarantee that bond issuers pay in full and on time the bond principal and interest upon maturity as well as other rights for bond buyers Therefore, in case a bond issuer loses money and cannot afford to pay, investors will face the risk of not getting paid for the bonds, because private corporate bonds issued in Vietnam mainly come from the companies not rated yet, and many types of bonds are not accompanied by payment security Second, lack of transparency and disclosure in the banking systems There are no regulations on monitoring and managing the use of the mobilized cash flow of investors to ensure that the bond mobilization source is used for the right purpose of development, action and law, which include plans to issue bonds to buy and sell shares in internal enterprises to increase capital "virtual control" or misuse In Vietnam today, in the law on bond issuance, there are

disclose basic information about businesses and bonds

to investors, to the State Securities Commission, Ministry of Finance However, the information was not made public Finding or accessing information about corporate bond issuance and trading, especially private placement, is very difficult This is due to the fact that the bond issuance plan is subject to approval by leaders of the enterprise itself, such as the General Meeting of Shareholders, for joint-stock companies, or the chairperson of the Board of Directors, for limited liability companies Furthermore, the supervision of the mobilization and use of capital through bond issuance and payment of bond principal and interest is the responsibility of the Board of Directors, the General Meeting of Shareholders, the Members’ Council, the Company President, or the company owner in accordance with the Decree 153 and the company charter Because of the lack of management and supervision by competent state agencies, businesses can arbitrarily mobilize and use capital for improper purposes, thus causing serious damage to investors

Third, the legal system lacks a credit rating In Vietnam, there is currently no bond rating activity, leading to a lack of basis for assessing the credit or risk level of the issuer or each issue As bond purchase via private placements is a high-risk investment, it is only suitable to

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ability However, according to the MOF, current regulations on professional investors are loose, enabling bond salesmen to turn amateur investors into professionals, so that they may offer bonds to every investor, regardless of who they are

Fourth, there are no bankruptcy and restructuring regulations One of the risks that exist for bond investors is the risk of default Vietnamese bond investors need the protection provided via bankruptcy laws and by way of property rights legislation or bond covenants

3 Credit ratings and rating agencies in the Vietnamese market

In Vietnam, bonds issued to the public are not subject to compulsory credit rating Therefore, when purchasing bonds from companies that have not had their claims of high interest rates verified, investors must assume the risk on their own behalf As a result, there have been innumerable instances where investors have been left with nothing because the companies that sold the bonds fail, are unable to pay their debts, etc To expand Vietnam's bond market and enable it to compete on an equal footing with other international powers, this condition must be addressed

3.1 Credit rating of bonds in Vietnam

The credit rating of bonds is the most crucial tool for increasing market transparency and acting as a foundation for investors to choose investment channels

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3.1.4 The credit rating system in Vietnam

Rating agencies in Vietnam in particular and in the world, in general, often build and use their own credit rating system with letters as the main symbol Accordingly, the bonds will be ranked in alphabetical order A, B, and C corresponding to the level of risk from low to high

They classify bonds into two levels: investment grade and non-investment grade:

o Bonds with an investment-grade are safe and stable bonds associated with issuers with positive business prospects One of two licensed credit rating agencies in Vietnam, FiinRatings, rated their investment-grade bonds as follows:

- AAA: Best capacity to meet financial obligations (Extremely Strong);

- AA: High capacity to meet financial obligations (Very Strong);

- A: Good capacity to meet financial obligations but vulnerable to adverse economic conditions and changing circumstances (Strong);

- BBB: Moderate capacity to meet financial obligations but more vulnerable

to adverse economic developments (Neutral)

o Non-investment-grade (also known as “speculative” grade) bonds have lower, or even unrated ratings Bonds of this grade are considered high-risk investments Therefore, to attract investors’ attention, they are often issued with a rather high or extremely high-interest rate However, these types of bonds are also extremely risky and may leave investors empty-handed According to FiinRatings’ rating system, non-investment grade bonds are typically rated as follows:

- BB: Low capacity to meet financial obligations and has a speculative element (Risky);

- B: Weak capacity to meet financial obligations Sensitive to business, financial and economic conditions (High risk);

- C: Very Weak or a high probability of default Very sensitive to business, financial and economic conditions (Extremely high risk) (Regulations on the credit rating of bonds in Vietnam - Asl Law 2022)

3.2 Reasons why bonds needed credit rating

The majority of investors in Vietnam are office workers who lack in-depth knowledge of the financial markets Instead of investing in banks with relatively modest interest rates, people aim to double or triple the value of their idle pay money So they focus on anything that can yield them a high interest rate quickly, such as stocks, bonds, gambling, etc All of these investing strategies have a significant risk of losing some or all of the invested money, though The system of credit rating has been devised in order to evaluate the credit risk or default risk However, compared to other nations, the number of institutions authorized to provide credit ratings in Vietnam is quite small at the time

10 more on the credibility of a bond, the business with a high credit rating would gain more attraction and will develop exponentially

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CHAPTER 3: CASE STUDIES OF SUCCESSFUL BOND MARKETS

1 Malaysia

1.1 History of the Malaysia bond market

Malaysia’s financial industry has supported the country’s economic expansion, which has been further bolstered by significant contributions from the domestic capital market Until the late 1980s, banks had served as the principal source of financing, providing short-term, floating-rate financing to retailers, particularly for working capital needs The Malaysian capital market only began to offer complementary longer-term, fixed-rate financing through the issuance of debt securities in the 1990s

By 1992, capital market issuance (RM12.5 billion) exceeded bank financing (RM13.8 billion of net new lending) While equity markets provided the means for the private sector’s growth initially, a substantial amount of capital market financing took the form of bonds over time As of the end of 2019, the capitalization of the stock market stood at RM1.7 trillion (113 percent of GDP) with 929 listed companies, while the total value of outstanding bonds came up

to RM1.5 trillion (98 percent of GDP; see figure 1) Net local currency (LCY) bond issuance swelled from just RM2.1 billion as at the end of 1990 (equivalent to 20 percent of the corporate sector’s capital market financing needs) to RM88.9 billion as at the end of 2019

Malaysia has a sizable bond market It has Asia’s second-highest ratio of outstanding bonds relative to GDP as at the end of September 2019 (Japan is first with 242 percent of GDP due to its vast public debt) In absolute terms, the Malaysian bond market ranked fifth in Asia after China, Japan, the Republic of Korea, and Thailand Valued at US$356.5 billion, the Malaysian bond market represents a healthy mix between government securities (51.5 percent of GDP) and corporate bonds (49.5 percent of GDP) (2019)

1.2 Factors leading to Malaysia bond market success

1.2.1 In the nascent stage

i) Policy and regulatory framework

To enforce every decision made by the government, the Securities Commission Malaysia (SC) was established in 1993 to efficiently drive and regulate the market It has since maintained its mission "to promote and maintain fair, efficient, secure and transparent securities and derivatives markets; and facilitate the orderly development of an innovative and competitive capital market"

The government first took a more conservative approach to approvals, such as by doing the reporting and approval on a merit basis, and made efforts to maintain oversight of intermediaries, particularly if they play a major role in market development like domestic Credit Rating Agencies (CRAs) do

The bond issuance regime should evaluate the investor market structure Listing instruments to achieve liquidity and access to markets as retail-based markets require is less important The bond framework should be flexible enough to allow project bond issuance to leverage the same framework

ii) Supporting the demand side