Firms still bashful about bonds

Corporate bonds are still an unpopular method for raising capital, despite holding several advantages over Stocks and bank loans.

In 2006, the Government passed Decree 52/2006/ND-CP allowing private companies to issue debentures, yet few took advantage of this new source of capital. The majority of bonds in the market are from State enterprises.

Earlier this month, the HCM City Infrastructure Investment JSC (CII) succeeded in selling VND500bil (US$31.25mil) in debentures, one of the few private listings this year. The Viet Nam International Bank (VIBank) and International Securities Company (VISecurities) acted as underwriters.

CII bonds were bought by seven major institutional investors, including the Bank for Investment and Development of Vietnam, Military Bank, Bao Viet Fund Management and Hong Kong - based PCA Investment Funds.

Despite CII's success, companies still prefer traditional avenues for raising money.

Experts, though, argue if a company has been long established and has a solid performance record then there was no need to rely on bank loans and stocks, but could instead issue bonds.

"The cost of issuing corporate bonds is often lower than that of issuing shares, and companies can easily raise a huge amount of money at the same time," said Vo Hoai Chang, deputy research head at SME Securities.

"Besides, the success rates of bond issues are higher because when issuing bonds a company must have an institution to guarantee the bonds if they go unsold in the auction."

VIBank deputy director Nguyen Dinh Tung noted that bond rates currently are lower than bank loans.

CII seven-year bonds carry a 10.3% coupon rate, while if the company borrowed from a bank the interest would be 1-1.5% a year higher.

"However, the reason for bonds being unpopular lies in procedures to find a guarantor," said Chang.

"Normally, companies often raise a large amount of money through issuing bonds, often from VND100bil to VND500bil, so they have to find a guarantor who has the financial capacity to cover the amount," which is not easy in the current monetary tightening cycle.

Chang also said State enterprises are better equipped to offer bonds, because they tend to have long term development plans and the financial capacity to cover debts.

In contrast, private companies tend to look at the short or medium term and, therefore, do not have the same capital requirements.

In fact, only infrastructure and real estate developers, like CII, needed a large amount of capital quickly, said Chang.

CII will invest the money raised via the debentures into high-rise building projects in HCM City, the Tan An Hoi residential zone and the Tam Tan resettlement zone.

So for the time being, the bond market remains in its infancy, though analysts foresee strong growth.

"It is likely that in the next one or two years, the market will develop as companies begin to recognise the benefits of issuing bonds and investors start being lured by bonds," Chang said.

"Several securities companies have set up research and analysis departments focusing on bonds to help develop the market and raise investor awareness."

Tung added that as companies exhaust traditional avenues for mobilising capital then the bond market should accelerate.

Source: VNE