Businesses borrow VND400 trillion at high interest rates, raising concerns about solvency
The financial health of many enterprises that issued bonds in 2020 is getting worse, with profits not high enough to pay bond interest.
According to Fiin Ratings, the total value of bonds issued by Vietnam’s enterprises in 2020 reached a record high at VND429.5 trillion, an increase of 28.3 percent over 2019. The figure was equal to 4.7 percent of the outstanding loans of the entire banking system for the year.
The Vietnamese corporate bond market is relatively large, equal to 15.1 percent of GDP and 10.3 percent of the outstanding loans of the banking system at the end of 2020.
This shows that bond issuance has become an important capital channel for Vietnam’s enterprises, which previously mostly relied on bank loans.
However, experts found high risks in the 2020 bond market, where 80 percent of the bond value were issued by unlisted companies. The companies are believed to have weaker financial capability than listed ones, though they have mortgaged assets or guarantees by third parties.
This, plus the unprofessionalism of the market, creates doubts about the quality of bonds, with ‘dragons and fish jumbled together’.
A study found that the bond interest rates issued by real estate firms are nearly the same, 10-12 percent per annum. This means that the bonds issued by enterprises with weak financial health have similar interest rates with healthy enterprises.
In 2020, real estate firms alone mobilized VND162 trillion worth of capital via bond issuance, a 100 percent increase compared with 2019. The bonds had the average term of 3.8 years, or one year longer than 2019. The average interest rate was 10.5 percent per annum.
Fiin Ratings, after surveying 17 listed real estate firms which issued bonds, concluded that the average interest coverage ratio has decreased from 4.5 percent in 2019 to 3.4 percent in late 2020. However, this was still within the safety line, because the ratio of Net Debt/EBITDA (earnings before interest, taxes, depreciation, and amortization) was lower than the average term of issued bonds.
Fiin Ratings found a clear difference between leading companies and the rest. Some businesses have the interest coverage ratio decreasing to 0.7x, which means that the profit created is not high enough to pay interests.
Meanwhile, the ratio of Net Debt/EBITDA of some enterprises has soared to 17.3x, or much higher than the bond average term of 3.8 years.
Therefore, the companies’ capability of fulfilling debt payment obligations will heavily depend on the recovery of the real estate sector.
Financial experts have pointed out that real estate bonds account for a high proportion of the bonds that will mature in the next three years. Meanwhile, the issuers’ solvency depends on the recovery of the real estate market. If the business goes well and the real estate market is bustling, issuers will be able to pay debts.
But the risks are high and they usually fall at the maturity moments, especially bonds with high interest rates. Mortgaged assets don’t have much significance to public investors because they don’t have the capability of dealing with the assets.
The risks are lower in the case of private offerings and some parties commit to buy back the bonds or allow mortgaging the bonds for loans.
As for the bond market in 2021, experts believe that it will still be bustling. The demand for medium and long-term capital is very high, which cannot be satisfied by bank commercial loans alone.
Issuing bonds is the only way to seek capital for enterprises which don’t have mortgaged assets. It is difficult to obtain a higher credit limit in the current context.
At present, investors want to pour money into bonds to get higher profits as the bank deposit interest rates are at a record low. Therefore, analysts believe that the bond market will still be bustling in 2021, but the scale will be smaller.
The corporate bond market in Vietnam is expected to be robust this year as the Government has issued regulations to untie the market but still aimed to ensure transparency and healthy market development.
The HCM City Real Estate Association (HOREA), in its report about the real estate market in 2020 and prospects in 2021, says the real estate bond market will continue to grow well this year.