Paradox exists on corporate bond market

In developed economies, when the share market falls, investors tend to turn their investments to the bond market, which is less risky. However, it is quite different in Vietnam: when the VN Index falls, the bond market also becomes quiet.

At the Hanoi Securities Trading Centre, the daily value of bond transactions accounts for 70% of the total value of transactions on the market, worth VND170-180bil ($10.62mil).

However, Vietnam’s bond market is still considered underdeveloped for many reasons.

First, the scale of the market remains small, equivalent to 3-6% of GDP. In a developed stock market like the US’, the value of the bond market is equivalent to 80% of the country’s GDP.

Second, the main commodity of the market is the government bond, accounting for 80% of total issued bonds. Meanwhile, the corporate bond, not the government bond, plays the decisive role in creating the attractiveness of the market.

According to a recent report by the Hong Kong and Shanghai Banking Corporation (HSBC), the issued corporate bonds had the value of more than VND4tril ($250mil). The biggest bond issuers are the Bank for Investment and Development of Vietnam (BIDV), Electricity of Vietnam (EVN), the Vietnam Shipbuilding Industry Corporation (Vinashin). Most recently, the HCM City Infrastructure Investment and Development Company (CII) has successfully issued VND500bil worth of corporate bonds. Meanwhile, Vinashin has been well known for its successful bond issuance, raising VND3tril ($187.5mil) in capital.

The bonds’ interest rates proved to be attractive to investors. EVN’s 10-year interest rate was 8.9%, while BIDV’s 15-year interest rate was 8.4%, higher than the government bond’s rate, at nearly 8%.

According to HSBC, an estimated VND12tril ($750mil) worth of corporate bonds will be issued from now to the end of the year, raising the total value of bonds to be issued this year to VND16tril ($1bil), higher than the volume of VND15tril ($937.5mil) in 2006.

Enterprises well understand that issuing bonds is a good way to raise funds. This is a source of long-term capital with stable interest rates. The bond issuers only have to pay interest to bond holders every year, 8-10% on average. The interest rate proves to be much lower than that which the dividend companies have to pay their shareholders, thus helping make the costs of raising capital lower.

However, in fact, not many enterprises want to issue bonds. The government still has to come forward and issue bonds, then re-lend raised capital to enterprises. The process proves to waste time and money.

The biggest problem lies in bond issuance techniques. Many Vietnamese enterprises cannot meet the standardised requirements in accountancy (having financial reports audited and having no credit rating).

Source: VNE