Corporate bond market thriving yet risky

Illustrative photo (Source: VOV)

The market has been undergoing a boom since 2018. Firms raised a total of VND89 trillion (US$3.82 billion) from bond issuance during the first half of 2019, a sharp rise of 34 per cent.

The increasing issuance of corporate bonds illustrates that firms are actively participating in mobilizing capital from other sources rather than loans provided by banks and financial intermediaries.

This also helps to ease risks facing the banking sector as corporate bonds normally have longer terms than bank loans.

However, analysts believe that the robust growth seen in the corporate bond market could pose various perils.

Economic expert Nguyen Minh Phong noted that the most obvious risk to corporate bonds is the unclear binding clauses within buying contracts. Buyers are likely to get confused about a large number of the binding clauses and conditions, especially those relating to conditional and guaranteed bonds.

High risk exists for the purchase of unsecured corporate bonds, as this type of bond investment resembles a lending method without guaranteed assets.

Another danger comes from the possibility that bond buyers could potentially suffer losses if the bond issuers themselves declare bankruptcy.

Furthermore, it also could make the management of currency flows chaotic, especially those provided by banks, Phong noted. He elaborated that commercial banks could in turn increase the interest rates in deposits, therefore pushing up their lending interest rates. In short, these moves could put additional pressure on the State Bank of Vietnam’s credit policy as well as the lending activities of banks.

Enterprises should put forth detailed plans on capital mobilization based on their solvency while also considering the right time to launch their bonds to the market.

Negative information could pose another threat to bond issuers when buyers sell their purchased bonds. This could result in a sharp drop in bond prices and hamper the issuers’ solvency, he stressed.