Encouraging credibility rating culture to improve corporate bond quality

	Encourage credit rating culture to improve corporate bond quality
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Mr. Phung Xuan Minh, Chairman of the Board of Directors of Saigon Phat Thinh Ratings Joint Stock Company.

The corporate bond market has developed strongly. From the perspective of a credibility rating agency, how do you assess the development of the corporate bond market in recent years?

The Vietnamese corporate bond market has developed quickly, undergone a transformation since 2006 and showed strong growth in the period from 2013 to 2021 with a compound annual growth rate of about 46%.

Corporate bonds started to explode in 2016 due to favourable market movements and positive growth in all sectors of the economy. The demand for medium and long-term capital to serve production and business activities, and carry out M&A deals has increased, therefore, raising capital through corporate bonds has been promoted.

In 2021, there were a total of 1,099 issuances of corporate bonds in the domestic market with a total issuance value estimated at more than VND706,937 billion, the average issuance value was about VND643,255 billion per batch, 2.7 times higher than that of 2020.

Along with that, seven issuances in the international market had a total issuance value of US$1.609 billion, equivalent to a scale of nearly US$230 million per batch. In 2021, the total outstanding value of Vietnamese corporate bonds was approximately 14.77% of GDP (current price GDP), equivalent to more than VND1.24 quadrillion.

These statistics show that the corporate bond market has been growing very quickly, and the room for growth is still very large for the future. In particular, according to the Government's Strategy for Development of the Financial Market to 2030, the total outstanding debt of the corporate bond market must reach 20% of GDP by 2025 and aim for 25% of GDP by 2030.

One of the limitations of the corporate bond market is the lack of information transparency, especially accurate information about the financial health of the issuers. In your opinion, what is the solution to solve this limitation?

This problem is actually happening, due to three main reasons: more than 95% of corporate bonds are currently issued through a private channel in the primary market; the conditions for issuing corporate bonds are still quite open; and the issuer and debt instrument risk stratification corridor has not yet been clearly formed. These make information transparency in the market almost non-existent.

From international experience in countries with developed corporate bond markets such as Korea, Malaysia, and Singapore, there are five essential factors for the healthy, safe and sustainable development of the corporate bond market.

Firstly, market information must be transparent, capital market participants must improve their capacity, self-responsibility and professionalism in related operations.

Secondly, in order to do this, it is necessary to have credibility rating agencies. The task of the credibility rating agency is to identify the type of standard investment or speculative bonds; clearly separate each type of bond with different risks and these risks are determined on the basis of the classification of the credit rating agency. From here, investors will identify the segment of each type of bond, and decide to invest according to their own risk appetite.

Third, the primary and secondary markets must be developed to increase liquidity for the conversion of corporate bonds. The direction of the Ministry of Finance still wants to promote the centralized secondary corporate bond market.

Fourth, investors must be professional, have high and strict standards, which are clearly regulated by the Law, specifically in Vietnam, the Securities Law 2019.

Fifth, the issuer of corporate bonds must issue a statement, or a commitment of the issuer on the purpose of using capital. Enterprises must fulfil their commitments, investors also have the obligation to supervise the use of capital of the issuing company.

As mentioned above, one of the important things for the corporate bond market right now is the creation of a credibility rating culture. This is also the experience of many countries in developing the corporate bond market. In your opinion, how can this be applied in Vietnam?

An effective credibility rating agency is the piece that fills the information gap between the issuer, or debt instrument, and the investor. Credibility rating reports are in-depth analytical views that clearly reflect the business's performance and ability to meet its debt obligations or financial commitments. Investors can rely on the standard rating scale of each credibility rating agency to get an initial view of the risk level of the issuer or ranked debt instrument. In countries with a developed corporate bond market, credibility rating agencies are an important component in supporting information transparency for the market. However, for the Vietnamese market, this operation is still too new, and the enterprises do not really understand the process and benefits of credibility rating, so the rating culture has not been formed.

Regarding the number of credibility rating agencies, Saigon Ratings recommends that State management agencies refer to the experience and practices of countries with developed bond markets in the region and the world. The international credibility rating service currently has three units, Moody's, Fitch, and S&P, accounting for nearly 95% of the global rating demand. In addition, through observation in developed markets, the number of credibility rating agencies is not much, such as Japan has three units, Korea has three units, Malaysia has three units, and China has six units.

With the development of the bond market and the current size of Vietnam's GDP, I believe that the licensed units basically meet the credibility rating needs of the market. However, to ensure the quality of credibility ratings, the management agency needs to carry out annual monitoring, post-audit, and improve the capacity of domestic credibility rating agencies to approach the standards of the international credibility rating agencies.

Do you have any recommendations to the management agency on solutions and issues to pay attention to the sustainability and safe development of the corporate bond market?

In order for the corporate bond market to develop sustainably, the authorities need to create the development for the corporate bond market but still have to closely monitor and control risks; enhance the transparency of market information; completing the legal corridor with the amendment of Decree 153/2020/ND-CP, Decree 156/2020/ND-CP, Law on Securities 2019 to upgrade professional investor standards and criteria.

At the same time, there should be regulations on credibility rating to help investors easily determine the quality of enterprises and the level of risk of the issued bonds; improve the infrastructure of the bond market, and establish a centralized secondary market with corporate bonds.

Along with that, it is necessary to strictly handle market actors, participate in the standardization of investors who are not professional but finely circumvent the provisions of the law to access inappropriate types of investment product.

For bond issuers and issuance consulting company, it is necessary to improve corporate governance systems, encourage the application of international accounting standards IFRS, and encourage a credibility rating culture to improve prestige and quality of issuers, or quality for each bond issue.

Particularly for investors, individual investors and professional investors must improve their own capacity and knowledge when participating in the capital market, promoting the form of investment trust in professional investment funds.