Insecurity with real estate bonds

In the last five years, corporate bonds is the important mobilized channel of real estate enterprise. Sketched by Fiin Group

Increase "the heat"

Real estate bonds continue to be the focus of attention in the primary corporate bond market with attractive interest rates for investors.

According to a report by the Bond Association (VBMA), in the first 11 months of 2021, real estate businesses have issued over VND187 trillion of bonds, accounting for 38% of the total issued value. Notably, Evergrande's default in China did not make the real estate bond market less exciting, having risen to the top position in terms of issuance value since October 2021. Even in October, the issuance value of real estate bonds reached more than VND16,000 billion, accounting for 42% of the total issued value of the month.

Notably, according to a report by SSI Research, the proportion of unlisted real estate enterprises participating in capital mobilization activities in the bond market is relatively high compared to other industries. According to statistics in the first nine months of 2021, the total issuance value of listed real estate companies only accounted for about 27% of the total real estate bonds, which was about VND58,000 billion. Meanwhile, in the remaining industries, this rate was 70%. This makes it difficult for investors to access information about the financial situation of enterprises.

Taking a closer look at unlisted real estate companies, Mr. Nguyen Nhat Hoang, Deputy Head of Credit Rating Division - Fiin Rating, found that there were issuers with weaker financial capacity than Evergrande. For listed real estate developers, a preliminary assessment showed a relatively better financial position compared with Evergrande, with lower financial leverage, profitability and inventory turnover. However, changes in credit policy or unexpected difficulties in sales due to the impact of the pandemic may cause the financial status of these enterprises to change in a more negative direction.

In addition, according to VBMA, about 30% of the value of real estate bonds issued are unsecured or secured by stocks and this percentage is increasing. According to SSI Research, this would be a big risk for investors in case the cash flow of real estate businesses was not guaranteed. If production and business activities faced difficulties, they would not be able to pay the principal and interest of the bonds for investors. Ensuring the obligation to pay bond principal and interest by shares does not make much sense because when the enterprise becomes insolvent, the value of the shares (usually of the issuer or related to the issuer) would also drop significantly.

Credit rating is still "ignored"

In order to promote transparency and protect investors' interests in the corporate bond market, Decree 155/2020/ND-CP which took effect from the beginning of 2021, stipulated credit ratings of public offerings of a certain size or a certain level of financial security. However, Mr. Nguyen Minh Tu, Executive Director of FiinRating Credit Rating Services division of Fiin Group - one of the two units licensed by the Ministry of Finance to provide social services, said that up to now this enterprise has only performed credit ratings for six issuers. In particular, there was only one enterprise in the real estate and renewable energy industry that was Bamboo Capital.

Mr. Nguyen Minh Tu said, after the communication and dissemination of the management agency and Fiin Group, many businesses expressed interest in credit rating activities. However, the number of enterprises implementing credit ratings was not high because legal regulations have not yet required the implementation of credit ratings when issuing bonds, so the actual demand was still low compared to the potential.

“We have encountered a number of cases where businesses hired us to carry out credit ratings but when the results we gave were not as expected, that enterprise did not agree to announce them and changed the bond issuance plan to focus on a few investors instead of offering it to the public," Tu said.

In fact, many businesses still do not really understand the role of independent credit rating in building credit profiles in the long-term capital market, optimizing capital costs, and diversifying the investor basis to serve their investment and expansion strategies.

Specifically, at Fiin Group, there are some businesses that ask the company to help them reduce interest rates or help them successfully issue new bonds then they would implement credit ratings.

“That is something that a credit rating unit like us or any other organization cannot commit to or do. Because that will lose the independence of a credit rating unit and the ranking results will no longer be valid because of the loss of objectivity. We can only give implications and conclusions based on which investors will understand and make lending and investment decisions and businesses themselves will understand to change their related factors to be able to have a better credit record and then the benefits will come,” Tu said.

On the side of bond buyers, many investors including institutional investors, also think "it's good if it's already rated" or "if it's already rated, why say there is a possibility of default?".

According to Tu, this view was completely incorrect because credit rating aimed to indicate a relative level of financial health in meeting financial obligations of enterprises to related parties, especially subjects with information asymmetries, such as investors in bonds and debt instruments.

In order to further promote credit rating activities in corporate bond issuance, the draft amending Decree 153/2020/ND-CP is being submitted by the Ministry of Finance for comments has added regulations on credit rating for some types of bonds issuance.

Accordingly, it is required that the bond offering dossier must have the results of credit rating for bond issuers and bond issuance if issuing bonds to individual professional investors, issuing bonds without collateral, no payment guarantee or the issuer has business results of the year immediately preceding the issuance or has accumulated losses up to the year of issuance.

This regulation is expected to contribute to increase publicity and transparency, contributing to improving the quality of issued bonds. At the same time, helping the market get into the habit of using credit rating results to assess the risks of bonds, approaching international practices and limiting investors' risks.