Demand for capital
The years between 2019 to 2021 witnessed a boom in the corporate bonds market with a huge spike in issuances. In these three years, the issuance value reached nearly VND 1,600,000 bln, accounting for 64% of the total issuance from 2005 until 2022, causing the GDP to increase from 7.3% in 2018 to nearly 18.9% in 2021. In terms of industry structure, banking and real estate accounted for the highest portion of corporate bonds issuances, upto 65% in value and 60% in the number of issuances, during the period 2005 to 2022. Both these industries are in constant need of large amounts of capital.
Real estate enterprises actively issued corporate bonds in the period 2019 to 2021 due to difficulty in accessing loans from the banking system, when the State Bank of Vietnam clearly stated its policy of strict monitoring of real estate credit. In addition, many real estate enterprises did not meet the conditions for loans from banks and switched to corporate bonds with high interest rates that did not require collaterals. They were also subject to supervision of money disbursement activities like borrowing from banks.
After a period of hot growth, the issuance of corporate bonds in the first six months of 2022 suddenly dropped sharply. The reason why the issuance volume in the second quarter dropped sharply was due to the Government's tough stand in the financial market and the influence of the Tan Hoang Minh event. In the second quarter, the issuance volume reached VND 119,000 bln, down 45% over the same period. In particular, the real estate group continued to rank second in terms of total issuance value, despite a sharp decline over the same period. However, excluding more than USD 500 mln in international bonds made by Vingroup, the issuance value in the second quarter was only 16% over the same period.
Pressure of bonds maturity
The real estate enterprises strongly promoted bond issuances in the period 2019 until 2021 which has now increased the pressure of maturity in 2022 until 2026. According to estimates of KB Securities Vietnam (KBSV), the total maturity value of corporate bonds will reach VND 374,300 bln in 2023, and VND 381,200 bln in 2024. In this the real estate group accounts for the second largest portion. Therefore, businesses are facing challenges in mobilizing capital to repay debts. One of the plans under consideration by businesses is to raise capital by issuing new bonds to pay off old debts. However, the implementation of this plan is not easy, because several difficulties can arise from policies and actual needs.
Recently the 5th draft amendment of Decree 153/2020/ND-CP regulating the offer of corporate bonds was published, with changes in the direction of further tightening for issuers and investors. The first is the decision to ban enterprises from issuing bonds to contribute capital in the form of capital contribution or purchase of shares in other enterprises, or lending capital to other enterprises.
Next, it is required that the total outstanding debt of bonds does not exceed three times of equity if business activities in the preceding year were profitable and there is no accumulated loss. Another strict requirement for professional investors is that individuals can only buy individual bonds issued by public companies and must have collaterals or payment guarantees. If this draft is approved, it will make businesses that have financial difficulties face limit in accessing bank credit and will not be able to issue individual bonds.
Impact of recession
From the end of this year until 2023 and 2024 it will not be an easy period in terms of cash flow for real estate businesses with mature bonds. Small and medium-sized enterprises with low asset quality will face many difficulties in finding capital to rotate. These businesses are facing difficulties due to three factors, namely, difficulty in accessing bank loans, tight capital from bond issuance, and the absorption of the real estate market in 2023 and 2024 not being high due to the impact of the economic recession.
On the other hand, the large group of real estate enterprises is somewhat less pressured because of a large land bank and collaterals to borrow from banks, along with being eligible to issue new bonds as well as being able to borrow international bonds. However, these enterprises still have to continuously accumulate and deploy new projects, despite periods of rapid market growth and high valuations, in order to mobilize more debt sources to supplement cash flow to pay due obligations. This will also cause a cash flow imbalance and reduce operational efficiency in coming years.
Recently, the State Bank of Vietnam has expanded the credit room for the banking system to fulfill the target of 14% credit growth in 2022. This move will partly have a positive impact on the cash flow of real estate businesses as per two angles. First, businesses have new sources of money to borrow against the due debt. However, this option is only applicable to enterprises with new projects and good quality assets. Second, the real estate market is expected to warm up again in the last months of the year when credit flows are cleared, and businesses can release inventories and have more money to pay off debts.
With rising inflation, the move to raise interest rates is becoming common in countries around the world. Vietnam is expected to find it difficult to avoid the general trend to ease the pressure on the exchange rate. However, high-interest rates will directly affect the cost of real estate investment capital for businesses as well as individuals. This will lead to the absorption capacity of the market to decrease while the accumulated inventory is still very large.
